Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.



OUR BUSINESS
Executive Overview	40
Our Operations	42
Our Business Risks	43
OUR CRITICAL ACCOUNTING POLICIES
Revenue Recognition	46
Goodwill and Other Intangible Assets	47
Income Tax Expense and Accruals	49
Pension and Retiree Medical Plans	49
OUR FINANCIAL RESULTS
Items Affecting Comparability	52
Results of Operations – Consolidated Review	55
Results of Operations – Division Review	59
Frito-Lay North America	61
Quaker Foods North America	62
North America Beverages	63
Latin America	64
Europe Sub-Saharan Africa	65
Asia, Middle East and North Africa	67
Our Liquidity and Capital Resources	69



Consolidated Statement of Income	73
Consolidated Statement of Comprehensive Income	74
Consolidated Statement of Cash Flows	75
Consolidated Balance Sheet	77
Consolidated Statement of Equity	78
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation and Our Divisions	79
Note 2 – Our Significant Accounting Policies	85
Note 3 – Restructuring and Impairment Charges	88
Note 4 – Property, Plant and Equipment and Intangible Assets	91
Note 5 – Income Taxes	94
Note 6 – Share-Based Compensation	97
Note 7 – Pension, Retiree Medical and Savings Plans	101
Note 8 – Related Party Transactions	108
Note 9 – Debt Obligations and Commitments	108
Note 10 – Financial Instruments	110
Note 11 – Net Income Attributable to PepsiCo per Common Share	115
Note 12 – Preferred Stock	116
Note 13 – Accumulated Other Comprehensive Loss Attributable to PepsiCo	117
Note 14 – Supplemental Financial Information	119
Note 15 – Divestitures	120
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING	121
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	123
GLOSSARY	125

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 consolidated financial statements and the accompanying notes. Definitions of key terms can be found in the glossary beginning on page 125. 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 BUSINESS

Executive Overview

We are a leading global food and beverage company with a complementary portfolio of enjoyable brands, including Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. Through our operations, authorized bottlers, contract manufacturers and other third parties, we make, market, distribute and sell a wide variety of convenient and enjoyable beverages, foods and snacks, serving customers and consumers in more than 200 countries and territories.

Our management monitors a variety of key indicators to evaluate our business results and financial condition. These indicators include growth in volume, revenue, organic revenue, operating profit (as reported and excluding certain items and the impact of foreign exchange translation), EPS (as reported and excluding certain items and the impact of foreign exchange translation), retail sales, market share, safety, innovation, product and service quality, organizational health, brand equity, media viewership and engagement, employee diversity, net commodity inflation, productivity savings, net capital spending, free cash flow and free cash flow excluding certain items, cash returned to shareholders in the forms of share repurchases and dividends, advertising and marketing expenses, research and development expenditures, ROIC and net ROIC (excluding certain items), and gross and operating margins (as reported and excluding certain items).

During 2015, we continued to take steps to position ourselves for sustainable value creation over the long term and continued our progress against certain key business priorities – brand building and innovation, productivity, portfolio and capability transformation, talent management and disciplined capital allocation. For example:


•	In 2015, PepsiCo was the leading contributor to food and beverage retail sales in the United States in measured channels, according to Information Resources, Inc.


•	Since 2012, we have increased spending as a percent of net revenue on both advertising and marketing and research and development, illustrating our ability to manage costs and margins in the short run while reinvesting in our business to drive growth over the long term.


•	In 2015, excluding items affecting comparability, we achieved a net ROIC of 19.6%, reflecting our focus on disciplined capital allocation. For further information on this non-GAAP measure, please see “Net Return on Invested Capital.”


•	PepsiCo increased its annualized dividend for the 43rd consecutive year in 2015 and returned $9 billion to our shareholders through share repurchases and dividends. Since 2012, we have delivered $24 billion back to shareholders in the form of dividends and share repurchases.

At PepsiCo, we believe delivering strong performance and acting with a sense of purpose are intertwined – we call this approach Performance with Purpose and it is embedded into our business. Performance with Purpose is focused on three priorities: human sustainability (improving the nutritional profile of many of our products while offering more choices to meet changing consumer needs), environmental sustainability (reducing our environmental impact while lowering our operating costs), and talent sustainability (continuing

to develop a diverse and engaged workforce).

As we look to 2016 and beyond, we believe our Performance with Purpose strategy will enable us to continue delivering strong financial results while positioning our Company for long-term sustainable growth. Our business strategies are designed to address key challenges facing our Company, including: uncertain and volatile macroeconomic conditions, including unfavorable exchange rate fluctuations and currency restrictions; geopolitical, economic and social instability; an increasingly competitive business environment with constantly changing consumer tastes and preferences, including continued consumer focus on nutritious products and changes in methods of distribution and payment; resource scarcity; and intensifying regulatory pressures, including changes in tax laws and the imposition of labeling requirements in markets in which our products are made, manufactured, distributed or sold. See also “Item 1A. Risk Factors” for additional information about risks and uncertainties that the Company faces. We believe that many of these challenges also create new growth opportunities for our Company. We anticipate that the challenges we currently face will continue and we intend to focus on the following areas to address and adapt to these challenges and to capitalize on these opportunities:

Upgrading our commercial capabilities.

Continued growth of our business remains critical to our success and we remain focused on innovation and brand building to position ourselves to continue to deliver the types of products our consumers demand and address increasing regulation of our products, including changes in tax laws and the imposition of labeling requirements. Consumer demand continues to shift towards more nutritious products and we are accelerating our efforts to meet this demand by reducing sodium, added sugars and saturated fat in many of our products while continuing to invest in growing our nutrition businesses. We are also focused on developing new ways to reach our consumers through innovative digital marketing, social media engagement and content creation. In addition, as the global economic, social and political landscape remains volatile, with many markets in which our products are made, manufactured, distributed or sold experiencing unstable conditions, we intend to address these challenges by continuing to build a portfolio that is balanced across categories and geographies to navigate short-term volatility and uncertainty.

Building new capabilities.

With consumer tastes and preferences continuing to evolve, we must continue to build new capabilities to meet the demands of our customers and consumers. To that end, we are focused on increasing our e-commerce presence and capabilities, continuing to invest in research and development and design to foster breakthrough innovations and to enhance consumer experiences across our businesses, and increasing our foodservice presence through new culinary, equipment, product and marketing innovations.

Increasing our focus on reducing costs.

We intend to continue our focus on productivity and lowering the cost base of the Company, primarily by utilizing our global scale, eliminating duplication, deploying new technologies and capitalizing on everyday opportunities to lower our cost base. In 2014, we announced a goal of delivering $5 billion in savings over five years from 2015-2019, and we are on track to do so. We have doubled productivity since 2011, delivering approximately $3 billion in savings from 2013-2015, and over $1 billion in savings in 2015 alone. To build on this progress, we continue to identify new opportunities to cut costs, innovating our way to a more productive future. We are automating our processes for packaging and warehousing. We are making products for one market on production lines in another, lifting utilization rates and better integrating our global supply chain. We are enabling engineers to monitor our production systems remotely, resulting in better, faster solutions at a lower cost. We are also instituting policies that we call “Smart Spending” to control expenses and are expanding training to minimize waste and boost efficiency.

Fostering a culture of collaboration.

PepsiCo has a history of developing strong leaders and we expect the global competition for talent to continue to intensify. To meet the future needs of our business, we remain focused on building the next generation of capabilities and talent, including building a workforce that reflects the diversity of the consumers we serve and developing the functional, technical and leadership skills we need for long-term sustainable performance.

Exercising discipline with respect to capital returns.

We believe that disciplined, balanced capital allocation is one of the hallmarks of a well-run business. We are focused on reinvesting in our business, continuing to pay dividends to shareholders, strengthening our market positions through acquisitions, and returning residual cash to shareholders through share repurchases. Over the past ten years, we have returned approximately $35 billion to shareholders in the form of share repurchases – and more than $65 billion including dividends.

Our Operations

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


1)	Frito-Lay North America (FLNA);


2)	Quaker Foods North America (QFNA);


3)	North America Beverages (NAB);


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


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


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

See “Item 1. Business.” for more information on our divisions and a description of our distribution network, ingredients and other supplies, brands and intellectual property rights, seasonality, customers and competition. In addition, see Note 1 to our consolidated financial statements for financial information about our divisions and geographic areas.

Our Business Risks

We are subject to risks in the normal course of business. During 2015 and 2014, certain countries in which our products are sold operated in a challenging environment, experiencing unstable economic, political and social conditions, civil unrest, debt and credit issues, and currency fluctuations. We continue to monitor the economic, operating and political environment in these markets closely and have identified actions to potentially mitigate the unfavorable impact, if any, on our future results. See also “Item 1A. Risk Factors”, “Executive Overview” above and “Market Risks” below for more information about these risks and the actions we have taken to address key challenges.

Risk Management Framework

The achievement of our strategic and operating objectives involves taking risks. To identify, assess, prioritize, address, manage, monitor and communicate these risks across the Company’s operations, we leverage an integrated risk management framework. This framework includes the following:


•	PepsiCo’s Board of Directors has oversight responsibility for PepsiCo’s integrated risk management framework. One of the Board’s primary responsibilities is overseeing and interacting with senior management with respect to key aspects of the Company’s business, including risk assessment and risk mitigation of the Company’s top risks. The Board receives updates on key risks throughout the year. In addition, the Board has tasked designated Committees of the Board with oversight of certain categories of risk management, and the Committees report to the Board regularly on these matters.

•

PepsiCo’s Board of Directors has oversight responsibility for PepsiCo’s integrated risk management framework. One of the Board’s primary responsibilities is overseeing and interacting with senior management with respect to key aspects of the Company’s business, including risk assessment and risk mitigation of the Company’s top risks. The Board receives updates on key risks throughout the year. In addition, the Board has tasked designated Committees of the Board with oversight of certain categories of risk management, and the Committees report to the Board regularly on these matters.


◦	The Audit Committee of the Board reviews and assesses the guidelines and policies governing PepsiCo’s risk management and oversight processes, and assists with the Board’s oversight of financial, compliance and employee safety risks facing PepsiCo; and


◦	The Compensation Committee of the Board reviews PepsiCo’s employee compensation policies and practices to assess whether such policies and practices could lead to unnecessary risk-taking behavior.


•	The PepsiCo Risk Committee (PRC), which is comprised of a cross-functional, geographically diverse, senior management group, including PepsiCo’s Chairman of the Board and Chief Executive Officer, meets regularly to identify, assess, prioritize and address our top strategic, financial, operating, business, compliance, safety, reputational and other risks. The PRC is also responsible for reporting progress on our risk mitigation efforts to the Board;

•

The PepsiCo Risk Committee (PRC), which is comprised of a cross-functional, geographically diverse, senior management group, including PepsiCo’s Chairman of the Board and Chief Executive Officer, meets regularly to identify, assess, prioritize and address our top strategic, financial, operating, business, compliance, safety, reputational and other risks. The PRC is also responsible for reporting progress on our risk mitigation efforts to the Board;


•	Division and key country risk committees, comprised of cross-functional senior management teams meet regularly to identify, assess, prioritize and address division and country-specific business risks;


•	PepsiCo’s Risk Management Office, which manages the overall risk management process, provides ongoing guidance, tools and analytical support to the PRC and the division and key country risk committees, identifies and assesses potential risks and facilitates ongoing communication between the parties, as well as with PepsiCo’s Board of Directors and the Audit Committee of the Board;


•	PepsiCo’s Corporate Audit Department evaluates the ongoing effectiveness of our key internal controls through periodic audit and review procedures; and


•	PepsiCo’s Compliance & Ethics Department leads and coordinates our compliance policies and practices.

Market Risks

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


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


•	foreign exchange rates and currency restrictions; and


•	interest rates.

In the normal course of business, we manage commodity price, foreign exchange and interest rate risks through a variety of strategies, including productivity initiatives, global purchasing programs and hedging with derivative instruments. Ongoing productivity initiatives involve the identification and effective implementation of meaningful cost-saving opportunities or efficiencies, including the use of derivatives. Our global purchasing programs include fixed-price contracts and purchase orders and pricing agreements. See “Unfavorable economic conditions may have an adverse impact on our business, financial condition or results of operations.” and “Our business, financial condition or results of operations may be adversely affected by increased costs, disruption of supply or shortages of raw materials and other supplies.” in “Item 1A. Risk Factors.” See Note 9 to our consolidated financial statements for further information on our non-cancelable purchasing commitments.

The fair value of our derivatives fluctuates based on market rates and prices. The sensitivity of our derivatives to these market fluctuations is discussed below. See Note 10 to our consolidated financial statements for further discussion of these derivatives and our hedging policies. See “Our Critical Accounting Policies” for a discussion of the exposure of our pension and retiree medical plan assets and liabilities to risks related to market fluctuations.

Inflationary, deflationary and recessionary conditions impacting these market risks also impact the demand for and pricing of our products. See “Item 1A. Risk Factors” for further discussion.

Commodity Prices

Our open commodity derivative contracts had a notional value of $1.0 billion as of December 26, 2015 and $1.2 billion as of December 27, 2014. At the end of 2015, the potential change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity price, would have increased our net unrealized losses in 2015 by $85 million.

Foreign Exchange

Our operations outside of the U.S. generated 44% of our net revenue in 2015, with Mexico, Russia, Canada, the United Kingdom and Brazil comprising approximately 20% of our net revenue in 2015. As a result, we are exposed to foreign exchange risks in the international markets in which our products are made, manufactured, distributed or sold. During 2015, unfavorable foreign exchange reduced net revenue growth by 10 percentage points, primarily due to the Russian ruble, Venezuelan bolivar, Mexican peso, euro, Brazilian real and the Canadian dollar. Currency declines against the U.S. dollar which are not offset could adversely impact our future financial results.

In addition, unstable economic, political and social conditions and civil unrest in certain markets in which our products are made, manufactured, distributed or sold, including in Russia, Ukraine, Brazil, Greece and the Middle East, and currency fluctuations in certain of these international markets continue to result in challenging operating environments.

Starting in 2014, Russia announced economic sanctions against the United States and other nations that include a ban on imports of certain ingredients and finished goods from specific countries. We do not anticipate the current sanctions to have a material impact on the results of our operations in Russia or our consolidated

results or financial position, and we will continue to monitor the economic, operating and political environment in Russia closely. For the years ended December 26, 2015 and December 27, 2014, total net revenue generated by our operations in Russia represented 4% and 7% of our consolidated net revenue, respectively. As of December 26, 2015, our long-lived assets in Russia were $3.6 billion. Our operations in Ukraine are not significant in relation to our consolidated results or financial position.

Our foreign currency derivatives had a total notional value of $2.1 billion as of December 26, 2015 and $2.7 billion as of December 27, 2014. At the end of 2015, we estimate that an unfavorable 10% change in the underlying exchange rates would have decreased our net unrealized gains by $118 million.

Evolving conditions in Venezuela, including increasingly restrictive exchange control regulations and reduced access to dollars through official currency exchange markets, resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar, which significantly impacted our ability to effectively manage our Venezuelan businesses, including restrictions on the ability of our Venezuelan businesses to import certain raw materials to maintain normal production and to settle U.S. dollar-denominated obligations. The exchange restrictions, combined with other regulations that have limited our ability to import certain raw materials, also increasingly constrained our ability to make and execute operational decisions regarding our businesses in Venezuela. In addition, the inability of our Venezuelan businesses to pay dividends, which remain subject to Venezuelan government approvals, restricted our ability to realize the earnings generated out of our Venezuelan businesses. We expect these conditions will continue for the foreseeable future.

As a result of these factors, we concluded that, effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries, and therefore we deconsolidated our wholly-owned Venezuelan subsidiaries effective as of the end of the third quarter of 2015. We also concluded that, effective as of the end of the third quarter of 2015, due to the above-mentioned factors and other matters impacting the operation of our beverage joint venture with our franchise bottler in Venezuela and the distribution of its products, we no longer had significant influence over our joint venture, which was previously accounted for under the equity method. As a result of these conclusions, effective at the end of the third quarter of 2015, we began accounting for our investments in our wholly-owned Venezuelan subsidiaries and our joint venture using the cost method of accounting and recorded pre- and after-tax charges of $1.4 billion in our Consolidated Statement of Income to reduce the value of the cost method investments to their estimated fair values, resulting in a full impairment. The impairment charges primarily included approximately $1.2 billion related to our investments in previously consolidated Venezuelan subsidiaries and our joint venture, and $111 million related to the reclassification of cumulative translation losses. The factors that led to the above-mentioned conclusions at the end of the third quarter of 2015 continued to exist as of the end of 2015. For further information, please refer to Note 1 to our consolidated financial statements and “Items Affecting Comparability.”

Beginning in the fourth quarter of 2015, we no longer included the results of our Venezuelan businesses in our Consolidated Statement of Income and our financial results only included revenue relating to the sales of inventory to our Venezuelan entities to the extent cash was received for those sales. Any dividends from our Venezuelan entities will be recorded as income upon receipt of the cash. We did not receive any U.S. dollars in the fourth quarter of 2015 from our Venezuelan entities. Our ongoing contractual commitments to our Venezuelan businesses are not material. In 2015, the results of our operations in Venezuela, which include the months of January through August, generated 2% of our net revenue and 2% of our operating profit, prior to the impairment charges of $1.4 billion.

Interest Rates

Our interest rate derivative instruments outstanding as of December 26, 2015 and December 27, 2014 had a total notional value of $12.5 billion and $9.3 billion, respectively. Assuming year-end 2015 investment levels and variable rate debt, a 1-percentage-point increase in interest rates would have decreased net interest expense by $8 million in 2015 due to higher cash and cash equivalents and short-term investments levels as compared with our variable rate debt.

OUR CRITICAL ACCOUNTING POLICIES

An appreciation of our critical accounting policies is necessary to understand our financial results. These policies may require management to make difficult and subjective judgments regarding uncertainties, and as a result, such estimates may significantly impact our financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. Other than our accounting for pension and retiree medical plans, our critical accounting policies do not involve a choice between alternative methods of accounting. We applied our critical accounting policies and estimation methods consistently in all material respects, and for all periods presented, and have discussed these policies with our Audit Committee.

Our critical accounting policies are:


•	revenue recognition;


•	goodwill and other intangible assets;


•	income tax expense and accruals; and


•	pension and retiree medical plans.

Revenue Recognition

Our products are sold for cash or on credit terms. Our credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery in the U.S., and generally within 30 to 90 days internationally, and may allow discounts for early payment. We recognize revenue upon shipment or delivery to our customers based on written sales terms that do not allow for a right of return. However, our policy for DSD and certain chilled products is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly, our policy for certain warehouse-distributed products is to replace damaged and out-of-date products. Based on our experience with this practice, we have reserved for anticipated damaged and out-of-date products.

Our policy is to provide customers with product when needed. In fact, our commitment to freshness and product dating serves to regulate the quantity of product shipped or delivered. In addition, DSD products are placed on the shelf by our employees with customer shelf space and storerooms limiting the quantity of product. For product delivered through other distribution networks, we monitor customer inventory levels.

As discussed in “Our Customers” in “Item 1. Business”, we offer sales incentives and discounts through various programs to customers and consumers. Total marketplace spending includes sales incentives, discounts, advertising and other marketing activities. Sales incentives and discounts are primarily accounted for as a reduction of revenue and include payments to customers for performing merchandising activities on our behalf, such as payments for in-store displays, payments to gain distribution of new products, payments for shelf space and discounts to promote lower retail prices. Sales incentives and discounts also include support provided to our independent bottlers through funding of advertising and other marketing activities. A number of our sales incentives, such as bottler funding to independent bottlers and customer volume rebates,

are based on annual targets, and accruals are established during the year for the expected payout. These accruals are based on contract terms and our historical experience with similar programs and require management judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also based on annual targets and recognized during the year as incurred. The terms of most of our incentive arrangements do not exceed a year, and therefore do not require highly uncertain long-term estimates. Certain arrangements, such as fountain pouring rights, may extend beyond one year. Costs incurred to obtain these rights are recognized over the shorter of the economic or contractual life, primarily as a reduction of revenue, and the remaining balances of $321 million as of December 26, 2015 and $355 million as of December 27, 2014 are included in prepaid expenses and other current assets and other assets on our balance sheet.

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. See Note 2 to our consolidated financial statements for additional information on our total marketplace spending. Our annual financial statements are not impacted by this interim allocation methodology.

We estimate and reserve for our bad debt exposure based on our experience with past due accounts and collectibility, the aging of accounts receivable and our analysis of customer data. Bad debt expense is classified within selling, general and administrative expenses in our income statement.

Goodwill and Other Intangible Assets

We sell products under a number of brand names, many of which were developed by us. Brand development costs are expensed as incurred. We also purchase brands and other intangible assets in acquisitions. In a business combination, the consideration is first assigned to identifiable assets and liabilities, including brands and other intangible assets, based on estimated fair values, with any excess recorded as goodwill. Determining fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such as marketplace participants, product life cycles, market share, consumer awareness, brand history and future expansion expectations, amount and timing of future cash flows and the discount rate applied to the cash flows.

We believe that a brand has an indefinite life if it has a history of strong revenue and cash flow performance and we have the intent and ability to support the brand with marketplace spending for the foreseeable future. If these perpetual brand criteria are not met, brands are amortized over their expected useful lives, which generally range from five to 40 years. Determining the expected life of a brand requires management judgment and is based on an evaluation of a number of factors, including market share, consumer awareness, brand history, future expansion expectations and regulatory restrictions, as well as the macroeconomic environment of the countries in which the brand is sold.

In connection with previous acquisitions, we reacquired certain franchise rights which provided the exclusive and perpetual rights to manufacture and/or distribute beverages for sale in specified territories. In determining the useful life of these franchise rights, many factors were considered, including the pre-existing perpetual bottling arrangements, the indefinite period expected for these franchise rights to contribute to our future cash flows, as well as the lack of any factors that would limit the useful life of these franchise rights to us,

including legal, regulatory, contractual, competitive, economic or other factors. Therefore, certain of these franchise rights are considered as indefinite-lived, with the balance amortized over the remaining contractual period of the contract in which the right was granted.

Indefinite-lived intangible assets and goodwill are not amortized and are assessed for impairment at least annually, using either a qualitative or quantitative approach. We perform this annual assessment during our third quarter. Where we use the qualitative assessment, first we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include macroeconomic, industry and competitive conditions, legal and regulatory environment, historical financial performance and significant changes in the brand or reporting unit. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed.

The quantitative assessment requires an analysis of several estimates including future cash flows or income consistent with management’s strategic business plans, annual sales growth rates, perpetuity growth assumptions and the selection of assumptions underlying a discount rate (weighted-average cost of capital) based on market data available at the time. Significant management judgment is necessary to estimate the impact of competitive operating, macroeconomic and other factors to estimate future levels of sales, operating profit or cash flows. All assumptions used in our impairment evaluations for nonamortizable intangible assets, such as forecasted growth rates and weighted-average cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. These assumptions could be adversely impacted by certain of the risks described in “Item 1A. Risk Factors” and “Our Business Risks.”

See Note 2 to our consolidated financial statements for additional information on performing the quantitative assessment.

Amortizable intangible assets are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. If an evaluation of the undiscounted future cash flows indicates impairment, the asset is written down to its estimated fair value, which is based on its discounted future cash flows.

We did not recognize any impairment charges for goodwill in each of the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013. In 2015, we performed the impairment analysis for goodwill for certain of our reporting units and for certain of our indefinite-lived intangible assets using the qualitative approach and concluded that it was more likely than not that the estimated fair values of our reporting units or our indefinite-lived intangible assets were greater than their carrying amounts. After reaching this conclusion, no further testing was performed.

We recognized no material impairment charges for nonamortizable intangible assets in each of the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013. In 2014, we recognized pre-tax impairment charges in ESSA for nonamortizable intangible assets of $23 million. As of December 26, 2015, the estimated fair values of our indefinite-lived reacquired and acquired franchise rights recorded at NAB exceeded their carrying values. However, there could be an impairment of the carrying value of NAB’s reacquired and acquired franchise rights if future revenues and their contribution to the operating results of NAB’s CSD business do not achieve our expected estimated future cash flows or if macroeconomic conditions result in a future increase in the weighted-average cost of capital used to estimate fair value. We have also analyzed the impact of the recent economic and political developments in Russia on the estimated fair value of our indefinite-lived intangible assets in Russia and have concluded that there is no impairment as of December 26, 2015. However, a further deterioration in these conditions in Russia could potentially require us to record an impairment charge for these assets in the future.

Income Tax Expense and Accruals

Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are subject to challenge and that we likely will not succeed. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances, such as the progress of a tax audit. See “Imposition of new taxes, disagreements with tax authorities or additional tax liabilities could adversely affect our business, financial condition or results of operations.” in “Item 1A. Risk Factors.”

An estimated annual effective tax rate is applied to our quarterly operating results. In the event there is a significant or unusual item recognized in our quarterly operating results, the tax attributable to that item is separately calculated and recorded at the same time as that item. We consider the tax adjustments from the resolution of prior year tax matters to be among such items.

Tax law requires items to be included in our tax returns at different times than the items are reflected in our financial statements. As a result, our annual tax rate reflected in our financial statements is different than that reported in our tax returns (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years for which we have already recorded the tax benefit in our income statement. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred, or expense for which we have already taken a deduction in our tax return but have not yet recognized as expense in our financial statements.

In 2015, our annual tax rate was 26.1% compared to 25.1% in 2014, as discussed in “Other Consolidated Results.” The tax rate increased 1.0 percentage point compared to the prior year reflecting the impact of the Venezuela impairment charges, which had no accompanying tax benefit, partially offset by the favorable resolution with the IRS of substantially all open matters related to the audits for taxable years 2010 and 2011.

Pension and Retiree Medical Plans

Our pension plans cover certain full-time employees in the United States and certain international employees. Benefits are determined based on either years of service or a combination of years of service and earnings. Certain U.S. and Canada retirees are also eligible for medical and life insurance benefits (retiree medical) if they meet age and service requirements. Generally, our share of retiree medical costs is capped at specified dollar amounts, which vary based upon years of service, with retirees contributing the remainder of the cost. In addition, the Company has been phasing out certain Company subsidies of retiree medical benefits.

In the fourth quarter of 2014, the Company offered certain former employees who had vested benefits in our U.S. defined benefit pension plans the option of receiving a one-time lump sum payment equal to the present value of the participant’s pension benefit (payable in cash or rolled over into a qualified retirement plan or Individual Retirement Account (IRA)). As a result, we recorded a pension lump sum settlement charge in corporate unallocated expenses of $141 million ($88 million after-tax or $0.06 per share). See “Items Affecting Comparability” and Note 7 to our consolidated financial statements.

Our Assumptions

The determination of pension and retiree medical expenses and obligations requires the use of assumptions to estimate the amount of benefits that employees earn while working, as well as the present value of those benefits. Annual pension and retiree medical expense amounts are principally based on four components: (1) the value of benefits earned by employees for working during the year (service cost), (2) the increase in the liability due to the passage of time (interest cost), and (3) other gains and losses as discussed in Note 7 to our consolidated financial statements, reduced by (4) the expected return on assets for our funded plans.

Significant assumptions used to measure our annual pension and retiree medical expenses include:


•	the interest rate used to determine the present value of liabilities (discount rate);


•	certain employee-related demographic factors, such as turnover, retirement age and mortality;


•	the expected return on assets in our funded plans;


•	for pension expense, the rate of salary increases for plans where benefits are based on earnings; and


•	for retiree medical expense, health care cost trend rates.

Our assumptions reflect our historical experience and management’s best judgment regarding future expectations. Due to the significant management judgment involved, our assumptions could have a material impact on the measurement of our pension and retiree medical expenses and obligations.

At each measurement date, the discount rates are based on interest rates for high-quality, long-term corporate debt securities with maturities comparable to those of our liabilities. Our U.S. obligation and pension and retiree medical expense is based on the discount rates determined using the Mercer Above Mean Curve. This curve includes bonds that closely match the timing and amount of our expected benefit payments and reflects the portfolio of investments we would consider to settle our liabilities.

We review our employee demographic assumptions annually and update the assumptions as necessary. During 2014, we revised our mortality assumptions to include the impact of the new set of mortality tables issued by the Society of Actuaries, adjusted to reflect our experience and future expectations. This resulted in an increase in the projected benefit obligation of our U.S. pension and retiree medical programs. We also reviewed and revised other demographic assumptions to reflect recent experience. The net effect of these changes and certain plan design changes resulted in an increase of approximately $150 million in the projected benefit obligation at December 27, 2014.

See Note 7 to our consolidated financial statements for information about the expected return on plan assets and our plan investment strategy.

The health care trend rate used to determine our retiree medical plan’s liability and expense is reviewed annually. Our review is based on our claims experience, information provided by our health plans and actuaries, and our knowledge of the health care industry. Our review of the trend rate considers factors such as demographics, plan design, new medical technologies and changes in medical carriers.

Weighted-average assumptions for pension and retiree medical expense are as follows:



	2016		2015		2014
Pension
Expense discount rate	4.4	%	4.1	%	5.0	%
Expected rate of return on plan assets	7.2	%	7.3	%	7.3	%
Expected rate of salary increases	3.2	%	3.5	%	3.7	%
Retiree medical
Expense discount rate	4.2	%	3.8	%	4.3	%
Expected rate of return on plan assets	7.5	%	7.5	%	7.5	%
Current health care cost trend rate	6.0	%	6.2	%	6.4	%

Based on our assumptions, we expect our pension and retiree medical expenses to decrease in 2016 primarily driven by higher discount rates and updates to demographic assumptions, partially offset by the amortization of higher losses on plan assets.

Sensitivity of Assumptions

A decrease in the discount rate or in the expected rate of return assumptions would increase expense for our benefit plans. A 25-basis-point decrease in the discount rate and expected rate of return assumptions would increase the 2016 pension and retiree medical expense as follows:



Assumption		Amount
Discount rate		$47
Expected rate of return		$36

See Note 7 to our consolidated financial statements for additional information about the sensitivity of our retiree medical cost assumptions.

Funding

We make contributions to pension trusts that provide plan benefits for certain pension plans. These contributions are made in accordance with applicable tax regulations that provide for current tax deductions for our contributions and taxation to the employee only upon receipt of plan benefits. Generally, we do not fund our pension plans when our contributions would not be currently tax deductible. As our retiree medical plans are not subject to regulatory funding requirements, we generally fund these plans on a pay-as-you-go basis, although we periodically review available options to make additional contributions toward these benefits.

Our pension and retiree medical contributions are subject to change as a result of many factors, such as changes in interest rates, deviations between actual and expected asset returns and changes in tax or other benefit laws. See Note 7 to our consolidated financial statements for our past and expected contributions and estimated future benefit payments.

OUR FINANCIAL RESULTS

Items Affecting Comparability

The year-over-year comparisons of our financial results are affected by the following items:



	2015			2014			2013
Operating profit
Mark-to-market net gains/(losses)	$	11		$	(68	)	$	(72	)
Restructuring and impairment charges	$	(230	)	$	(418	)	$	(163	)
Pension-related settlement benefits/(charge)	$	67		$	(141	)	$	—
Charge related to the transaction with Tingyi	$	(73	)	$	—		$	—
Venezuela impairment charges	$	(1,359	)	$	—		$	—
Venezuela remeasurement charges	$	—		$	(105	)	$	(111	)
Merger and integration charges	$	—		$	—		$	(10	)
Net income attributable to PepsiCo
Mark-to-market net gains/(losses)	$	8		$	(44	)	$	(44	)
Restructuring and impairment charges	$	(184	)	$	(316	)	$	(129	)
Pension-related settlement benefits/(charge)	$	42		$	(88	)	$	—
Charge related to the transaction with Tingyi	$	(73	)	$	—		$	—
Venezuela impairment charges	$	(1,359	)	$	—		$	—
Venezuela remeasurement charges	$	—		$	(105	)	$	(111	)
Merger and integration charges	$	—		$	—		$	(8	)
Tax benefits	$	230		$	—		$	209
Net income attributable to PepsiCo per common share – diluted
Mark-to-market net gains/(losses)	$	—		$	(0.03	)	$	(0.03	)
Restructuring and impairment charges	$	(0.12	)	$	(0.21	)	$	(0.08	)
Pension-related settlement benefits/(charge)	$	0.03		$	(0.06	)	$	—
Charge related to the transaction with Tingyi	$	(0.05	)	$	—		$	—
Venezuela impairment charges	$	(0.91	)	$	—		$	—
Venezuela remeasurement charges	$	—		$	(0.07	)	$	(0.07	)
Merger and integration charges	$	—		$	—		$	(0.01	)
Tax benefits	$	0.15		$	—		$	0.13

Mark-to-Market Net Impact

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. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses.

In 2015, we recognized $11 million ($8 million after-tax with a nominal amount per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses, with an $18 million net loss recognized in cost of sales and a $29 million net gain recognized in selling, general and administrative expenses.

In 2014, we recognized $68 million ($44 million after-tax or $0.03 per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses, with a $33 million net gain recognized in cost of sales and a $101 million net loss recognized in selling, general and administrative expenses.

In 2013, we recognized $72 million ($44 million after-tax or $0.03 per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses, with an $82 million net loss recognized in cost of sales and a $10 million net gain recognized in selling, general and administrative expenses.

See Note 1 to our consolidated financial statements for further information.

Restructuring and Impairment Charges

2014 Multi-Year Productivity Plan

We expect to incur pre-tax charges of approximately $990 million, of which approximately $705 million represents cash expenditures related to the 2014 Productivity Plan, summarized by period as follows:



	Charges			Cash Expenditures
2013	$	53		$	—
2014	357			175		(b)
2015	169			165		(b)
2016 (expected)	132			150
2017 - 2019 (expected)	279			215
	$	990	(a)	$	705


(a)	This total pre-tax charge will consist of approximately $525 million of severance and other employee-related costs, approximately $120 million for asset impairments (all non-cash) resulting from plant closures and related actions, and approximately $345 million for other costs associated with the implementation of our initiatives, including contract termination costs. This charge is expected to impact reportable segments approximately as follows: FLNA 12%, QFNA 2%, NAB 35%, Latin America 15%, ESSA 25%, AMENA 4% and Corporate 7%.

(a)

This total pre-tax charge will consist of approximately $525 million of severance and other employee-related costs, approximately $120 million for asset impairments (all non-cash) resulting from plant closures and related actions, and approximately $345 million for other costs associated with the implementation of our initiatives, including contract termination costs. This charge is expected to impact reportable segments approximately as follows: FLNA 12%, QFNA 2%, NAB 35%, Latin America 15%, ESSA 25%, AMENA 4% and Corporate 7%.


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

2012 Multi-Year Productivity Plan

We incurred pre-tax charges of $894 million, of which $694 million represented cash expenditures related to the 2012 Productivity Plan, summarized by period as follows:



	Charges			Cash Expenditures
2011	$	383		$	30
2012	279			343
2013	110			133
2014	61			101
2015	61			49		(b)
2016 - 2017 (expected)	—			38
	$	894	(a)	$	694


(a)	This total pre-tax charge consisted of $560 million of severance and other employee-related costs, $91 million for asset impairments (all non-cash) resulting from plant closures and related actions, and $243 million for other costs, including costs related to the termination of leases and other contracts. This charge impacted our reportable segments as follows: FLNA 14%, QFNA 3%, NAB 22%, Latin America 14%, ESSA 25%, AMENA 11% and Corporate 11%.

(a)

This total pre-tax charge consisted of $560 million of severance and other employee-related costs, $91 million for asset impairments (all non-cash) resulting from plant closures and related actions, and $243 million for other costs, including costs related to the termination of leases and other contracts. This charge impacted our reportable segments as follows: FLNA 14%, QFNA 3%, NAB 22%, Latin America 14%, ESSA 25%, AMENA 11% and Corporate 11%.


(b)	In 2015, cash expenditures include $4 million reported on the Consolidated Statement of Cash Flows in pension and retiree medical plan contributions.

Pension-Related Settlements

In 2015, we recorded pre-tax gains of $67 million ($42 million after-tax or $0.03 per share) in the NAB segment associated with the settlement of pension-related liabilities from previous acquisitions. These gains were recognized in selling, general and administrative expenses.

In 2014, we recorded a pension lump sum settlement charge in corporate unallocated expenses of $141 million ($88 million after-tax or $0.06 per share) related to payments for pension liabilities to certain former employees who had vested benefits. See Note 7 to our consolidated financial statements.

Charge Related to the Transaction with Tingyi

In 2015, we recorded a pre- and after-tax charge of $73 million ($0.05 per share) in the AMENA segment related to a write-off of the value of a call option to increase our holding in TAB to 20%.

See Note 10 to our consolidated financial statements.

Venezuela Impairment Charges

In 2015, we recorded pre- and after-tax charges of $1.4 billion ($0.91 per share) in the Latin America segment related to the impairment of investments in our wholly-owned Venezuelan subsidiaries and beverage joint venture.

For additional information on Venezuela, see Note 1 to our consolidated financial statements and “Our Business Risks.”

Venezuela Remeasurement Charges

In 2014, we recorded a $105 million net charge related to our remeasurement of the bolivar for certain net monetary assets of our Venezuelan businesses. $126 million of this charge was recorded in corporate unallocated expenses, with the balance (equity income of $21 million) recorded in our Latin America segment. In total, this net charge had an after-tax impact of $105 million or $0.07 per share.

In 2013, we recorded a $111 million net charge related to the devaluation of the bolivar for our Venezuelan businesses. $124 million of this charge was recorded in corporate unallocated expenses, with the balance (equity income of $13 million) recorded in our Latin America segment. In total, this net charge had an after-tax impact of $111 million or $0.07 per share.

For additional information on Venezuela, see “Our Business Risks” and Note 1 to our consolidated financial statements.

Merger and Integration Charges

In 2013, we incurred merger and integration charges of $10 million ($8 million after-tax or $0.01 per share) related to our acquisition of WBD, all of which were recorded in the ESSA segment.

Tax Benefits

In 2015, we recognized a non-cash tax benefit of $230 million ($0.15 per share) associated with our agreement with the IRS resolving substantially all open matters related to the audits for taxable years 2010 through 2011, which reduced our reserve for uncertain tax positions for the tax years 2010 and 2011.

In 2013, we recognized a non-cash tax benefit of $209 million ($0.13 per share) associated with our agreement with the IRS resolving all open matters related to the audits for taxable years 2003 through 2009, which reduced our reserve for uncertain tax positions for the tax years 2003 through 2012.

See Note 5 to our consolidated financial statements.

Non-GAAP Measures

Certain measures contained in this Form 10-K are financial measures that are adjusted for items affecting comparability (see “Items Affecting Comparability” for a detailed list and description of each of these items), as well as, in certain instances, adjusted for foreign exchange. These measures are not in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Items adjusted for currency assume foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In order to compute our constant currency results, we multiply or divide, as appropriate, our current year U.S. dollar results by the current year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior year average foreign exchange rates. We believe investors should consider these non-GAAP measures in evaluating our results as they are indicative of our ongoing performance and reflect how management evaluates our operational results and trends. These measures are not, and should not be viewed as, a substitute for U.S. GAAP reporting measures. See “Organic Revenue Growth,” “Free Cash Flow” and “Net Return on Invested Capital.”

Results of Operations — Consolidated Review

In the discussions of net revenue and operating profit below, “effective net pricing” reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries and “net pricing” reflects the year-over-year combined impact of list price changes, weight changes per package, discounts and allowances. Additionally, “acquisitions and divestitures,” except as otherwise noted, reflect all mergers and acquisitions activity, including the impact of acquisitions, divestitures and changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees. The impact of the structural change related to the deconsolidation of our Venezuelan businesses is presented separately.

Volume

Our beverage volume in the NAB, Latin America, ESSA and AMENA segments reflects sales to authorized bottlers, independent distributors and retailers, as well as the sale of beverages bearing Company-owned or licensed trademarks that have been sold through our authorized independent bottlers. Bottler case sales (BCS) and concentrate shipments and equivalents (CSE) are not necessarily equal during any given period due to seasonality, timing of product launches, product mix, bottler inventory practices and other factors. While our beverage revenues are not entirely based on BCS volume, as there are independent bottlers in the supply chain, we believe that BCS is a valuable measure as it quantifies the sell-through of our beverage products at the consumer level. Sales of products from our unconsolidated joint ventures are reflected in our reported volume. NAB, Latin America, ESSA and AMENA, either independently or in conjunction with third parties, make, market, distribute and sell ready-to-drink tea products through a joint venture with Unilever (under the Lipton brand name), and NAB further, either independently or in conjunction with third parties, makes, markets, distributes and sells ready-to-drink coffee products through a joint venture with Starbucks. In addition, AMENA licenses the Tropicana brand for use in China on co-branded juice products in connection with a strategic alliance with Tingyi.

Our food and snacks volume in the FLNA, QFNA, Latin America, ESSA and AMENA segments is reported on a system-wide basis, which includes our own sales and the sales by our noncontrolled affiliates of snacks bearing Company-owned or licensed trademarks.

Servings

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.

In 2015 and 2014, total servings increased 1% compared to 2014 and 2013, respectively. Servings growth in 2015 excludes the fourth quarter 2014 results of our Venezuelan businesses, which were deconsolidated effective as of the end of the third quarter of 2015.

Total Net Revenue and Operating Profit/(Loss)



										Change
	2015			2014			2013			2015		2014
Total net revenue	$	63,056		$	66,683		$	66,415		(5	)%	—	%
Operating profit/(loss)
FLNA	$	4,304		$	4,054		$	3,877		6	%	5	%
QFNA	560			621			617			(10	)%	1	%
NAB	2,785			2,421			2,580			15	%	(6	)%
Latin America	(206		)	1,636			1,617			(113	)%	1	%
ESSA	1,081			1,389			1,327			(22	)%	5	%
AMENA	941			985			1,140			(4.5	)%	(14	)%
Corporate Unallocated
Mark-to-market net gains/(losses)	11			(68		)	(72		)
Restructuring and impairment charges	(13		)	(41		)	(11		)
Pension lump sum settlement charge	—			(141		)	—
Venezuela remeasurement charges	—			(126		)	(124		)
Other	(1,110		)	(1,149		)	(1,246		)
	$	(1,112	)	$	(1,525	)	$	(1,453	)	(27	)%	5	%
Total operating profit	$	8,353		$	9,581		$	9,705		(13	)%	(1	)%

Total operating profit margin	13.2		%	14.4		%	14.6		%	(1.2	)	(0.2	)

2015

On a reported basis, total operating profit decreased 13% and operating margin decreased 1.2 percentage points. Operating profit performance was primarily driven by certain operating cost increases, unfavorable foreign exchange, higher commodity costs and increased advertising and marketing expenses. These impacts were partially offset by effective net pricing, the benefit of actions associated with our productivity initiatives, which contributed more than $1 billion in cost reductions across a number of expense categories throughout all of our segments, and volume growth. Items affecting comparability (see “Items Affecting Comparability”) negatively impacted operating profit performance by 9 percentage points and decreased total operating margin by 1.4 percentage points, primarily reflecting the Venezuela impairment charges. Higher commodity inflation negatively impacted reported operating profit performance by 5 percentage points, primarily attributable to inflation in the Latin America and ESSA segments, partially offset by deflation in the NAB, FLNA, AMENA and QFNA segments. Additionally, impairment charges in the QFNA segment associated with our MQD joint venture and the fourth quarter impact of our Venezuelan businesses (as a result of the deconsolidation) each negatively impacted reported operating profit performance by 1 percentage point. Other corporate unallocated expenses decreased 3%, primarily reflecting decreased pension expense, partially offset by increased research and development costs and charges associated with productivity initiatives outside the scope of the 2014 and 2012 Productivity Plans.

2014

On a reported basis, total operating profit decreased 1% and operating margin decreased 0.2 percentage points. Operating profit performance was primarily driven by certain operating cost increases including strategic initiatives related to capacity and capability, higher commodity costs and unfavorable foreign exchange. Commodity inflation negatively impacted operating profit performance by 4 percentage points, primarily attributable to inflation in the Latin America and ESSA segments, partially offset by deflation in the NAB and FLNA segments. These impacts were partially offset by favorable effective net pricing and the

benefit of actions associated with our productivity initiatives, which contributed more than $1 billion in cost reductions across a number of expense categories throughout all of our segments. Additionally, the impact of certain charges associated with productivity initiatives outside the scope of the 2014 and 2012 Productivity Plans negatively impacted operating profit performance by nearly 1 percentage point, primarily in the ESSA and AMENA segments. Other corporate unallocated expenses decreased 8%, primarily reflecting decreased pension expense, as well as the lapping of incremental investments into our business in the prior year, partially offset by higher foreign exchange transaction losses. Items affecting comparability (see “Items Affecting Comparability”) negatively impacted total operating profit performance by 3.8 percentage points and total operating margin by 0.6 percentage points.

Other Consolidated Results



												Change
	2015			2014				2013				2015			2014
Interest expense, net	$	(911	)	$	(824	)		$	(814	)		$	(87	)	$	(10	)
Annual tax rate	26.1		%	25.1		%		23.7		%
Net income attributable to PepsiCo	$	5,452		$	6,513			$	6,740			(16		)%	(3		)%
Net income attributable to PepsiCo per common share – diluted	$	3.67		$	4.27			$	4.32			(14		)%	(1		)%
Mark-to-market net (gains)/losses	—			0.03				0.03
Restructuring and impairment charges	0.12			0.21				0.08
Pension-related settlement (benefits)/charge	(0.03		)	0.06				—
Charge related to the transaction with Tingyi	0.05			—				—
Venezuela impairment charges	0.91			—				—
Venezuela remeasurement charges	—			0.07				0.07
Merger and integration charges	—			—				0.01
Tax benefits	(0.15		)	—				(0.13		)
Net income attributable to PepsiCo per common share – diluted, excluding above items (a)	$	4.57		$	4.63		(b)	$	4.37		(b)	(1		)%	6		%
Impact of foreign exchange translation												11			3
Growth in net income attributable to PepsiCo per common share – diluted, excluding above items, on a constant currency basis (a)												10		%	9		%


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

2015

Net interest expense increased $87 million, reflecting higher rates on our debt balances and lower gains on the market value of investments used to economically hedge a portion of our deferred compensation costs.

The reported tax rate increased 1.0 percentage point reflecting the impact of the Venezuela impairment charges, which had no accompanying tax benefit, partially offset by the favorable resolution with the IRS of substantially all open matters related to the audits for taxable years 2010 and 2011.

Net income attributable to PepsiCo decreased 16% and net income attributable to PepsiCo per common share decreased 14%. Items affecting comparability (see “Items Affecting Comparability”) negatively impacted net income attributable to PepsiCo by 12 percentage points and net income attributable to PepsiCo per common share by 13 percentage points.

2014

Net interest expense increased $10 million, primarily reflecting lower gains on the market value of investments used to economically hedge a portion of our deferred compensation costs, partially offset by higher interest income due to higher average cash balances.

The reported tax rate increased 1.4 percentage points, primarily due to lapping the prior year impact of the favorable resolution with the IRS of audits for taxable years 2003 through 2009, partially offset by favorable resolution of certain tax matters in 2014.

Net income attributable to PepsiCo decreased 3% and net income attributable to PepsiCo per common share decreased 1%. Items affecting comparability (see “Items Affecting Comparability”) negatively impacted both net income attributable to PepsiCo and net income attributable to PepsiCo per common share by 7 percentage points.

Results of Operations — Division Review

The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. Accordingly, 2015 volume growth measures exclude the fourth quarter 2014 results of our Venezuelan businesses, which were deconsolidated effective as of the end of the third quarter of 2015. See “Items Affecting Comparability” for a discussion of items to consider when evaluating our results and related information regarding non-GAAP measures.



	FLNA			QFNA				NAB			Latin America			ESSA			AMENA			Total
Net Revenue, 2015	$	14,782		$	2,543			$	20,618		$	8,228		$	10,510		$	6,375		$	63,056
Net Revenue, 2014	$	14,502		$	2,568			$	20,171		$	9,425		$	13,399		$	6,618		$	66,683
% Impact of:
Volume(a)	1		%	1		%		0.5		%	1		%	(2		)%	4		%	0.5		%
Effective net pricing(b)	2			—				3			19			4			0.5			5
Foreign exchange translation	(1		)	(2		)		(1		)	(27		)	(24		)	(5		)	(10		)
Acquisitions and divestitures	—			—				—			—			—			(3		)	—
Venezuela deconsolidation(c)	—			—			—	—			(6		)	—			—			(1		)
Reported growth(d)	2		%	(1		)%		2		%	(13		)%	(22		)%	(4		)%	(5		)%



	FLNA			QFNA			NAB			Latin America			ESSA			AMENA			Total
Net Revenue, 2014	$	14,502		$	2,568		$	20,171		$	9,425		$	13,399		$	6,618		$	66,683
Net Revenue, 2013	$	14,126		$	2,612		$	20,083		$	9,335		$	13,828		$	6,431		$	66,415
% Impact of:
Volume(a)	2		%	—		%	—		%	(2		)%	1		%	6		%	1		%
Effective net pricing(b)	1			(1		)	1			11			3.5			1			3
Foreign exchange translation	(1		)	(1		)	(0.5		)	(9		)	(8		)	(3		)	(3		)
Acquisitions and divestitures	—			—			—			—			—			(1.5		)	—
Reported growth(d)	3		%	(2		)%	—		%	1		%	(3		)%	3		%	—		%


(a)	Excludes the impact of acquisitions and divestitures. In certain instances, volume growth varies from the amounts disclosed in the following divisional discussions due to nonconsolidated joint venture volume, and, for our beverage businesses, temporary timing differences between BCS and CSE, as well as the mix of beverage volume sold by our Company-owned and franchised-owned bottlers. Our net revenue excludes nonconsolidated joint venture volume, and, for our beverage businesses, is based on CSE.

(a)

Excludes the impact of acquisitions and divestitures. In certain instances, volume growth varies from the amounts disclosed in the following divisional discussions due to nonconsolidated joint venture volume, and, for our beverage businesses, temporary timing differences between BCS and CSE, as well as the mix of beverage volume sold by our Company-owned and franchised-owned bottlers. Our net revenue excludes nonconsolidated joint venture volume, and, for our beverage businesses, is based on CSE.


(b)	Includes the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries.


(c)	Represents the impact of the exclusion of the fourth quarter 2014 results of our Venezuelan businesses, which were deconsolidated effective as of the end of the third quarter of 2015.


(d)	Amounts may not sum due to rounding.

Organic Revenue Growth

Organic revenue growth is a significant measure we use to monitor net revenue performance. However, it is not a measure provided by U.S. GAAP. Therefore, this measure is not, and should not be viewed as, a substitute for U.S. GAAP net revenue growth. In order to compute our organic revenue growth results, we exclude the impact of acquisitions, divestitures and other structural changes, including the Venezuela deconsolidation, and foreign exchange translation from reported net revenue growth. See also “Non-GAAP Measures.”



2015	FLNA		QFNA		NAB		Latin America		ESSA		AMENA		Total
Reported Growth	2	%	(1	)%	2	%	(13	)%	(22	)%	(4	)%	(5	)%
% Impact of:
Foreign exchange translation	1		2		1		27		24		5		10
Acquisitions and divestitures	—		—		—		—		—		3		—
Venezuela deconsolidation(a)	—		—		—		6		—		—		1
Organic Growth(b)	3	%	1	%	3	%	20	%	2	%	4	%	5	%

2014	FLNA		QFNA		NAB		Latin America		ESSA		AMENA		Total
Reported Growth	3	%	(2	)%	—	%	1	%	(3	)%	3	%	—	%
% Impact of:
Foreign exchange translation	1		1		0.5		9		8		3		3
Acquisitions and divestitures	—		—		—		—		—		1.5		—
Organic Growth(b)	3	%	(1	)%	1	%	10	%	5	%	7	%	4	%


(a)	Represents the impact of the exclusion of the fourth quarter 2014 results of our Venezuelan businesses, which were deconsolidated effective as of the end of the third quarter of 2015.


(b)	Amounts may not sum due to rounding.

Frito-Lay North America



							% Change
	2015		2014		2013		2015		2014
Net revenue	$	14,782	$	14,502	$	14,126	2		3
Impact of foreign exchange translation							1		1
Net revenue growth, on a constant currency basis(a)							3		3	(b)

Operating profit	$	4,304	$	4,054	$	3,877	6		5
Restructuring and impairment charges	26		48		19
Operating profit excluding above item(a)	$	4,330	$	4,102	$	3,896	5.5		5
Impact of foreign exchange translation							1		0.5
Operating profit growth excluding above item, on a constant currency basis(a)							7	(b)	6	(b)


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

2015

Net revenue grew 2% and volume grew 1%. The net revenue growth was driven by effective net pricing and the volume growth. The volume growth reflects mid-single-digit growth in variety packs and trademark Tostitos, double-digit growth in trademark Smartfood and low-single-digit growth in trademark Doritos. These increases were partially offset by a low-single-digit decline in trademark Lay’s.

Operating profit grew 6%, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which contributed 5 percentage points to operating profit growth, primarily cooking oil and packaging. These impacts were partially offset by certain operating cost increases, including strategic initiatives, as well as higher advertising and marketing expenses.

2014

Net revenue grew 3% and volume grew 2%. Net revenue growth was driven by the volume growth and effective net pricing. The volume growth reflects mid-single-digit growth in trademark Doritos, double-digit growth in variety packs and our Sabra joint venture products and low-single-digit growth in dips. These gains were partially offset by a double-digit decline in trademark SunChips.

Operating profit grew 5%, primarily reflecting the net revenue growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, primarily cooking oil and corn, which increased operating profit growth by 2 percentage points. These impacts were partially offset by certain operating cost increases including strategic initiatives.

Quaker Foods North America



							% Change
	2015		2014		2013		2015		2014
Net revenue	$	2,543	$	2,568	$	2,612	(1	)	(2	)
Impact of foreign exchange translation							2		1
Net revenue growth, on a constant currency basis(a)							1		(1	)

Operating profit	$	560	$	621	$	617	(10	)	1
Restructuring and impairment charges	3		14		4
Operating profit excluding above item(a)	$	563	$	635	$	621	(11	)	2
Impact of foreign exchange translation							1		1
Operating profit growth excluding above item, on a constant currency basis(a)							(10	)	3


(a)	See “Non-GAAP Measures.”

2015

Net revenue declined 1% and volume grew slightly. The net revenue decline reflects unfavorable foreign exchange, which negatively impacted net revenue performance by 2 percentage points, partially offset by the volume growth. The volume growth reflects mid-single digit growth in ready-to-eat cereals and Aunt Jemima syrup and mix, partially offset by a double-digit decline in MQD products and mid-single digit declines in both grits and bars.

Operating profit decreased 10%, reflecting MQD impairment charges, which included a fourth quarter charge related to ceasing operations of our joint venture as well as the lapping of the gain associated with the divestiture of a cereal business in the prior year, each negatively impacting operating profit performance by 12 and 3 percentage points, respectively. In addition, operating profit performance was also negatively impacted by certain operating cost increases and higher advertising and marketing expenses. These impacts were partially offset by planned cost reductions across a number of expense categories, favorable mix and the volume growth, as well as lower commodity costs, which positively contributed 3 percentage points to operating profit performance.

2014

Net revenue declined 2% and volume was even with the prior year. The net revenue decline primarily reflects unfavorable net pricing and unfavorable foreign exchange, which negatively impacted net revenue performance by 1 percentage point. The volume performance reflects low-single-digit declines in Aunt Jemima syrup and mix and ready-to-eat cereals, a mid-single-digit decline in regional grains, as well as a double-digit decline in cookies, offset by low-single-digit growth in Oatmeal.

Operating profit increased 1%, primarily driven by planned cost reductions across a number of expense categories, improvement in our share of the operating results of our MQD joint venture, which reflected start-up costs in the prior year, and lower advertising and marketing expenses. Additionally, the net gain on the divestiture of a cereal business contributed 3 percentage points to operating profit growth. These impacts were partially offset by the unfavorable net pricing and mix, as well as certain operating cost increases.

North America Beverages



								% Change
	2015			2014		2013		2015	2014
Net revenue	$	20,618		$	20,171	$	20,083	2	—
Impact of foreign exchange translation								1	0.5
Net revenue growth, on a constant currency basis(a)								3	1		(b)

Operating profit	$	2,785		$	2,421	$	2,580	15	(6	)
Restructuring and impairment charges	33			179		30
Pension-related settlement benefits	(67		)	—		—
Operating profit excluding above items(a)	$	2,751		$	2,600	$	2,610	6	—
Impact of foreign exchange translation								1	1
Operating profit growth excluding above items, on a constant currency basis(a)								7	—		(b)


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

2015

Net revenue increased 2%, primarily reflecting effective net pricing and volume growth. Unfavorable foreign exchange reduced net revenue growth by 1 percentage point.

Volume increased 1%, driven by a 6% increase in non-carbonated beverage volume, partially offset by a 2% decline in CSD volumes. The non-carbonated beverage volume increase primarily reflected a double-digit increase in our overall water portfolio, a mid-single-digit increase in Gatorade sports drinks, and a high-single-digit increase in Lipton ready-to-drink teas.

Operating profit increased 15%. Excluding the items affecting comparability in the above table (see “Items Affecting Comparability”), operating profit increased 6%. This increase primarily reflects the net revenue growth and planned cost reductions across a number of expense categories, as well as lower commodity costs, which contributed 8 percentage points to reported operating profit growth. These impacts were partially offset by certain operating cost increases and higher advertising and marketing expenses, as well as the lapping of favorable settlements of promotional spending accruals in the prior year, which reduced reported operating profit growth by 2 percentage points. Unfavorable foreign exchange reduced operating profit growth by 1 percentage point.

2014

Net revenue was even with the prior year, primarily reflecting effective net pricing, partially offset by unfavorable foreign exchange, which negatively impacted net revenue performance by 0.5 percentage points.

Volume declined slightly, driven by a 2% decline in CSD volumes, partially offset by a 2% increase in non-carbonated beverage volume. The non-carbonated beverage volume increase primarily reflected mid-single-digit increases in Gatorade sports drinks, our overall water portfolio and Lipton ready-to-drink teas, partially offset by a high-single-digit decline in our juice and juice drinks portfolio.

Operating profit decreased 6%. Excluding the item affecting comparability in the above table (see “Items Affecting Comparability”), operating profit was even with the prior year. Operating profit performance reflected certain operating cost increases, mostly offset by the favorable effective net pricing, planned cost reductions across a number of expense categories, as well as lower commodity costs, which positively impacted reported operating profit performance by 7 percentage points. Unfavorable foreign exchange negatively impacted operating profit performance by 1 percentage point.

Latin America



										% Change
	2015			2014			2013			2015		2014
Net revenue	$	8,228		$	9,425		$	9,335		(13	)	1
Impact of foreign exchange translation										27		9
Net revenue growth, on a constant currency basis(a)										14		10

Operating (loss)/profit	$	(206	)	$	1,636		$	1,617		(113	)	1
Restructuring and impairment charges	36			28			13
Venezuela impairment charges	1,359			—			—
Venezuela remeasurement	—			(21		)	(13		)
Operating profit excluding above items(a)	$	1,189		$	1,643		$	1,617		(28	)	2
Impact of foreign exchange translation										37		13
Operating profit growth excluding above items, on a constant currency basis(a)										9		14	(b)


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

2015

Net revenue decreased 13%, primarily reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 27 percentage points, including 11 percentage points from Venezuela. In addition, the fourth quarter impact of the deconsolidation of our Venezuelan businesses negatively impacted net revenue performance by 6 percentage points. These impacts were partially offset by effective net pricing, including 14 percentage points of inflation-based pricing from Venezuela, and volume growth.

Snacks volume grew 1%, reflecting a low-single-digit increase in Mexico, partially offset by a high-single-digit decrease in Brazil.

Beverage volume increased slightly, reflecting a low-single-digit increase in Mexico, partially offset by a high-single-digit decrease in Brazil and a mid-single-digit decline in Argentina. The beverage volume growth included a one-half-percentage point positive contribution from certain of our bottler’s brands related to our joint venture in Chile.

Operating profit decreased 113%, primarily reflecting the Venezuela impairment charges in the above table. Excluding the items affecting comparability in the above table (see “Items Affecting Comparability”), operating profit decreased 28%. This decrease reflects certain operating cost increases, including strategic initiatives, as well as higher commodity costs, which negatively impacted reported operating profit performance by 39 percentage points, including transaction-related foreign exchange. Additionally, charges associated with productivity initiatives outside the scope of the 2014 and 2012 Productivity Plans negatively impacted reported operating profit performance by 2 percentage points. These impacts were partially offset by the effective net pricing, planned cost reductions across a number of expense categories and the volume growth. Unfavorable foreign exchange negatively impacted operating profit performance by 37 percentage points, including a 23-percentage-point impact from Venezuela. The results of our Venezuelan businesses negatively impacted reported operating profit performance by 94 percentage points, primarily related to the impairment charges. Additionally, excluding the items affecting comparability, our Venezuelan businesses negatively impacted operating profit performance by 10 percentage points, which included 4 percentage points from the fourth quarter impact of the deconsolidation. For additional information on Venezuela, see Note 1 to our consolidated financial statements and “Our Business Risks.”

See Note 3 to our consolidated financial statements for additional information on “Other Productivity Initiatives.”

2014

Net revenue increased 1%, primarily reflecting effective net pricing, including 7 percentage points related to inflation-based pricing in Venezuela, partially offset by net volume declines. Unfavorable foreign exchange reduced net revenue growth by 9 percentage points.

Snacks volume declined 2%, reflecting a mid-single-digit decline in Mexico due to a tax on certain packaged foods, which became effective during the first quarter of 2014. Additionally, Brazil experienced a low-single-digit decline.

Beverage volume increased 4%, reflecting low-single-digit increases in Brazil and Mexico, partially offset by low-single-digit declines in Argentina and Venezuela. The beverage volume growth included a 2-percentage-point contribution from certain of our bottler’s brands relating to a new joint venture in Chile.

Operating profit increased 1%, primarily reflecting the effective net pricing and planned cost reductions across a number of expense categories, as well as the net impact of adjustments recognized through our share of the results of a joint venture, which increased operating profit growth by 2 percentage points. These impacts were partially offset by certain operating cost increases, including strategic initiatives, higher commodity costs led by Venezuela, primarily reflecting packaging and potato inflation, which reduced operating profit growth by 21 percentage points, and the net volume declines. Unfavorable foreign exchange reduced operating profit growth by 13 percentage points, including an 8-percentage-point impact from Venezuela. The results of our Venezuelan businesses positively contributed 9 percentage points to operating profit growth.

Europe Sub-Saharan Africa



							% Change
	2015		2014		2013		2015			2014
Net revenue	$	10,510	$	13,399	$	13,828	(22	)		(3	)
Impact of foreign exchange translation							24			8
Net revenue growth, on a constant currency basis(a)							2			5

Operating profit	$	1,081	$	1,389	$	1,327	(22	)		5
Restructuring and impairment charges	89		71		60
Merger and integration charges	—		—		10
Operating profit excluding above items(a)	$	1,170	$	1,460	$	1,397	(20	)		4.5
Impact of foreign exchange translation							22			1
Operating profit growth excluding above items, on a constant currency basis(a)							2.5		(b)	6		(b)


(a)	See “Non-GAAP Measures.”


(b)	Does not sum due to rounding.

2015

Net revenue decreased 22%, primarily reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 24 percentage points, including 13 percentage points from Russia, as well as net volume declines. These impacts were partially offset by effective net pricing.

Snacks volume grew 1%, primarily reflecting mid-single-digit growth in Turkey and Spain, and low-single-digit growth in the United Kingdom, South Africa and the Netherlands, partially offset by a mid-single-digit decline in Russia.

Beverage volume declined 2%, primarily reflecting a double-digit decline in Russia, partially offset by mid-single-digit growth in Nigeria and low-single-digit growth in Turkey and the United Kingdom. Additionally, Germany experienced a slight decline.

Operating profit decreased 22%, reflecting higher commodity costs, which negatively impacted operating profit performance by 24 percentage points, primarily from transaction-related foreign exchange. Additionally, operating profit performance was negatively impacted by certain operating cost increases, the net volume declines and higher advertising and marketing expenses, as well as the lapping of a prior-year gain associated with the sale of agricultural assets in Russia, which negatively impacted operating profit performance by 2 percentage points. These impacts were partially offset by the effective net pricing and planned cost reductions across a number of expense categories, as well as lower charges in the current year associated with productivity initiatives outside the scope of the 2014 and 2012 Productivity Plans, which positively impacted operating profit performance by 1.5 percentage points. In addition, the net impact of a prior-year impairment charge associated with a brand in Greece positively contributed 1 percentage point to operating profit performance. Unfavorable foreign exchange translation negatively impacted operating profit performance by 22 percentage points.

See Note 3 to our consolidated financial statements for additional information on “Other Productivity Initiatives.”

2014

Net revenue decreased 3%, primarily reflecting unfavorable foreign exchange, which negatively impacted net revenue performance by 8 percentage points, partially offset by effective net pricing and volume growth.

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

Beverage volume grew 2%, primarily reflecting double-digit growth in Nigeria and mid-single-digit growth in Germany, partially offset by a mid-single-digit decline in Russia. Additionally, the United Kingdom and Turkey experienced low-single-digit growth.

Operating profit increased 5%, primarily reflecting the effective net pricing, planned cost reductions across a number of expense categories and the volume growth. These impacts were partially offset by certain operating cost increases, including strategic initiatives, and higher commodity costs, primarily reflecting milk prices and foreign exchange transaction losses, which reduced operating profit growth by 21 percentage points. The impacts of lapping incremental investments into our business in the prior year and the gain associated with the sale of agricultural assets in Russia contributed 3 percentage points and 2 percentage points to operating profit growth, respectively. These impacts were partially offset by the impairment charge associated with a brand in Greece and charges associated with productivity initiatives outside the scope of the 2014 and 2012 Productivity Plans, each of which reduced operating profit growth by 2 percentage points.

Asia, Middle East and North Africa



							% Change
	2015		2014		2013		2015		2014
Net revenue	$	6,375	$	6,618	$	6,431	(4	)	3
Impact of foreign exchange translation							5		3
Net revenue growth, on a constant currency basis(a)							1		6

Operating profit	$	941	$	985	$	1,140	(4.5	)	(14	)
Restructuring and impairment charges	30		37		26
Charge related to the transaction with Tingyi	73		—		—
Operating profit excluding above items(a)	$	1,044	$	1,022	$	1,166	2		(12	)
Impact of foreign exchange translation							3		2
Operating profit growth excluding above items, on a constant currency basis(a)							5		(10	)


(a)	See “Non-GAAP Measures.”

2015

Net revenue declined 4%, reflecting the impact of refranchising a portion of our beverage businesses in India and the Middle East, which negatively impacted net revenue performance by 3 percentage points. These impacts were offset by volume growth and effective net pricing. Unfavorable foreign exchange negatively impacted net revenue performance by 5 percentage points.

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

Beverage volume grew 1%, driven by double-digit growth in Pakistan and mid-single-digit growth in the Middle East and Philippines, partially offset by high-single-digit declines in China and India.

Operating profit decreased 4.5%. Excluding the items affecting comparability in the above table (see “Items Affecting Comparability”), operating profit increased 2%, primarily reflecting the volume growth, planned cost reductions across a number of expense categories and the effective net pricing. In addition, lower commodity costs positively contributed 6 percentage points to reported operating profit performance. These impacts were partially offset by certain operating cost increases, including strategic initiatives, and higher advertising and marketing expenses, as well as an impairment charge associated with a joint venture in the Middle East, which negatively impacted reported operating profit performance by 3 percentage points. The net impact of the refranchising of a portion of our beverage businesses in India and the Middle East had a slight positive impact on reported operating profit performance. This impact included a 4-percentage-point gain from the India refranchising, partially offset by a 1.5-percentage-point impact from lapping the prior year gain from the Middle East refranchising. Unfavorable foreign exchange negatively impacted operating profit performance by 3 percentage points.

2014

Net revenue grew 3%, reflecting volume growth and effective net pricing, partially offset by the net impact of the refranchising of our beverage businesses in Vietnam and the Middle East, which reduced net revenue growth by 1.5 percentage points. Unfavorable foreign exchange reduced net revenue growth by 3 percentage points.

Snacks volume grew 8%, reflecting double-digit growth in China and high-single-digit growth in India, partially offset by a mid-single-digit decline in Thailand. Additionally, Australia experienced mid-single-digit growth and the Middle East experienced high-single-digit growth.

Beverage volume grew 1%, driven by mid-single-digit growth in the Middle East and India and double-digit growth in the Philippines, partially offset by a double-digit decline in China and a low-single-digit decline in Pakistan.

Operating profit declined 14%, reflecting certain operating cost increases, including strategic initiatives, as well as the impact of lapping the prior year refranchising of our Vietnam beverage business, which negatively impacted operating performance by 12 percentage points and primarily reflected a one-time gain of $137 million. These impacts were partially offset by the net revenue growth and planned cost reductions across a number of expense categories. The lapping of incremental investments into our business in the prior year, which positively contributed 4 percentage points to operating profit performance, was partially offset by certain charges associated with productivity initiatives outside the scope of the 2014 and 2012 Productivity Plans, which negatively impacted operating performance by 3 percentage points.

See Note 3 to our consolidated financial statements for additional information on “Other Productivity Initiatives.”

Our Liquidity and Capital Resources

We believe that our cash generating capability and financial condition, together with our revolving credit facilities and other available methods of debt financing, such as commercial paper borrowings and long-term debt financing, will be adequate to meet our operating, investing and financing needs. Our primary sources of cash available to us to fund cash outflows, such as our anticipated share repurchases, dividend payments and scheduled debt maturities, include cash from operations and proceeds obtained from issuances of commercial paper and long-term debt. However, there can be no assurance that volatility in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable to us, or at all. See Note 9 to our consolidated financial statements for a description of our credit facilities. See also “Unfavorable economic conditions may have an adverse impact on our business, financial condition or results of operations.” in “Item 1A. Risk Factors.”

As of December 26, 2015, we had cash, cash equivalents and short-term investments in our consolidated subsidiaries of $11.1 billion outside the U.S. To the extent foreign earnings are repatriated, such amounts would be subject to income tax liabilities, both in the U.S. and in various applicable foreign jurisdictions.

Furthermore, our cash provided from operating activities is somewhat impacted by seasonality. Working capital needs are impacted by weekly sales, which are generally highest in the third quarter due to seasonal and holiday-related sales patterns, and generally lowest in the first quarter. On a continuing basis, we consider various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures, joint ventures, share repurchases, productivity and other efficiency initiatives, and other structural changes. These transactions may result in future cash proceeds or payments.

The table below summarizes our cash activity:



	2015			2014			2013
Net cash provided by operating activities	$	10,580		$	10,506		$	9,688
Net cash used for investing activities	$	(3,569	)	$	(4,937	)	$	(2,625	)
Net cash used for financing activities	$	(3,828	)	$	(8,264	)	$	(3,789	)

Operating Activities

During 2015, net cash provided by operating activities was $10.6 billion, compared to $10.5 billion in the prior year. The operating cash flow performance in part reflects lapping the impact of prior-year discretionary pension and retiree medical contributions, pertaining to the lump sum settlement payments, in the United States of $388 million ($261 million after-tax). In addition, working capital (comprised of changes in accounts and notes receivable, inventories, prepaid expenses and other current assets, and accounts payable and other current liabilities, each adjusted for the effects of currency translation and the Venezuela deconsolidation) reflects favorable comparisons to the prior year. These increases were partially offset by unfavorable operating profit performance.

During 2014, net cash provided by operating activities was $10.5 billion, compared to $9.7 billion in the prior year. The operating cash flow performance primarily reflects lapping the impact of 2013 U.S. federal net cash tax payments of $758 million, including interest, related to an agreement with the IRS resolving all open matters related to the audits for taxable years 2003 through 2009 and $226 million of cash payments for other federal, state and local tax matters related to open tax years. See Note 5 to our consolidated financial statements. This impact was partially offset by the discretionary pension and retiree medical contributions described above.

Also see “Free Cash Flow” below for certain other items impacting net cash provided by operating activities.

Investing Activities

During 2015, net cash used for investing activities was $3.6 billion, primarily reflecting net capital spending of $2.7 billion, a reduction of cash of $568 million due to the deconsolidation of our Venezuelan subsidiaries and net purchases of debt securities greater than three months of $317 million. See Note 1 to our consolidated financial statements for further discussion of capital spending by division and for further discussion of Venezuela. See Note 10 to our consolidated financial statements for further discussion of our investments in debt securities.

During 2014, net cash used for investing activities was $4.9 billion, primarily reflecting net capital spending of $2.7 billion and net purchases of debt securities greater than three months of $2.4 billion.

We expect 2016 net capital spending to be approximately $3 billion, within our long-term capital spending target of less than or equal to 5% of net revenue.

Financing Activities

During 2015, net cash used for financing activities was $3.8 billion, primarily reflecting the return of operating cash flow to our shareholders through dividend payments and share repurchases of $9.0 billion, partially offset by net proceeds from long-term debt of $4.6 billion and proceeds from exercises of stock options of $0.5 billion.

During 2014, net cash used for financing activities was $8.3 billion, primarily reflecting the return of operating cash flow to our shareholders through dividend payments and share repurchases of $8.7 billion and net payments of short-term borrowings of $2.0 billion, partially offset by net proceeds from long-term debt of $1.7 billion and proceeds from exercises of stock options of $0.8 billion.

We annually review our capital structure with our Board of Directors, including our dividend policy and share repurchase activity. On February 11, 2015, we announced a new share repurchase program providing for the repurchase of up to $12.0 billion of PepsiCo common stock commencing from July 1, 2015 and expiring on June 30, 2018. This repurchase program was in addition to the $10.0 billion repurchase program authorized by our Board of Directors and publicly announced in the first quarter of 2013, which commenced on July 1, 2013 and under which we completed repurchases during the fourth quarter of 2015. In addition, on February 11, 2016, we announced a 7.1% increase in our annualized dividend to $3.01 per share from $2.81 per share, effective with the dividend that is expected to be paid in June 2016. We expect to return a total of $7 billion to shareholders in 2016 through share repurchases of approximately $3 billion and dividends of approximately $4 billion.

Free Cash Flow

We focus on free cash flow as an important element in evaluating our performance. Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. Additionally, we consider certain items (included in the table below) in evaluating free cash flow. We believe investors should consider these items in evaluating our free cash flow results. Free cash flow excluding certain items is the primary measure we use to monitor cash flow performance. However, free cash flow and free cash flow excluding certain items are not measures provided by U.S. GAAP. Therefore, these measures are not, and should not be viewed as, substitutes for U.S. GAAP cash flow measures.

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



										% Change
	2015			2014			2013			2015		2014
Net cash provided by operating activities	$	10,580		$	10,506		$	9,688		1		8
Capital spending	(2,758		)	(2,859		)	(2,795		)
Sales of property, plant and equipment	86			115			109
Free cash flow	7,908			7,762			7,002			2		11
Discretionary pension and retiree medical contributions (after-tax)	—			274			20
Pension-related settlements (after-tax)	57			—			—
Payments related to restructuring charges (after-tax)	163			215			105
Net capital investments related to restructuring plan	—			8			8
Net payments related to income tax settlements	—			—			984
Net capital investments related to merger and integration	—			—			(4		)
Merger and integration payments (after-tax)	—			—			21
Payments for restructuring and other charges related to the transaction with Tingyi (after-tax)	—			—			26
Free cash flow excluding above items	$	8,128		$	8,259		$	8,162		(2	)	1

In all years presented, free cash flow was used primarily to pay dividends and repurchase shares. We expect to continue to return free cash flow to our shareholders through dividends and share repurchases while maintaining Tier 1 commercial paper access, which we believe will ensure appropriate financial flexibility and ready access to global capital and credit markets at favorable interest rates. However, see “Our borrowing costs and access to capital and credit markets may be adversely affected by a downgrade or potential downgrade of our credit ratings.” in “Item 1A. Risk Factors” and “Our Business Risks” for certain factors that may impact our credit ratings or our operating cash flows.

Any downgrade of our credit ratings by a credit rating agency, especially any downgrade to below investment grade, whether or not as a result of our actions or factors which are beyond our control, could increase our future borrowing costs and impair our ability to access capital and credit markets on terms commercially acceptable to us, or at all. In addition, any downgrade of our current short-term credit ratings could impair our ability to access the commercial paper market with the same flexibility that we have experienced historically, and therefore require us to rely more heavily on more expensive types of debt financing. See “Our borrowing costs and access to capital and credit markets may be adversely affected by a downgrade or potential downgrade of our credit ratings.” in “Item 1A. Risk Factors,” “Our Business Risks” and Note 9 to our consolidated financial statements.

Net Return on Invested Capital

ROIC is a metric management uses to monitor the profitability of our utilized capital. We believe this metric balances our operating results with asset and liability management, and may contribute to long-term shareholder value creation. In addition, we use net ROIC, excluding items affecting comparability, to compare our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that are not indicative of our ongoing performance and reflects how management evaluates our operating results and trends. We believe the calculation of net ROIC, excluding items affecting comparability, provides useful information to investors and is an additional relevant comparison of our performance to consider when evaluating our capital allocation discipline. Net ROIC, excluding items affecting comparability, is not a measure provided by GAAP. Therefore, it is not, and should not be, viewed as a substitute for ROIC.

We calculate net ROIC, excluding items affecting comparability, by using net income attributable to PepsiCo, excluding items affecting comparability, plus after-tax interest expense, divided by a quarterly average of invested capital less cash, cash equivalents and short-term investments adjusted for these items.



	2015
Reported ROIC	13.1		%
Impact of:
Cash, cash equivalents and short-term investments	4.1
Interest income after tax	(0.1	)
Commodity mark-to-market net impact	—
Restructuring and impairment charges	0.2
Venezuela remeasurement charge	—
Tax benefits	(0.4	)
Restructuring and other charges related to the transaction with Tingyi	0.1
Pension-related settlement (benefits)/charge	(0.1	)
Venezuela impairment charges	2.7
Net ROIC, excluding items affecting comparability	19.6		%

See also “Item 6. Selected Financial Data” for information on ROIC.

Credit Facilities and Long-Term Contractual Commitments

See Note 9 to our consolidated financial statements for a description of our credit facilities and long-term contractual commitments.

Off-Balance-Sheet Arrangements

It is not our business practice to enter into off-balance-sheet arrangements, other than in the normal course of business. Additionally, we do not enter into off-balance-sheet transactions specifically structured to provide income or tax benefits or to avoid recognizing or disclosing assets or liabilities. See Note 9 to our consolidated financial statements.

Consolidated Statement of Income

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013

(in millions except per share amounts)



	2015			2014			2013
Net Revenue	$	63,056		$	66,683		$	66,415
Cost of sales	28,384			30,884			31,243
Gross profit	34,672			35,799			35,172
Selling, general and administrative expenses	24,885			26,126			25,357
Venezuela impairment charges	1,359			—			—
Amortization of intangible assets	75			92			110
Operating Profit	8,353			9,581			9,705
Interest expense	(970		)	(909		)	(911		)
Interest income and other	59			85			97
Income before income taxes	7,442			8,757			8,891
Provision for income taxes	1,941			2,199			2,104
Net income	5,501			6,558			6,787
Less: Net income attributable to noncontrolling interests	49			45			47
Net Income Attributable to PepsiCo	$	5,452		$	6,513		$	6,740
Net Income Attributable to PepsiCo per Common Share
Basic	$	3.71		$	4.31		$	4.37
Diluted	$	3.67		$	4.27		$	4.32
Weighted-average common shares outstanding
Basic	1,469			1,509			1,541
Diluted	1,485			1,527			1,560
Cash dividends declared per common share	$	2.7625		$	2.5325		$	2.24

See accompanying notes to the consolidated financial statements.

Consolidated Statement of Comprehensive Income

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013

(in millions)



	2015
	Pre-tax amounts			Tax amounts			After-tax amounts
Net income							$	5,501
Other Comprehensive Loss
Currency translation:
Currency translation adjustment	$	(2,938	)	$	—		(2,938		)
Reclassification associated with Venezuelan entities	111			—			111
Cash flow hedges:
Reclassification of net losses to net income	97			(47		)	50
Net derivative losses	(95		)	48			(47		)
Pension and retiree medical:
Reclassification of net losses to net income	246			(74		)	172
Reclassification associated with Venezuelan entities	20			(4		)	16
Remeasurement of net liabilities and translation	(88		)	71			(17		)
Unrealized gains on securities	3			(2		)	1
Total Other Comprehensive Loss	$	(2,644	)	$	(8	)	(2,652		)
Comprehensive income							2,849
Comprehensive income attributable to noncontrolling interests							(47		)
Comprehensive Income Attributable to PepsiCo							$	2,802



	2014
	Pre-tax amounts			Tax amounts			After-tax amounts
Net income							$	6,558
Other Comprehensive Loss
Currency translation adjustment	$	(5,010	)	$	—		(5,010		)
Cash flow hedges:
Reclassification of net losses to net income	249			(95		)	154
Net derivative losses	(88		)	44			(44		)
Pension and retiree medical:
Reclassification of net losses to net income	369			(122		)	247
Remeasurement of net liabilities and translation	(1,323		)	437			(886		)
Unrealized losses on securities	(11		)	5			(6		)
Other	1			—			1
Total Other Comprehensive Loss	$	(5,813	)	$	269		(5,544		)
Comprehensive income							1,014
Comprehensive income attributable to noncontrolling interests							(43		)
Comprehensive Income Attributable to PepsiCo							$	971



	2013
	Pre-tax amounts			Tax amounts			After-tax amounts
Net income							$	6,787
Other Comprehensive Income
Currency translation adjustment	$	(1,303	)	$	—		(1,303		)
Cash flow hedges:
Reclassification of net losses to net income	45			(17		)	28
Net derivative losses	(20		)	10			(10		)
Pension and retiree medical:
Reclassification of net losses to net income	353			(123		)	230
Remeasurement of net liabilities and translation	2,164			(764		)	1,400
Unrealized gains on securities	57			(28		)	29
Other	—			(16		)	(16		)
Total Other Comprehensive Income	$	1,296		$	(938	)	358
Comprehensive income							7,145
Comprehensive income attributable to noncontrolling interests							(45		)
Comprehensive Income Attributable to PepsiCo							$	7,100

See accompanying notes to the consolidated financial statements.

Consolidated Statement of Cash Flows

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013

(in millions)



	2015			2014			2013
Operating Activities
Net income	$	5,501		$	6,558		$	6,787
Depreciation and amortization	2,416			2,625			2,663
Share-based compensation expense	295			297			303
Merger and integration charges	—			—			10
Cash payments for merger and integration charges	—			—			(25		)
Restructuring and impairment charges	230			418			163
Cash payments for restructuring charges	(208		)	(266		)	(133		)
Charge related to the transaction with Tingyi	73			—			—
Cash payments for restructuring and other charges related to the transaction with Tingyi	—			—			(26		)
Venezuela impairment charges	1,359			—			—
Venezuela remeasurement charges	—			105			111
Excess tax benefits from share-based payment arrangements	(133		)	(114		)	(117		)
Pension and retiree medical plan expenses	467			667			663
Pension and retiree medical plan contributions	(205		)	(655		)	(262		)
Deferred income taxes and other tax charges and credits	78			(19		)	(1,058		)
Change in assets and liabilities:
Accounts and notes receivable	(461		)	(343		)	(88		)
Inventories	(244		)	(111		)	4
Prepaid expenses and other current assets	(50		)	80			(51		)
Accounts payable and other current liabilities	1,692			1,162			1,007
Income taxes payable	55			371			86
Other, net	(285		)	(269		)	(349		)
Net Cash Provided by Operating Activities	10,580			10,506			9,688

Investing Activities
Capital spending	(2,758		)	(2,859		)	(2,795		)
Sales of property, plant and equipment	86			115			109
Acquisitions and investments in noncontrolled affiliates	(86		)	(88		)	(109		)
Reduction of cash due to Venezuela deconsolidation	(568		)	—			—
Divestitures	76			203			130
Short-term investments, by original maturity
More than three months - purchases	(4,428		)	(6,305		)	—
More than three months - maturities	4,111			3,891			—
Three months or less, net	3			116			61
Other investing, net	(5		)	(10		)	(21		)
Net Cash Used for Investing Activities	(3,569		)	(4,937		)	(2,625		)

(Continued on following page)

Consolidated Statement of Cash Flows (continued)

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013

(in millions)



	2015			2014			2013
Financing Activities
Proceeds from issuances of long-term debt	$	8,702		$	3,855		$	4,195
Payments of long-term debt	(4,095		)	(2,189		)	(3,894		)
Short-term borrowings, by original maturity
More than three months - proceeds	15			50			23
More than three months - payments	(43		)	(10		)	(492		)
Three months or less, net	53			(2,037		)	1,634
Cash dividends paid	(4,040		)	(3,730		)	(3,434		)
Share repurchases - common	(5,000		)	(5,012		)	(3,001		)
Share repurchases - preferred	(5		)	(10		)	(7		)
Proceeds from exercises of stock options	504			755			1,123
Excess tax benefits from share-based payment arrangements	133			114			117
Acquisition of noncontrolling interests	—			—			(20		)
Other financing	(52		)	(50		)	(33		)
Net Cash Used for Financing Activities	(3,828		)	(8,264		)	(3,789		)
Effect of exchange rate changes on cash and cash equivalents	(221		)	(546		)	(196		)
Net Increase/(Decrease) in Cash and Cash Equivalents	2,962			(3,241		)	3,078
Cash and Cash Equivalents, Beginning of Year	6,134			9,375			6,297
Cash and Cash Equivalents, End of Year	$	9,096		$	6,134		$	9,375

See accompanying notes to the consolidated financial statements.

Consolidated Balance Sheet

PepsiCo, Inc. and Subsidiaries

December 26, 2015 and December 27, 2014

(in millions except per share amounts)



	2015			2014
ASSETS
Current Assets
Cash and cash equivalents	$	9,096		$	6,134
Short-term investments	2,913			2,592
Accounts and notes receivable, net	6,437			6,651
Inventories	2,720			3,143
Prepaid expenses and other current assets	1,865			2,143
Total Current Assets	23,031			20,663
Property, Plant and Equipment, net	16,317			17,244
Amortizable Intangible Assets, net	1,270			1,449
Goodwill	14,177			14,965
Other nonamortizable intangible assets	11,811			12,639
Nonamortizable Intangible Assets	25,988			27,604
Investments in Noncontrolled Affiliates	2,311			2,689
Other Assets	750			860
Total Assets	$	69,667		$	70,509

LIABILITIES AND EQUITY
Current Liabilities
Short-term obligations	$	4,071		$	5,076
Accounts payable and other current liabilities	13,507			13,016
Total Current Liabilities	17,578			18,092
Long-Term Debt Obligations	29,213			23,821
Other Liabilities	5,887			5,744
Deferred Income Taxes	4,959			5,304
Total Liabilities	57,637			52,961
Commitments and contingencies
Preferred Stock, no par value	41			41
Repurchased Preferred Stock	(186		)	(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: 1,448 and 1,488 shares, respectively)	24			25
Capital in excess of par value	4,076			4,115
Retained earnings	50,472			49,092
Accumulated other comprehensive loss	(13,319		)	(10,669		)
Repurchased common stock, in excess of par value (418 and 378 shares, respectively)	(29,185		)	(24,985		)
Total PepsiCo Common Shareholders’ Equity	12,068			17,578
Noncontrolling interests	107			110
Total Equity	12,030			17,548
Total Liabilities and Equity	$	69,667		$	70,509

See accompanying notes to the consolidated financial statements.

Consolidated Statement of Equity

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013

(in millions)



	2015					2014					2013
	Shares		Amount			Shares		Amount			Shares		Amount
Preferred Stock	0.8		$	41		0.8		$	41		0.8		$	41
Repurchased Preferred Stock
Balance, beginning of year	(0.7	)	(181		)	(0.6	)	(171		)	(0.6	)	(164		)
Redemptions	—		(5		)	(0.1	)	(10		)	—		(7		)
Balance, end of year	(0.7	)	(186		)	(0.7	)	(181		)	(0.6	)	(171		)
Common Stock
Balance, beginning of year	1,488		25			1,529		25			1,544		26
Repurchased common stock	(40	)	(1		)	(41	)	—			(15	)	(1		)
Balance, end of year	1,448		24			1,488		25			1,529		25
Capital in Excess of Par Value
Balance, beginning of year			4,115					4,095					4,178
Share-based compensation expense			299					294					303
Stock option exercises, RSUs, PSUs and PEPunits converted (a)			(182		)			(200		)			(287		)
Withholding tax on RSUs, PSUs and PEPunits converted			(151		)			(91		)			(87		)
Other			(5		)			17					(12		)
Balance, end of year			4,076					4,115					4,095
Retained Earnings
Balance, beginning of year			49,092					46,420					43,158
Net income attributable to PepsiCo			5,452					6,513					6,740
Cash dividends declared - common			(4,071		)			(3,840		)			(3,477		)
Cash dividends declared - preferred			(1		)			(1		)			(1		)
Balance, end of year			50,472					49,092					46,420
Accumulated Other Comprehensive Loss
Balance, beginning of year			(10,669		)			(5,127		)			(5,487		)
Other comprehensive (loss)/income attributable to PepsiCo			(2,650		)			(5,542		)			360
Balance, end of year			(13,319		)			(10,669		)			(5,127		)
Repurchased Common Stock
Balance, beginning of year	(378	)	(24,985		)	(337	)	(21,004		)	(322	)	(19,458		)
Share repurchases	(52	)	(4,999		)	(57	)	(5,012		)	(37	)	(3,000		)
Stock option exercises, RSUs, PSUs and PEPunits converted	12		794			15		1,030			22		1,451
Other	—		5			1		1			—		3
Balance, end of year	(418	)	(29,185		)	(378	)	(24,985		)	(337	)	(21,004		)
Total PepsiCo Common Shareholders’ Equity			12,068					17,578					24,409
Noncontrolling Interests
Balance, beginning of year			110					110					105
Net income attributable to noncontrolling interests			49					45					47
Distributions to noncontrolling interests			(48		)			(41		)			(34		)
Currency translation adjustment			(2		)			(2		)			(2		)
Acquisitions and divestitures			—					—					(6		)
Other, net			(2		)			(2		)			—
Balance, end of year			107					110					110
Total Equity			$	12,030				$	17,548				$	24,389

(a) Includes total tax benefits of $107 million in 2015, $74 million in 2014 and $45 million in 2013.

See accompanying notes to the consolidated financial statements.

Notes to Consolidated Financial Statements

Note 1 — Basis of Presentation and Our Divisions

Basis of Presentation

The accompanying financial statements have been prepared in accordance with U.S. GAAP and 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.

Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw materials handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.

The preparation of our consolidated financial statements 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, share-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.

Prior to the end of the third quarter of 2015, the financial position and results of operations of our Venezuelan snack and beverage businesses were included in our consolidated financial statements. Effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries and significant influence over our joint venture, and therefore we deconsolidated our Venezuelan subsidiaries from our consolidated financial statements and began accounting for our investments in our wholly-owned Venezuelan subsidiaries and our joint venture using the cost method of accounting. See subsequent discussion of “Venezuela”; for further unaudited information, see “Our Business Risks” and “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years (and our fiscal 2016 results will include an extra week). While our 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:



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. Certain reclassifications were made to prior years’ amounts to conform to the current year presentation.

Our Divisions

Through our operations, authorized bottlers, contract manufacturers and other third parties, we make, market, distribute and sell a wide variety of convenient and enjoyable beverages, foods and snacks, serving customers and consumers in more than 200 countries and territories with our largest operations in North America, Mexico, Russia, 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 and are considered our reportable segments. For additional unaudited information on our divisions, see “Our Operations” contained in “Item 1. Business.” The accounting policies for the divisions are the same as those described in Note 2, except for the following allocation methodologies:


•	share-based compensation expense;


•	pension and retiree medical expense; and


•	derivatives.

Share-Based Compensation Expense

Our divisions are held accountable for share-based compensation expense and, therefore, this expense is allocated to our divisions as an incremental employee compensation cost. The allocation of share-based compensation expense in 2015 was approximately 15% to FLNA, 2% to QFNA, 23% to NAB, 7% to Latin America, 13% to ESSA, 11% to AMENA and 29% to corporate unallocated expenses. We had similar allocations of share-based compensation expense to our divisions in 2014 and 2013. 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 fixed discount rates, as well as amortization of costs related to certain pension plan amendments and gains and losses due to demographics (including mortality assumptions and salary experience) are reflected in division results for North American employees. Division results also include interest costs, measured at fixed discount rates, 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, for our North American plans, 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, metals and energy. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses, as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize

the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses. These derivatives hedge underlying commodity price risk and were not entered into for trading or speculative purposes.

Net revenue and operating profit/(loss) of each division are as follows:



	Net Revenue						Operating Profit/(Loss) (a)
	2015		2014		2013		2015			2014			2013
FLNA	$	14,782	$	14,502	$	14,126	$	4,304		$	4,054		$	3,877
QFNA (b)	2,543		2,568		2,612		560			621			617
NAB (c)	20,618		20,171		20,083		2,785			2,421			2,580
Latin America (d)	8,228		9,425		9,335		(206		)	1,636			1,617
ESSA	10,510		13,399		13,828		1,081			1,389			1,327
AMENA (e)	6,375		6,618		6,431		941			985			1,140
Total division	63,056		66,683		66,415		9,465			11,106			11,158
Corporate Unallocated
Mark-to-market net gains/(losses)							11			(68		)	(72		)
Restructuring and impairment charges							(13		)	(41		)	(11		)
Pension lump sum settlement charge							—			(141		)	—
Venezuela remeasurement charges							—			(126		)	(124		)
Other							(1,110		)	(1,149		)	(1,246		)
	$	63,056	$	66,683	$	66,415	$	8,353		$	9,581		$	9,705


(a)	For information on the impact of restructuring and impairment charges on our divisions, see Note 3 to our consolidated financial statements.


(b)	Operating profit for QFNA for the year ended December 26, 2015 includes pre-tax impairment charges of $76 million associated with our MQD joint venture investment, including a fourth quarter charge related to ceasing its operations.


(c)	Operating profit for NAB for the year ended December 26, 2015 includes pre-tax gains of $67 million associated with the settlements of pension-related liabilities from previous acquisitions.


(d)	Operating loss for Latin America for the year ended December 26, 2015 includes a pre- and after-tax charge of $1.4 billion related to our change in accounting for our investments in our wholly-owned Venezuelan subsidiaries and beverage joint venture. See subsequent “Venezuela” discussion.

(e)

Operating profit for AMENA for the year ended December 26, 2015 includes a pre-tax gain of $39 million associated with refranchising a portion of our beverage businesses in India, a pre- and after-tax charge of $73 million related to a write-off of the value of a call option to increase our holding in TAB to 20% and a pre- and after-tax impairment charge of $29 million associated with a joint venture in the Middle East.

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 initiatives and certain other items.

Other Division Information

Total assets and capital spending of each division are as follows:



	Total Assets				Capital Spending
	2015		2014		2015		2014		2013
FLNA	$	5,375	$	5,307	$	608	$	519	$	423
QFNA	872		982		40		58		38
NAB	28,128		28,665		695		708		705
Latin America (a)	4,284		6,283		368		379		395
ESSA	12,225		13,934		404		502		551
AMENA	5,901		5,855		441		517		530
Total division	56,785		61,026		2,556		2,683		2,642
Corporate (b)	12,882		9,483		202		176		153
	$	69,667	$	70,509	$	2,758	$	2,859	$	2,795


(a)	The change in total assets in 2015 reflects a decrease of $1.7 billion related to the Venezuela impairment charges.


(b)	Corporate assets consist principally of certain cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment and pension and tax assets. In 2015, the change in total Corporate assets was primarily due to the increase in cash and cash equivalents.

Amortization of intangible assets and depreciation and other amortization of each division are as follows:



	Amortization of Intangible Assets						Depreciation and Other Amortization
	2015		2014		2013		2015		2014		2013
FLNA	$	7	$	7	$	7	$	427	$	424	$	430
QFNA	—		—		—		51		51		51
NAB	38		43		55		813		837		843
Latin America	7		10		11		238		273		273
ESSA	20		28		32		353		471		525
AMENA	3		4		5		293		313		283
Total division	75		92		110		2,175		2,369		2,405
Corporate	—		—		—		166		164		148
	$	75	$	92	$	110	$	2,341	$	2,533	$	2,553

Net revenue and long-lived assets by country are as follows:



	Net Revenue						Long-Lived Assets(a)
	2015		2014		2013		2015			2014
U.S.	$	35,266	$	34,219	$	33,626	$	27,876		$	27,964
Mexico	3,687		4,113		4,347		994			1,126
Russia (b)	2,797		4,414		4,908		3,614			4,520
Canada	2,677		3,022		3,195		2,386			2,815
United Kingdom	1,966		2,174		2,115		1,107			1,155
Brazil	1,289		1,790		1,835		649			928
All other countries	15,374		16,951		16,389		9,260		(c)	10,478		(c)
	$	63,056	$	66,683	$	66,415	$	45,886		$	48,986


(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.


(b)	Change in net revenue and long-lived assets in 2015 primarily reflects the depreciation of the Russian ruble.


(c)	Included in all other countries as of December 26, 2015 and December 27, 2014 is $538 million and $611 million, respectively, related to our 5% indirect equity interest in TAB.

Venezuela

Prior to the end of the third quarter of 2015, the financial position and results of operations of our Venezuelan businesses, which consist of our wholly-owned subsidiaries and our beverage joint venture with our franchise bottler in Venezuela, were reported under highly inflationary accounting, with the functional currency of the U.S. dollar.

The Venezuelan government has maintained currency controls and a fixed exchange rate since 2003 and has created additional exchange mechanisms and issued several exchange agreements governing the scope and applicability of each, while continuing to maintain control over the exchange rates and, to an increasingly significant extent, over the distribution of U.S. dollars under each mechanism.

During 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); (2) the government-operated auction-based Supplementary Foreign Currency Administration System (SICAD); and (3) an open market Marginal Foreign Exchange System (SIMADI).

These three mechanisms became increasingly illiquid over time. We believe that significant uncertainty continues to exist 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. The amount of U.S. dollars made available to our Venezuelan entities through CENCOEX declined significantly since 2014 and worsened during the third quarter of 2015. In addition,

our Venezuelan entities were not able to participate in SICAD auctions during 2015, as the auctions that were held were not for our industry, and had limited access to the SIMADI market since its inception.

The evolving conditions in Venezuela, including increasingly restrictive exchange control regulations and reduced access to dollars through official currency exchange markets, resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar, which significantly impacted our ability to effectively manage our Venezuelan businesses, including restrictions on the ability of our Venezuelan businesses to import certain raw materials to maintain normal production and to settle U.S. dollar-denominated obligations. The exchange restrictions, combined with other regulations that have limited our ability to import certain raw materials, also increasingly constrained our ability to make and execute operational decisions regarding our businesses in Venezuela. In addition, the inability of our Venezuelan businesses to pay dividends, which remain subject to Venezuelan government approvals, restricted our ability to realize the earnings generated out of our Venezuelan businesses. We expect these conditions will continue for the foreseeable future.

As a result of these factors, we concluded that, effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries, and therefore we deconsolidated our wholly-owned Venezuelan subsidiaries effective as of the end of the third quarter of 2015. We also concluded that, effective as of the end of the third quarter of 2015, due to the above-mentioned factors and other matters impacting the operation of our joint venture and the distribution of its products, we no longer had significant influence over our joint venture, which was previously accounted for under the equity method. As a result of these conclusions, effective at the end of the third quarter of 2015, we began accounting for our investments in our wholly-owned Venezuelan subsidiaries and our joint venture using the cost method of accounting and recorded pre- and after-tax charges of $1.4 billion in our Consolidated Statement of Income to reduce the value of the cost method investments to their estimated fair values, resulting in a full impairment. The impairment charges primarily included approximately $1.2 billion related to our investments in previously consolidated Venezuelan subsidiaries and our joint venture and $111 million related to the reclassification of cumulative translation losses. The estimated fair value of the investments in our Venezuelan entities was derived using discounted cash flow analyses, including U.S. dollar exchange and discount rate assumptions that reflected the inflation and economic uncertainty in Venezuela, and are considered non-recurring Level 3 measurements within the fair value hierarchy. The factors that led to the above-mentioned conclusions at the end of the third quarter of 2015 continued to exist as of the end of 2015.

During 2015 and prior to the end of the third quarter of 2015, we used the SICAD exchange rate to remeasure our net monetary assets in Venezuela, except for certain other net monetary assets that we believed qualified for the fixed exchange rate (including requests for remittance of dividends submitted to CENCOEX in certain prior years at the fixed exchange rate and payables for imports of essential goods approved by CENCOEX).

During 2015, the results of our operations in Venezuela, which reflected the months of January through August, were included in our Consolidated Statement of Income using a combination of the fixed exchange and SICAD rates, as appropriate. As of the end of 2015, consistent with the end of the third quarter of 2015, we did not consolidate the assets and liabilities of our Venezuelan subsidiaries in our Consolidated Balance Sheet. Beginning in the fourth quarter of 2015, we no longer included the financial results of our Venezuelan businesses in our Consolidated Statement of Income and our financial results only included revenue relating to the sales of inventory to our Venezuelan entities to the extent cash was received for those sales. Any dividends from our Venezuelan entities will be recorded as income upon receipt of the cash. We did not receive any U.S. dollars in the fourth quarter of 2015 from our Venezuelan entities. Our ongoing contractual commitments to our Venezuelan businesses are not material.

Note 2 — Our Significant Accounting Policies

Revenue Recognition

We recognize revenue upon shipment or delivery to our customers based on written sales terms that do not allow for a right of return. However, our policy for DSD and certain chilled products is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly, our policy for certain warehouse-distributed products is to replace damaged and out-of-date products. Based on our experience with this practice, we have reserved for anticipated damaged and out-of-date products. For additional unaudited information on our revenue recognition and related policies, including our policy on bad debts, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We are exposed to concentration of credit risk from our major customers, including Wal-Mart. In 2015, sales to Wal-Mart (including Sam’s) represented approximately 13% of our total net revenue, including concentrate sales to our independent bottlers, which are used in finished goods sold by them to Wal-Mart. We have not experienced credit issues with these customers.

Total Marketplace Spending

We offer sales incentives and discounts through various programs to customers and consumers. Total marketplace spending includes sales incentives, discounts, advertising and other marketing activities. Sales incentives and discounts are primarily accounted for as a reduction of revenue and include payments to customers for performing merchandising activities on our behalf, such as payments for in-store displays, payments to gain distribution of new products, payments for shelf space and discounts to promote lower retail prices. It also includes support provided to our independent bottlers through funding of advertising and other marketing activities. While most of these incentive arrangements have terms of no more than one year, certain arrangements, such as fountain pouring rights, may extend beyond one year. Costs incurred to obtain these arrangements are recognized over the shorter of the economic or contractual life, primarily as a reduction of revenue, and the remaining balances of $321 million as of December 26, 2015 and $355 million as of December 27, 2014 are included in prepaid expenses and other current assets and other assets on our balance sheet. For additional unaudited information on our sales incentives, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Advertising and other marketing activities, reported as selling, general and administrative expenses, totaled $3.9 billion in 2015, 2014 and 2013, including advertising expenses of $2.4 billion in 2015, $2.3 billion in 2014 and $2.4 billion in 2013. Deferred advertising costs are not expensed until the year first used and consist of:


•	media and personal service prepayments;


•	promotional materials in inventory; and


•	production costs of future media advertising.

Deferred advertising costs of $40 million and $42 million as of December 26, 2015 and December 27, 2014, respectively, are classified as prepaid expenses and other current assets on our balance sheet.

Distribution Costs

Distribution costs, including the costs of shipping and handling activities, are reported as selling, general and administrative expenses. Shipping and handling expenses were $9.4 billion in 2015, $9.7 billion in 2014 and $9.4 billion in 2013.

Cash Equivalents

Cash equivalents are highly liquid investments with original maturities of three months or less.

Software Costs

We capitalize certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use when both the preliminary project stage is completed and it is probable that the software will be used as intended. Capitalized software costs include only (i) external direct costs of materials and services utilized in developing or obtaining computer software, (ii) compensation and related benefits for employees who are directly associated with the software projects and (iii) interest costs incurred while developing internal-use computer software. Capitalized software costs are included in property, plant and equipment on our balance sheet and amortized on a straight-line basis when placed into service over the estimated useful lives of the software, which approximate 5 to 10 years. Software amortization totaled $202 million in 2015, $208 million in 2014 and $197 million in 2013. Net capitalized software and development costs were $863 million and $944 million as of December 26, 2015 and December 27, 2014, respectively.

Commitments and Contingencies

We are subject to various claims and contingencies related to lawsuits, certain taxes and environmental matters, as well as commitments under contractual and other commercial obligations. We recognize liabilities for contingencies and commitments when a loss is probable and estimable. For additional information on our commitments, see Note 9 to our consolidated financial statements.

Research and Development

We engage in a variety of research and development activities and continue to invest to accelerate growth and to drive innovation globally. Consumer research is excluded from research and development costs and included in other marketing costs. Research and development costs were $754 million, $718 million and $665 million in 2015, 2014 and 2013, respectively, and are reported within selling, general and administrative expenses.

See “Research and Development” in “Item 1. Business” for additional unaudited information about our research and development activities.

Goodwill and Other Intangible Assets

In the quantitative assessment of indefinite-lived intangible assets, if the carrying amount of the indefinite-lived intangible asset exceeds its estimated fair value, as determined by its discounted cash flows, an impairment loss is recognized in an amount equal to that excess. Quantitative assessment of goodwill is performed using a two-step impairment test at the reporting unit level. A reporting unit can be a division or business within a division. The first step compares the carrying value of a reporting unit, including goodwill, with its estimated fair value, as determined by its discounted cash flows. If the carrying value of a reporting unit exceeds its estimated fair value, we complete the second step to determine the amount of goodwill impairment loss that we should record, if any. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the estimated fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The amount of impairment loss is equal to the excess of the carrying value of the goodwill over the implied fair value of that goodwill. The quantitative assessment, described above requires an analysis of several estimates including future cash

flows or income consistent with management’s strategic business plans, annual sales growth rates, perpetuity growth assumptions and the selection of assumptions underlying a discount rate (weighted average cost of capital) based on market data available at the time. Significant management judgment is necessary to estimate the impact of competitive operating, macroeconomic and other factors to estimate future levels of sales, operating profit or cash flows. All assumptions used in our impairment evaluations for nonamortizable intangible assets, such as forecasted growth rates and weighted-average cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans.

For additional unaudited information on goodwill and other intangible assets, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Other Significant Accounting Policies

Our other significant accounting policies are disclosed as follows:


•	Basis of Presentation - See Note 1 - Basis of Presentation for a description of our policies regarding use of estimates, basis of presentation and consolidation.


•	Property, Plant and Equipment and Intangible Assets – Note 4.


•	Income Taxes – Note 5, and for additional unaudited information see, “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.


•	Share-Based Compensation – Note 6.


•	Pension, Retiree Medical and Savings Plans – Note 7, and for additional unaudited information, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.


•	Financial Instruments – Note 10, and for additional unaudited information, see “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.


•	Inventories – Note 14. Inventories are valued at the lower of cost or market. Cost is determined using the average; first-in, first-out (FIFO) or last-in, first-out (LIFO) methods.

•

Translation of Financial Statements of Foreign Subsidiaries – Financial statements of foreign subsidiaries are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. Adjustments resulting from translating net assets are reported as a separate component of accumulated other comprehensive loss within common shareholders’ equity as currency translation adjustment.

Recently Issued Accounting Pronouncements - Adopted

In 2015, the Financial Accounting Standards Board (FASB) issued guidance which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability. We adopted the provisions of this guidance as of the beginning of our second quarter of 2015, and that adoption did not have a material impact on our financial statements.

Recently Issued Accounting Pronouncements - Not Yet Adopted

In 2016, the FASB issued guidance that generally requires companies to measure investments in other entities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The standard is effective in 2018 and early adoption is not permitted. We are currently evaluating the impact of this guidance on our financial statements.

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

In 2015, the FASB issued guidance that requires entities to measure inventory at the lower of cost or net realizable value. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our financial statements. We are evaluating the timing for adoption of this guidance.

In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. We have an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. We are currently evaluating the impact of this guidance on our financial statements and have not yet selected a transition approach.

Note 3 — Restructuring and Impairment Charges

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



	2015		2014		2013
2014 Productivity Plan	$	169	$	357	$	53
2012 Productivity Plan	61		61		110
Total restructuring and impairment charges	230		418		163
Other productivity initiatives	90		67		—
Total restructuring and impairment charges and other productivity initiatives	$	320	$	485	$	163

2014 Multi-Year 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. The 2014 Productivity Plan is in addition to the 2012 Productivity Plan and is expected to continue the benefits of that plan.

In 2015, 2014 and 2013, we incurred restructuring charges of $169 million ($134 million after-tax or $0.09 per share), $357 million ($262 million after-tax or $0.17 per share) and $53 million ($39 million or $0.02 per share), respectively, in conjunction with our 2014 Productivity Plan. All of these charges were recorded in selling, general and administrative expenses and primarily relate to severance and other employee-related costs, asset impairments (all non-cash), and other costs associated with the implementation of our initiatives, including contract termination costs. Substantially all of the restructuring accrual at December 26, 2015 is expected to be paid by the end of 2016.

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



	2015									2014									2013
	Severance and Other Employee Costs		Asset Impairments			Other Costs		Total		Severance and Other Employee Costs			Asset Impairments		Other Costs		Total		Severance and Other Employee Costs		Other Costs		Total
FLNA (a)	$	18	$	(1	)	$	9	$	26	$	25		$	10	$	11	$	46	$	11	$	—	$	11
QFNA	—		—			3		3		12			—		2		14		3		—		3
NAB	10		4			17		31		60			56		56		172		9		—		9
Latin America	2		10			16		28		15			3		10		28		6		—		6
ESSA	26		11			25		62		24			4		14		42		10		—		10
AMENA	2		—			8		10		14			—		8		22		1		—		1
Corporate (a)	1		—			8		9		(2		)	—		35		33		12		1		13
	$	59	$	24		$	86	$	169	$	148		$	73	$	136	$	357	$	52	$	1	$	53


(a)	Income amounts represent adjustments of previously recorded amounts.

A summary of our 2014 Productivity Plan activity is as follows:



	Severance and Other Employee Costs			Asset Impairments			Other Costs			Total
2013 restructuring charges	$	52		$	—		$	1		$	53
Non-cash charges and translation	(22		)	—			—			(22		)
Liability as of December 28, 2013	30			—			1			31
2014 restructuring charges	148			73			136			357
Cash payments	(56		)	—			(109		)	(165		)
Non-cash charges and translation	(33		)	(73		)	(4		)	(110		)
Liability as of December 27, 2014	89			—			24			113
2015 restructuring charges	59			24			86			169
Cash payments	(76		)	—			(87		)	(163		)
Non-cash charges and translation	(11		)	(24		)	(3		)	(38		)
Liability as of December 26, 2015	$	61		$	—		$	20		$	81

2012 Multi-Year Productivity Plan

The 2012 Productivity Plan included actions in every aspect of our business that we believe would strengthen our complementary food, snack and beverage businesses by: leveraging new technologies and processes across PepsiCo’s operations, go-to-market and information systems; heightening the focus on best practice sharing across the globe; consolidating manufacturing, warehouse and sales facilities; and implementing simplified organization structures, with wider spans of control and fewer layers of management. The 2012 Productivity Plan has enhanced PepsiCo’s cost-competitiveness and provided a source of funding for future brand-building and innovation initiatives.

In 2015, 2014 and 2013, we incurred restructuring charges of $61 million ($50 million after-tax or $0.03 per share), $61 million ($54 million after-tax or $0.04 per share) and $110 million ($90 million after-tax or $0.06 per share), respectively, in conjunction with our 2012 Productivity Plan. All of these charges were recorded in selling, general and administrative expenses and primarily relate to severance and other employee-related costs, asset impairments (all non-cash), and contract termination costs. We do not expect any further charges associated with our 2012 Productivity Plan. Substantially all of the restructuring accrual at December 26, 2015 is expected to be paid by the end of 2016.

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



	2015								2014										2013
	Severance and Other Employee Costs		Asset Impairments		Other Costs		Total		Severance and Other Employee Costs			Asset Impairments		Other Costs			Total		Severance and Other Employee Costs		Asset Impairments		Other Costs			Total
FLNA (a)	$	—	$	—	$	—	$	—	$	(1	)	$	—	$	3		$	2	$	4	$	—	$	4		$	8
QFNA	—		—		—		—		—			—		—			—		—		—		1			1
NAB (a)	—		—		2		2		(3		)	1		9			7		8		—		13			21
Latin America (a)	6		1		1		8		19			—		(19		)	—		5		2		—			7
ESSA	15		—		12		27		6			5		18			29		36		2		12			50
AMENA	15		3		2		20		12			—		3			15		21		2		2			25
Corporate (a)	3		—		1		4		(2		)	—		10			8		—		—		(2		)	(2		)
	$	39	$	4	$	18	$	61	$	31		$	6	$	24		$	61	$	74	$	6	$	30		$	110


(a)	Income amounts represent adjustments of previously recorded amounts.

A summary of our 2012 Productivity Plan activity is as follows:



	Severance and Other Employee Costs			Asset Impairments			Other Costs			Total
Liability as of December 29, 2012	$	91		$	—		$	36		$	127
2013 restructuring charges	74			6			30			110
Cash payments	(89		)	—			(44		)	(133		)
Non-cash charges and translation	(8		)	(6		)	(5		)	(19		)
Liability as of December 28, 2013	68			—			17			85
2014 restructuring charges	31			6			24			61
Cash payments	(65		)	—			(36		)	(101		)
Non-cash charges and translation	(6		)	(6		)	—			(12		)
Liability as of December 27, 2014	28			—			5			33
2015 restructuring charges	39			4			18			61
Cash payments	(24		)	—			(21		)	(45		)
Non-cash charges and translation	(8		)	(4		)	1			(11		)
Liability as of December 26, 2015	$	35		$	—		$	3		$	38

Other Productivity Initiatives

In 2015, we incurred pre-tax charges of $90 million ($66 million after-tax or $0.04 per share) related to other productivity and efficiency initiatives outside the scope of the 2014 and 2012 Productivity Plans, including $48 million in Latin America, $5 million in ESSA, $20 million in AMENA and $17 million in Corporate. In 2014, we incurred pre-tax charges of $67 million ($54 million after-tax or $0.04 per share) related to other productivity and efficiency initiatives, including $11 million in Latin America, $26 million in ESSA and $30 million in AMENA. Non-cash charges in 2015 and 2014 were $10 million and $13 million, respectively. Cash payments in 2015 and 2014 were $57 million and $3 million, respectively. All of these charges were recorded in selling, general and administrative expenses and primarily reflect severance and other employee-related costs and asset impairments (all non-cash). These initiatives were not included in items affecting comparability. Substantially all of the restructuring accrual of $74 million at December 26, 2015 is expected to be paid by the end of 2016. See additional unaudited information in “Results of Operations – Division Review” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Note 4 — Property, Plant and Equipment and Intangible Assets

A summary of our property, plant and equipment is as follows:



	Average Useful Life (Years)	2015			2014			2013
Property, plant and equipment, net
Land		$	1,184		$	1,288
Buildings and improvements	15 – 44	8,061			8,114
Machinery and equipment, including fleet and software	5 – 15	24,764			25,146
Construction in progress		1,738			1,752
		35,747			36,300
Accumulated depreciation		(19,430		)	(19,056		)
		$	16,317		$	17,244
Depreciation expense		$	2,248		$	2,441		$	2,472

Property, plant and equipment is recorded at historical cost. Depreciation and amortization are recognized on a straight-line basis over an asset’s estimated useful life. Land is not depreciated and construction in progress is not depreciated until ready for service.

A summary of our amortizable intangible assets is as follows:



		2015							2014							2013
Amortizable intangible assets, net	Average Useful Life (Years)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Acquired franchise rights	56 – 60	$	820	$	(92	)	$	728	$	879	$	(89	)	$	790
Reacquired franchise rights	5 – 14	105		(99		)	6		107		(95		)	12
Brands	20 – 40	1,298		(987		)	311		1,361		(1,004		)	357
Other identifiable intangibles	10 – 24	526		(301		)	225		595		(305		)	290
		$	2,749	$	(1,479	)	$	1,270	$	2,942	$	(1,493	)	$	1,449
Amortization expense							$	75						$	92	$	110

Amortization of intangible assets for each of the next five years, based on existing intangible assets as of December 26, 2015 and using average 2015 foreign exchange rates, is expected to be as follows:



	2016		2017		2018		2019		2020
Five-year projected amortization	$	65	$	60	$	59	$	56	$	55

Depreciable and amortizable assets are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. In these circumstances, if an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is based on discounted future cash flows. Useful lives are periodically evaluated to determine whether events or circumstances have occurred which indicate the need for revision. For additional unaudited information on our policies for amortizable brands, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Nonamortizable Intangible Assets

We did not recognize any impairment charges for goodwill in each of the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013. In 2015, we performed the impairment analysis for goodwill for all of our reporting units using the qualitative approach and concluded that it was more likely than not that the estimated fair values of our reporting units were greater than their carrying amounts. After reaching this conclusion, no further testing was performed.

We recognized no material impairment charges for nonamortizable intangible assets in each of the fiscal years ended December 26, 2015, December 27, 2014 and December 28, 2013. In 2014, we recognized pre-tax impairment charges in ESSA for nonamortizable intangible assets of $23 million. Based on our year-end assessment, the estimated fair values of our indefinite-lived reacquired and acquired franchise rights recorded at NAB exceed their carrying values. However, there could be an impairment of the carrying value of NAB’s reacquired and acquired franchise rights if future revenues and their contribution to the operating results of NAB’s CSD business do not achieve our estimated future cash flows or if macroeconomic conditions result in a future increase in the weighted-average cost of capital used to estimate fair value. We have also analyzed the impact of the recent economic and political developments in Russia on the estimated fair value of our indefinite-lived intangible assets in Russia and have concluded that there is no impairment as of December 26, 2015. However, a further deterioration in these conditions in Russia could potentially require us to record an impairment charge for these assets in the future. For additional information on our policies for nonamortizable intangible assets, see Note 2 to our consolidated financial statements.

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



	Balance, Beginning 2014		Translation and Other			Balance, End of 2014		Translation and Other			Balance, End of 2015
FLNA
Goodwill	$	305	$	(14	)	$	291	$	(24	)	$	267
Brands	29		(2		)	27		(5		)	22
	334		(16		)	318		(29		)	289
QFNA
Goodwill	175		—			175		—			175

NAB
Goodwill	9,894		(48		)	9,846		(92		)	9,754
Reacquired franchise rights	7,281		(88		)	7,193		(151		)	7,042
Acquired franchise rights	1,551		(13		)	1,538		(31		)	1,507
Brands	108		—			108		—			108
	18,834		(149		)	18,685		(274		)	18,411
Latin America (a)
Goodwill	709		(65		)	644		(123		)	521
Brands	244		(21		)	223		(86		)	137
	953		(86		)	867		(209		)	658
ESSA (b)
Goodwill	5,027		(1,488		)	3,539		(497		)	3,042
Reacquired franchise rights	760		(189		)	571		(83		)	488
Acquired franchise rights	230		(31		)	199		(9		)	190
Brands	4,071		(1,408		)	2,663		(451		)	2,212
	10,088		(3,116		)	6,972		(1,040		)	5,932
AMENA
Goodwill	503		(33		)	470		(52		)	418
Brands	127		(10		)	117		(12		)	105
	630		(43		)	587		(64		)	523

Total goodwill	16,613		(1,648		)	14,965		(788		)	14,177
Total reacquired franchise rights	8,041		(277		)	7,764		(234		)	7,530
Total acquired franchise rights	1,781		(44		)	1,737		(40		)	1,697
Total brands	4,579		(1,441		)	3,138		(554		)	2,584
	$	31,014	$	(3,410	)	$	27,604	$	(1,616	)	$	25,988


(a)	The change in 2015 includes a reduction of $41 million of nonamortizable brands arising from the Venezuela deconsolidation.


(b)	The change in 2015 and 2014 primarily reflects the depreciation of the Russian ruble.

Note 5 — Income Taxes

The components of income before income taxes are as follows:



		2015			2014			2013
U.S.		$	2,879		$	2,557		$	3,078
Foreign		4,563			6,200			5,813
		$	7,442		$	8,757		$	8,891

The provision for income taxes consisted of the following:

		2015			2014			2013
Current:	U.S. Federal	$	1,143		$	1,364		$	1,092
	Foreign	773			851			807
	State	65			210			124
		1,981			2,425			2,023
Deferred:	U.S. Federal	(14		)	(33		)	87
	Foreign	(32		)	(60		)	11
	State	6			(133		)	(17		)
		(40		)	(226		)	81
		$	1,941		$	2,199		$	2,104



A reconciliation of the U.S. Federal statutory tax rate to our annual tax rate is as follows:

	2015		2014		2013
U.S. Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State income tax, net of U.S. Federal tax benefit	0.6		0.6		1.2
Lower taxes on foreign results	(10.5	)	(8.6	)	(8.8	)
Impact of Venezuela impairment charges	6.4		—		—
Tax settlements	(3.1	)	—		(2.4	)
Other, net	(2.3	)	(1.9	)	(1.3	)
Annual tax rate	26.1	%	25.1	%	23.7	%

Deferred tax liabilities and assets are comprised of the following:



Deferred tax liabilities	2015			2014
Debt guarantee of wholly-owned subsidiary	$	842		$	842
Property, plant and equipment	2,023			2,174
Intangible assets other than nondeductible goodwill	3,920			4,068
Other	299			264
Gross deferred tax liabilities	7,084			7,348
Deferred tax assets
Net carryforwards	1,279			1,329
Share-based compensation	240			265
Retiree medical benefits	343			388
Other employee-related benefits	547			646
Pension benefits	424			263
Deductible state tax and interest benefits	186			158
Other	933			1,100
Gross deferred tax assets	3,952			4,149
Valuation allowances	(1,136		)	(1,230		)
Deferred tax assets, net	2,816			2,919
Net deferred tax liabilities	$	4,268		$	4,429

Deferred taxes are included within the following balance sheet accounts:



	2015		2014
Assets:
Prepaid expenses and other current assets	$	691	$	875
Liabilities:
Deferred income taxes	$	4,959	$	5,304

A summary of our valuation allowance activity is as follows:



	2015			2014			2013
Balance, beginning of year	$	1,230		$	1,360		$	1,233
(Benefit)/provision	(26		)	(25		)	111
Other (deductions)/additions	(68		)	(105		)	16
Balance, end of year	$	1,136		$	1,230		$	1,360

For additional unaudited information on our income tax policies, including our reserves for income taxes, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Reserves

A number of years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions and the related open tax audits are as follows:



Jurisdiction	Years Open to Audit	Years Currently Under Audit
United States	2010-2014	None
Mexico	2010-2014	None
United Kingdom	2013-2014	None
Canada (Domestic)	2011-2014	2011-2013
Canada (International)	2008-2014	2008-2013
Russia	2012-2014	2012-2014

While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular issue would usually require the use of cash. Favorable resolution would be recognized as a reduction to our annual tax rate in the year of resolution. For further unaudited information on the impact of the resolution of open tax issues, see “Other Consolidated Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In the fourth quarter of 2015, we reached an agreement with the IRS resolving substantially all open matters related to the audits of taxable years 2010 and 2011 (two immaterial matters were still open as of December 26, 2015). The agreement resulted in a fourth quarter non-cash tax benefit totaling $230 million.

In 2013, we reached an agreement with the IRS resolving all open matters related to the audits for taxable years 2003 through 2009. As a result, we made U.S. Federal net cash tax payments of $758 million, including interest. The settlement reduced our 2013 net cash provided by operating activities and our reserves for uncertain tax positions for the tax years 2003 through 2012 and resulted in a non-cash tax benefit of $209 million in 2013. In addition, payments for other U.S. Federal, state and local tax matters related to open tax years totaling $226 million were made in 2013. See additional unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As of December 26, 2015, the total gross amount of reserves for income taxes, reported in other liabilities, was $1,547 million. We accrue interest related to reserves for income taxes in our provision for income taxes and any associated penalties are recorded in selling, general and administrative expenses. The gross amount of interest accrued, reported in other liabilities, was $144 million as of December 26, 2015, of which $14 million of expense was recognized in 2015. The gross amount of interest accrued, reported in other liabilities, was $141 million as of December 27, 2014, of which $31 million of expense was recognized in 2014.

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



	2015			2014
Balance, beginning of year	$	1,587		$	1,268
Additions for tax positions related to the current year	248			349
Additions for tax positions from prior years	122			215
Reductions for tax positions from prior years	(261		)	(81		)
Settlement payments	(78		)	(70		)
Statutes of limitations expiration	(34		)	(42		)
Translation and other	(37		)	(52		)
Balance, end of year	$	1,547		$	1,587

Carryforwards and Allowances

Operating loss carryforwards totaling $10.9 billion at year-end 2015 are being carried forward in a number of foreign and state jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. These operating losses will expire as follows: $0.2 billion in 2016, $9.8 billion between 2017 and 2035 and $0.9 billion may be carried forward indefinitely. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Undistributed International Earnings

As of December 26, 2015, we had approximately $40.2 billion of undistributed international earnings. We intend to continue to reinvest earnings outside the U.S. for the foreseeable future and, therefore, have not recognized any U.S. tax expense on these earnings. It is not practicable for us to determine the amount of unrecognized U.S. tax expense on these reinvested international earnings.

Note 6 — Share-Based Compensation

Our share-based compensation program is designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders. Stock options, restricted stock units (RSUs), performance stock units (PSUs) and PepsiCo equity performance units (PEPunits) are granted to employees under the shareholder-approved 2007 Long-Term Incentive Plan (LTIP). Each RSU represents our obligation to deliver to the holder one share of PepsiCo common stock when the award vests at the end of the service period. PSUs are awards where the number of shares delivered to the holder upon vesting at the end of the service period depends on PepsiCo’s performance against specified targets. During the vesting period, RSUs and PSUs accrue dividend equivalents that pay out in cash (without interest) if and when the applicable RSU or PSU vests and becomes payable. PEPunits provide an opportunity to earn shares of PepsiCo common stock with a value that adjusts based upon changes in PepsiCo’s absolute stock price as well as PepsiCo’s Total Shareholder Return relative to the S&P 500 over a three-year performance period.

The Company may use authorized and unissued shares to meet share requirements resulting from the exercise of stock options and the vesting of RSUs and PSUs as well as PEPunits.

As of December 26, 2015, 91 million shares were available for future share-based compensation grants.

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



	2015		2014			2013
Share-based compensation expense	$	295	$	297		$	303
Restructuring and impairment charges/(credits)	4		(3		)	—
Total	$	299	$	294		$	303
Income tax benefits recognized in earnings related to share-based compensation	$	77	$	75		$	76

As of December 26, 2015, there was $335 million of total unrecognized compensation cost related to nonvested share-based compensation grants. This unrecognized compensation cost is expected to be recognized over a weighted-average period of two years.

Method of Accounting and Our Assumptions

We account for our employee stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. The fair value of RSUs is measured at the market price of the Company’s stock on the date of grant. The fair value of PSUs is measured at the market price of the Company’s stock on the date of grant with the exception of market-based awards, for which we use the Monte-Carlo simulation option-pricing model to determine the fair value. The Monte-Carlo simulation option-pricing model uses the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied. Compensation costs related to these awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.

All stock option grants have an exercise price equal to the fair market value of our common stock on the date of grant and generally have a 10-year term. We do not backdate, reprice or grant share-based compensation awards retroactively. Repricing of awards would require shareholder approval under the LTIP.

The fair value of share-based award grants is amortized to expense over the vesting period, primarily three years. Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. Executives who are awarded long-term incentives based on their performance may generally elect to receive their grant in the form of stock options or RSUs, or a combination thereof. Executives who elect RSUs receive one RSU for every four stock options that would have otherwise been granted. Certain executive officers and other senior executives do not have a choice and, through 2015, were granted a combination of 60% PEPunits measuring both absolute and relative stock price performance and 40% long-term cash based on achievement of specific performance operating metrics. Beginning in 2016, certain executive officers and other senior executives will be granted 66% performance stock units and 34% long-term cash, each of which will be subject to pre-established performance targets. Certain executives are granted performance-based stock units which require the achievement of specified financial and/or operational performance metrics. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of these performance metrics in accordance with the terms established at the time of the award.

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



	2015		2014		2013
Expected life	7 years		6 years		6 years
Risk-free interest rate	1.8	%	1.9	%	1.1	%
Expected volatility	15	%	16	%	17	%
Expected dividend yield	2.7	%	2.9	%	2.7	%

The expected life is the period over which our employee groups are expected to hold their options. It is based on our historical experience with similar grants. The risk-free interest rate is based on the expected U.S. Treasury rate over the expected life. Volatility reflects movements in our stock price over the most recent historical period equivalent to the expected life. Dividend yield is estimated over the expected life based on our stated dividend policy and forecasts of net income, share repurchases and stock price.

A summary of our share-based compensation activity for the year ended December 26, 2015 is as follows:



Our Stock Option Activity	Options(a)		Weighted-Average Exercise Price		Weighted-Average Contractual Life Remaining (years)	Aggregate Intrinsic Value(b)
Outstanding at December 27, 2014	38,857		$	64.06
Granted	1,884		$	98.19
Exercised	(8,483	)	$	59.51
Forfeited/expired	(786	)	$	77.73
Outstanding at December 26, 2015	31,472		$	66.98	4.38	$	1,056,138
Exercisable at December 26, 2015	24,609		$	62.20	3.34	$	943,605
Expected to vest as of December 26, 2015	6,365		$	83.60	8.07	$	107,845


(a)	Options are in thousands and include options previously granted under the PBG plan. No additional options or shares were granted under the PBG plan after 2009.


(b)	In thousands.



Our RSU and PSU Activity	RSUs/PSUs(a)		Weighted-Average Grant-Date Fair Value		Weighted-Average Contractual Life Remaining (years)	Aggregate Intrinsic Value(a)
Outstanding at December 27, 2014	11,228		$	74.49
Granted (b)	2,759		$	99.17
Converted	(3,920	)	$	67.91
Forfeited	(1,000	)	$	82.10
Actual performance change (c)	41		$	89.34
Outstanding at December 26, 2015 (d)	9,108		$	84.03	1.29	$	915,727
Expected to vest as of December 26, 2015	8,389		$	83.52	1.21	$	843,472


(a)	In thousands.


(b)	Grant activity for all PSUs are disclosed at target.


(c)	Reflects the net number of PSUs above and below target levels based on actual performance measured at the end of the performance period.


(d)	The outstanding PSUs for which the performance period has not ended as of December 26, 2015, at the threshold, target and maximum award levels were zero, 0.5 million and 0.7 million, respectively.



Our PEPunit Activity	PEPunits(a)		Weighted-Average Grant-Date Fair Value		Weighted-Average Contractual Life Remaining (years)	Aggregate Intrinsic Value(a)
Outstanding at December 27, 2014	953		$	61.04
Granted (b)	300		$	68.94
Converted	(395	)	$	64.36
Forfeited	(109	)	$	60.22
Actual performance change (c)	72		$	64.81
Outstanding at December 26, 2015 (d)	821		$	62.77	1.19	$	82,546
Expected to vest as of December 26, 2015	763		$	62.95	1.19	$	76,751


(a)	In thousands.


(b)	Grant activity for all PEPunits are disclosed at target.


(c)	Reflects the net number of PEPunits above and below target levels based on actual performance measured at the end of the performance period.


(d)	The outstanding PEPunits for which the performance period has not ended as of December 26, 2015, at the threshold, target and maximum award levels were zero, 0.8 million and 1.4 million, respectively.

Other Share-Based Compensation Data



	2015		2014		2013
Stock Options
Total number of options granted (a)	1,884		3,416		2,868
Weighted-average grant-date fair value of options granted	$	10.80	$	8.79	$	8.14
Total intrinsic value of options exercised (a)	$	366,188	$	423,251	$	471,475
Total grant-date fair value of options vested (a)	$	21,837	$	42,353	$	88,750
RSUs/PSUs
Total number of RSUs/PSUs granted (a)	2,759		4,379		4,231
Weighted-average grant-date fair value of RSUs/PSUs granted	$	99.17	$	80.39	$	76.30
Total intrinsic value of RSUs/PSUs converted (a)	$	375,510	$	319,820	$	294,065
Total grant-date fair value of RSUs/PSUs vested (a)	$	257,831	$	241,836	$	236,688
PEPunits
Total number of PEPunits granted (a)	300		387		355
Weighted-average grant-date fair value of PEPunits granted	$	68.94	$	50.95	$	68.48
Total intrinsic value of PEPunits converted (a)	$	37,705	$	—	$	3,868
Total grant-date fair value of PEPunits vested (a)	$	22,286	$	5,072	$	5,896


(a)	In thousands.

As of December 26, 2015 and December 27, 2014, there were approximately 293,000 and 324,000 outstanding awards, respectively, consisting primarily of phantom stock units that were granted under the PepsiCo Director Deferral Program and will be settled in shares of PepsiCo common stock pursuant to the LTIP at the end of the applicable deferral period, not included in the tables above.

Note 7 — Pension, Retiree Medical and Savings Plans

In the fourth quarter of 2014, the Company offered certain former employees who had vested benefits in our U.S. defined benefit pension plans the option of receiving a one-time lump sum payment equal to the present value of the participant’s pension benefit (payable in cash or rolled over into a qualified retirement plan or IRA). In the fourth quarter of 2014, we made a discretionary contribution of $388 million to fund substantially all of these payments. The Company recorded a pre-tax non-cash settlement charge of $141 million ($88 million after-tax or $0.06 per share) in 2014 as a result of this transaction. See additional unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

During 2014, we revised our mortality assumptions to include the impact of the new set of mortality tables issued by the Society of Actuaries, adjusted to reflect our experience and future expectations. This resulted in an increase in the projected benefit obligation of our U.S. pension and retiree medical programs. We also reviewed and revised other demographic assumptions to reflect recent experience. The net effect of these changes and certain plan design changes resulted in an increase of approximately $150 million in the projected benefit obligation at December 27, 2014.

The provisions of both the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act are reflected in our retiree medical expenses and liabilities and were not material to our financial statements.

Gains and losses resulting from actual experience differing from our assumptions, including the difference between the actual return on plan assets and the expected return on plan assets, and from changes in our assumptions are determined at each measurement date. If this net accumulated gain or loss exceeds 10% of the greater of the market-related value of plan assets or plan liabilities, a portion of the net gain or loss is included in expense for the following year based upon the average remaining service period of active plan participants, which is approximately 11 years for pension expense and approximately 8 years for retiree medical expense. The cost or benefit of plan changes that increase or decrease benefits for prior employee service (prior service cost/(credit)) is included in earnings on a straight-line basis over the average remaining service period of active plan participants.

Selected financial information for our pension and retiree medical plans is as follows:



	Pension												Retiree Medical
	U.S.						International
	2015			2014			2015			2014			2015			2014
Change in projected benefit liability
Liability at beginning of year	$	13,409		$	11,825		$	3,247		$	2,859		$	1,439		$	1,384
Service cost	435			393			99			98			35			36
Interest cost	546			580			115			131			52			58
Plan amendments	16			(122		)	1			—			—			(125		)
Participant contributions	—			—			2			3			—			—
Experience (gain)/loss	(583		)	1,635			(221		)	512			(115		)	190
Benefit payments	(808		)	(349		)	(89		)	(86		)	(102		)	(101		)
Settlement/curtailment gain	—			(577		)	(19		)	(25		)	—			—
Special termination benefits	18			24			1			—			1			3
Foreign currency adjustment	—			—			(264		)	(245		)	(10		)	(6		)
Liability at end of year	$	13,033		$	13,409		$	2,872		$	3,247		$	1,300		$	1,439

Change in fair value of plan assets
Fair value at beginning of year	$	12,224		$	11,462		$	3,002		$	2,777		$	415		$	406
Actual return on plan assets	(85		)	1,254			77			401			(2		)	46
Employer contributions/funding	66			434			96			157			43			64
Participant contributions	—			—			2			3			—			—
Benefit payments	(808		)	(349		)	(89		)	(86		)	(102		)	(101		)
Settlement	—			(577		)	(16		)	(24		)	—			—
Foreign currency adjustment	—			—			(249		)	(226		)	—			—
Fair value at end of year	$	11,397		$	12,224		$	2,823		$	3,002		$	354		$	415
Funded status	$	(1,636	)	$	(1,185	)	$	(49	)	$	(245	)	$	(946	)	$	(1,024	)



	Pension												Retiree Medical
	U.S.						International
	2015			2014			2015			2014			2015			2014
Amounts recognized
Other assets	$	—		$	97		$	56		$	37		$	—		$	—
Other current liabilities	(47		)	(42		)	(1		)	(1		)	(63		)	(57		)
Other liabilities	(1,589		)	(1,240		)	(104		)	(281		)	(883		)	(967		)
Net amount recognized	$	(1,636	)	$	(1,185	)	$	(49	)	$	(245	)	$	(946	)	$	(1,024	)

Amounts included in accumulated other comprehensive loss (pre-tax)
Net loss/(gain)	$	3,065		$	2,918		$	733		$	1,003		$	(138	)	$	(49	)
Prior service cost/(credit)	1			(18		)	(7		)	(7		)	(127		)	(166		)
Total	$	3,066		$	2,900		$	726		$	996		$	(265	)	$	(215	)

Components of the increase/(decrease) in net loss/(gain) included in accumulated other comprehensive loss
Change in discount rate	$	(593	)	$	1,424		$	(150	)	$	636		$	(42	)	$	98
Employee-related assumption changes	(35		)	345			6			(112		)	(37		)	58
Liability-related experience different from assumptions	51			(104		)	(77		)	(12		)	(36		)	34
Actual asset return different from expected return	935			(470		)	97			(225		)	29			(19		)
Amortization and settlement of losses	(205		)	(316		)	(77		)	(61		)	(2		)	4
Other, including foreign currency adjustments	(6		)	(30		)	(69		)	(72		)	(1		)	(2		)
Total	$	147		$	849		$	(270	)	$	154		$	(89	)	$	173

Accumulated benefit obligation at end of year	$	12,077		$	12,206		$	2,453		$	2,721

The components of benefit expense are as follows:



	Pension																		Retiree Medical
	U.S.									International
	2015			2014			2013			2015			2014			2013			2015			2014			2013
Components of benefit expense
Service cost	$	435		$	393		$	467		$	99		$	98		$	111		$	35		$	36		$	45
Interest cost	546			580			527			115			131			118			52			58			54
Expected return on plan assets	(850		)	(784		)	(823		)	(174		)	(176		)	(157		)	(27		)	(27		)	(27		)
Amortization of prior service (credit)/cost	(3		)	21			18			—			—			1			(39		)	(28		)	(23		)
Amortization of net loss/(gain)	205			175			289			71			53			66			2			(4		)	1
	333			385			478			111			106			139			23			35			50
Settlement/curtailment loss/(gain) (a)	—			141			(4		)	3			7			7			—			—			—
Special termination benefits	18			24			22			1			—			—			1			3			2
Total	$	351		$	550		$	496		$	115		$	113		$	146		$	24		$	38		$	52


(a)	U.S. includes a pension lump sum settlement charge of $141 million in 2014. See additional unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The estimated amounts to be amortized from accumulated other comprehensive loss into pre-tax expense in 2016 for our pension and retiree medical plans are as follows:



	Pension					Retiree Medical
	U.S.			International
Net loss	$	168		$	43	$	(2	)
Prior service credit	(1		)	—		(37		)
Total	$	167		$	43	$	(39	)

The following table provides the weighted-average assumptions used to determine projected benefit liability and benefit expense for our pension and retiree medical plans:



	Pension												Retiree Medical
	U.S.						International
	2015		2014		2013		2015		2014		2013		2015		2014		2013
Weighted-average assumptions
Liability discount rate	4.5	%	4.2	%	5.0	%	4.0	%	3.8	%	4.7	%	4.2	%	3.8	%	4.6	%
Expense discount rate	4.2	%	5.0	%	4.2	%	3.8	%	4.7	%	4.4	%	3.8	%	4.3	%	3.7	%
Expected return on plan assets	7.5	%	7.5	%	7.8	%	6.5	%	6.6	%	6.6	%	7.5	%	7.5	%	7.8	%
Liability rate of salary increases	3.1	%	3.5	%	3.7	%	3.6	%	3.6	%	3.9	%
Expense rate of salary increases	3.5	%	3.7	%	3.7	%	3.6	%	3.9	%	3.9	%

The following table provides selected information about plans with accumulated benefit obligation and total projected benefit liability in excess of plan assets:



	Pension												Retiree Medical
	U.S.						International
	2015			2014			2015			2014			2015			2014
Selected information for plans with accumulated benefit obligation in excess of plan assets
Liability for service to date	$	(6,536	)	$	(661	)	$	(155	)	$	(333	)
Fair value of plan assets	$	5,698		$	2		$	112		$	288
Selected information for plans with projected benefit liability in excess of plan assets
Benefit liability	$	(13,033	)	$	(7,385	)	$	(511	)	$	(2,865	)	$	(1,300	)	$	(1,439	)
Fair value of plan assets	$	11,397		$	6,103		$	406		$	2,583		$	354		$	415

Of the total projected pension benefit liability at year-end 2015, $780 million relates to plans that we do not fund because the funding of such plans does not receive favorable tax treatment.

Future Benefit Payments and Funding

Our estimated future benefit payments are as follows:



	2016		2017		2018		2019		2020		2021-25
Pension	$	755	$	780	$	835	$	880	$	930	$	5,335
Retiree medical (a)	$	120	$	120	$	120	$	120	$	115	$	535


(a)	Expected future benefit payments for our retiree medical plans do not reflect any estimated subsidies expected to be received under the 2003 Medicare Act. Subsidies are expected to be approximately $2 to $3 million for each of the years from 2016 through 2020 and approximately $9 million in total for 2021 through 2025.

These future benefit payments to beneficiaries include payments from both funded and unfunded plans.

In 2016, we expect to make pension and retiree medical contributions of approximately $215 million, with approximately $65 million for retiree medical benefits.

Plan Assets

Our pension plan investment strategy includes the use of actively managed accounts and is reviewed periodically in conjunction with plan liabilities, an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. This strategy is also applicable to funds held for the retiree medical plans. Our investment objective includes ensuring that funds are available to meet the plans’ benefit obligations when they become due. Our overall investment policy is to prudently invest plan assets in a well-diversified portfolio of equity and high-quality debt securities and real estate to achieve our long-term return expectations. Our investment policy also permits the use of derivative instruments which are primarily used to reduce risk.

For 2016 and 2015, our expected long-term rate of return on U.S. plan assets is 7.5%. Our target investment allocations for U.S. plan assets are as follows:



	2016		2015
Fixed income	40	%	40	%
U.S. equity	33	%	33	%
International equity	22	%	22	%
Real estate	5	%	5	%

Actual investment allocations may vary from our target investment allocations due to prevailing market conditions. We regularly review our actual investment allocations and periodically rebalance our investments to our target allocations.

The expected return on plan assets is based on our investment strategy and our expectations for long-term rates of return by asset class, taking into account volatility and correlation among asset classes and our historical experience. We also review current levels of interest rates and inflation to assess the reasonableness of the long-term rates. We evaluate our expected return assumptions annually to ensure that they are reasonable. To calculate the expected return on plan assets, our market-related value of assets for fixed income is the actual fair value. For all other asset categories, we use a method that recognizes investment gains or losses (the difference between the expected and actual return based on the market-related value of assets) over a five-year period. This has the effect of reducing year-to-year volatility.

Contributions to our pension and retiree medical plans were as follows:



	Pension						Retiree Medical
	2015		2014		2013		2015		2014		2013
Discretionary (a)	$	—	$	407	$	23	$	—	$	—	$	—
Non-discretionary	162		184		177		43		64		62
Total	$	162	$	591	$	200	$	43	$	64	$	62


(a)	Includes $388 million in 2014 pertaining to pension lump sum payments.

Plan assets measured at fair value as of fiscal year-end 2015 and 2014 are categorized consistently by level in both years, and are as follows:



	2015								2014
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
U.S. plan assets (a)
Equity securities:
U.S. common stock (b)	$	1,415	$	1,415	$	—	$	—	$	966
U.S. commingled funds (c) (d)	2,369		—		2,369		—		3,437
International common stock (b)	1,203		1,203		—		—		1,488
International commingled fund (e)	1,113		—		1,113		—		876
Preferred stock (f)	9		—		9		—		22
Fixed income securities:
Government securities (f)	1,181		—		1,181		—		1,279
Corporate bonds (f) (g)	3,191		—		3,191		—		3,338
Mortgage-backed securities (f)	207		—		207		—		274
Other:
Contracts with insurance companies (h)	7		—		—		7		6
Real estate commingled funds (i)	735		—		—		735		629
Cash and cash equivalents	267		267		—		—		267
Sub-total U.S. plan assets	11,697		$	2,885	$	8,070	$	742	12,582
Dividends and interest receivable	54								57
Total U.S. plan assets	$	11,751							$	12,639
International plan assets
Equity securities:
U.S. common stock (b)	$	4	$	4	$	—	$	—	$	5
U.S. commingled funds (c)	198		—		198		—		373
International common stock (b)	148		148		—		—		171
International commingled funds (e)	1,142		—		1,142		—		918
Preferred stock (f)	—		—		—		—		1
Fixed income securities:
Government securities (f)	433		—		433		—		454
Corporate bonds (f)	439		—		439		—		320
Fixed income commingled funds (j)	308		—		308		—		517
Other:
Contracts with insurance companies (h)	32		—		—		32		36
Currency commingled fund (k)	—		—		—		—		87
Real estate commingled fund (i)	100		—		—		100		92
Cash and cash equivalents	12		12		—		—		21
Sub-total international plan assets	2,816		$	164	$	2,520	$	132	2,995
Dividends and interest receivable	7								7
Total international plan assets	$	2,823							$	3,002


(a)	2015 and 2014 amounts include $354 million and $415 million, respectively, of retiree medical plan assets that are restricted for purposes of providing health benefits for U.S. retirees and their beneficiaries.


(b)	Based on quoted market prices in active markets.


(c)	Based on the fair value of the investments owned by these funds that track various U.S. large, mid-cap and small company indices.


(d)	Includes one large-cap fund that represents 18% and 25% of total U.S. plan assets for 2015 and 2014, respectively.


(e)	Based on the fair value of the investments owned by these funds that track various non-U.S. equity indices.


(f)	Based on quoted bid prices for comparable securities in the marketplace and broker/dealer quotes in active markets.


(g)	Corporate bonds of U.S.-based companies represent 23% of total U.S. plan assets for both 2015 and 2014.


(h)	Based on the fair value of the contracts as determined by the insurance companies using inputs that are not observable.


(i)	Based on the appraised value of the investments owned by these funds as determined by independent third parties using inputs that are not observable.


(j)	Based on the fair value of the investments owned by these funds that track various government and corporate bond indices.


(k)	Based on the fair value of the investments owned by this fund that invests primarily in derivatives to hedge currency exposure.

The changes in Level 3 plan assets are as follows:



	Balance, Beginning 2014		Return on Assets Held at Year-End		Purchases and Sales, Net		Balance, End of 2014		Return on Assets Held at Year-End			Purchases and Sales, Net		Balance, End of 2015
Real estate commingled funds	$	635	$	68	$	18	$	721	$	99		$	15	$	835
Contracts with insurance companies	40		2		—		42		(3		)	—		39
Total	$	675	$	70	$	18	$	763	$	96		$	15	$	874

Retiree Medical Cost Trend Rates



	2016		2015
Average increase assumed	6	%	6	%
Ultimate projected increase (a)	5	%	5	%
Year of ultimate projected increase (a)	2039		2025


(a)	During 2015, we revised our retiree trend assumption to reflect our experience and future expectations for changes in the cost of medical coverage, including a longer grade down period to the ultimate rate.

These assumed health care cost trend rates have an impact on the retiree medical plan expense and liability, however the cap on our share of retiree medical costs limits the impact. A 1-percentage-point change in the assumed health care trend rate would have the following effects:



	1% Increase		1% Decrease
2015 service and interest cost components	$	4	$	(3	)
2015 benefit liability	$	40	$	(36	)

Savings Plan

Certain U.S. employees are eligible to participate in 401(k) savings plans, which are voluntary defined contribution plans. The plans are designed to help employees accumulate additional savings for retirement, and we make Company matching contributions for certain employees on a portion of eligible pay based on years of service.

Certain U.S. salaried employees, who are not eligible to participate in a defined benefit pension plan, are also eligible to receive an employer contribution to the 401(k) savings plan based on age and years of service regardless of employee contribution.

In 2015, 2014 and 2013, our total Company contributions were $148 million, $130 million and $122 million, respectively.

For additional unaudited information on our pension and retiree medical plans and related accounting policies and assumptions, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Note 8 — Related Party Transactions

Our related party transactions in 2015, 2014 and 2013 were not material.

We coordinate, on an aggregate basis, the contract negotiations of raw material requirements, including sweeteners, aluminum cans and plastic bottles and closures for us and certain of our independent bottlers. Once we have negotiated the contracts, the bottlers order and take delivery directly from the supplier and pay the suppliers directly. Consequently, these transactions are not reflected in our consolidated financial statements. As the contracting party, we could be liable to these suppliers in the event of any nonpayment by our bottlers, but we consider this exposure to be remote.

In addition, our joint ventures with Unilever (under the Lipton brand name) and Starbucks sell finished goods (ready-to-drink teas and coffees, respectively) and concentrate to us and our noncontrolled bottling affiliates. Consistent with accounting for equity method investments, our joint venture revenue is not included in our consolidated net revenue.

Certain members of our Board of Directors also serve on the boards of certain vendors and customers. These Board members do not participate in our vendor selection and negotiations nor in our customer negotiations. Our transactions with these vendors and customers are in the normal course of business and are consistent with terms negotiated with other vendors and customers. In addition, certain of our employees serve on the boards of Pepsi Bottling Ventures LLC and other affiliated companies of PepsiCo and do not receive incremental compensation for such services.

Note 9 — Debt Obligations and Commitments

The following table summarizes the Company’s debt obligations:



	2015			2014
Short-term debt obligations
Current maturities of long-term debt	$	3,109		$	4,096
Commercial paper (0.3% and 0.1%)	770			746
Other borrowings (10.0% and 17.7%)	192			234
	$	4,071		$	5,076
Long-term debt obligations
Notes due 2015 (1.4%)	$	—		$	4,093
Notes due 2016 (2.6% and 2.6%)	3,087			3,099
Notes due 2017 (1.2% and 1.6%)	4,392			2,004
Notes due 2018 (3.6% and 4.4%)	4,122			3,410
Notes due 2019 (3.7% and 3.7%)	1,627			1,631
Notes due 2020 (2.4% and 3.8%)	3,830			1,983
Notes due 2021-2046 (3.9% and 4.0%)	15,228			11,657
Other, due 2016-2021 (4.3% and 4.4%)	36			40
	32,322			27,917
Less: current maturities of long-term debt obligations	(3,109		)	(4,096		)
Total	$	29,213		$	23,821

The interest rates in the above table reflect weighted-average rates at year-end.

In 2015, we issued the following senior notes:



Interest Rate		Maturity Date	Amount
Floating rate		April 2018	$	250
1.250	%	April 2018	500
1.850	%	April 2020	750
2.750	%	April 2025	1,000
Floating rate		July 2017	600
1.125	%	July 2017	650
3.100	%	July 2022	800
3.500	%	July 2025	700
4.600	%	July 2045	500
Floating rate		October 2017	700
1.000	%	October 2017	450
2.150	%	October 2020	1,100
4.450	%	April 2046	750
			$	8,750	(a)


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

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

In 2015, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement) which expires on June 8, 2020. The Five-Year Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.7225 billion, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 billion. Additionally, we may, once a year, request renewal of the agreement for an additional one-year period.

Also, in 2015, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement) which expires on June 6, 2016. The 364-Day Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.7225 billion, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 billion. We may request renewal of this facility for an additional 364-day period or convert any amounts outstanding into a term loan for a period of up to one year, which would mature no later than the anniversary of the then effective termination date. The Five-Year Credit Agreement and the 364-Day Credit Agreement together replaced our $3.7725 billion five-year credit agreement dated as of June 9, 2014 and our $3.7725 billion 364-day credit agreement dated as of June 9, 2014. Funds borrowed under the Five-Year Credit Agreement and the 364-Day Credit Agreement may be used for general corporate purposes. Subject to certain conditions, we may borrow, prepay and reborrow amounts under these agreements. As of December 26, 2015, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement.

In addition, as of December 26, 2015, our international debt of $193 million was related to borrowings from external parties including various lines of credit. These lines of credit are subject to normal banking terms and conditions and are fully committed at least to the extent of our borrowings.

Long-Term Contractual Commitments (a)

The following table summarizes our long-term contractual commitments by period:



`	Payments Due by Period
	Total		2016		2017 – 2018		2019 – 2020		2021 and beyond
Long-term debt obligations (b)	$	28,907	$	—	$	8,396	$	5,447	$	15,064
Interest on debt obligations (c)	10,431		987		1,770		1,325		6,349
Operating leases	1,860		387		660		380		433
Purchasing commitments (d)	1,767		635		798		220		114
Marketing commitments (d)	2,251		428		773		627		423
	$	45,216	$	2,437	$	12,397	$	7,999	$	22,383


(a)	Based on year-end foreign exchange rates. Reserves for uncertain tax positions are excluded from the table above as we are unable to reasonably predict the ultimate amount or timing of any such settlements.


(b)	Excludes $3,109 million related to current maturities of debt, $306 million related to the fair value adjustments for debt acquired in acquisitions and interest rate swaps and $162 million related to unamortized discount.


(c)	Interest payments on floating-rate debt are estimated using interest rates effective as of December 26, 2015.


(d)	Primarily reflects non-cancelable commitments as of December 26, 2015.

Most long-term contractual commitments, except for our long-term debt obligations, are not recorded on our balance sheet. Operating leases primarily represent building leases. Non-cancelable purchasing commitments are primarily for oranges and orange juice. Non-cancelable marketing commitments are primarily for sports marketing. Bottler funding to independent bottlers is not reflected in our long-term contractual commitments as it is negotiated on an annual basis. Accrued liabilities for pension and retiree medical plans are not reflected in our long-term contractual commitments. See Note 7 for additional information regarding our pension and retiree medical obligations.

Off-Balance-Sheet Arrangements

It is not our business practice to enter into off-balance-sheet arrangements, other than in the normal course of business. See Note 8 regarding contracts related to certain of our bottlers.

See “Our Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further unaudited information on our borrowings.

Note 10 — Financial Instruments

Derivatives

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


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


•	foreign exchange rates and currency restrictions; and


•	interest rates.

Our hedging strategies include the use of derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. Cash flows from derivatives used to manage commodity price, foreign exchange

or interest rate risks are classified as operating activities in the Consolidated Statement of Cash Flows. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item. See “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further unaudited information on our business risks.

For cash flow hedges, the effective portion of changes in fair value is deferred in accumulated other comprehensive loss within common shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including reviewing netting agreements, if any, and a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk.

Commodity Prices

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

Our open commodity derivative contracts had a notional value of $1.0 billion as of December 26, 2015 and $1.2 billion as of December 27, 2014.

Foreign Exchange

Additionally, we are exposed to foreign exchange risk from foreign currency purchases and foreign currency assets and liabilities created in the normal course of business. We manage this risk through sourcing purchases from local suppliers, negotiating contracts in local currencies with foreign suppliers and through the use of derivatives, primarily forward contracts with terms of no more than two years. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred.

Our foreign currency derivatives had a total notional value of $2.1 billion as of December 26, 2015 and $2.7 billion as of December 27, 2014. Ineffectiveness for derivatives that qualify for hedge accounting treatment was not material for all periods presented. For foreign currency derivatives that do not qualify for hedge accounting treatment, all losses and gains were offset by changes in the underlying hedged items, resulting in no material net impact on earnings.

Interest Rates

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

The notional values of the interest rate derivative instruments outstanding as of December 26, 2015 and December 27, 2014 were $12.5 billion and $9.3 billion, respectively. Ineffectiveness for derivatives that qualify for cash flow hedge accounting treatment was not material for all periods presented.

As of December 26, 2015, approximately 33% of total debt, after the impact of the related interest rate derivative instruments, was exposed to variable rates, compared to approximately 25% as of December 27, 2014.

Available-for-Sale Securities

Investments in debt and marketable equity securities, other than investments accounted for under the equity method, are classified as available-for-sale. All highly liquid investments with original maturities of three months or less are classified as cash equivalents. Our investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of available-for-sale securities are recognized in accumulated other comprehensive loss within common shareholders’ equity. Unrealized gains and losses on our investments in debt securities as of December 26, 2015 were not material. The pre-tax unrealized gains on our investments in marketable equity securities were $115 million and $111 million as of December 26, 2015 and December 27, 2014, respectively.

Changes in the fair value of available-for-sale securities impact net income only when such securities are sold or an other-than-temporary impairment is recognized. We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and our intent to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. Our assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. We recorded no other-than-temporary impairment charges for the years ended December 26, 2015 and December 27, 2014.

Tingyi-Asahi Beverages Holding Co. Ltd. Call Option

In connection with our transaction with Tingyi in the second quarter of 2012, we received a call option to increase our holding in TAB to 20% that expired in the fourth quarter of 2015. During the third quarter of 2015, we concluded that the probability of exercising the option prior to its expiration was remote and, accordingly, we recorded a pre- and after-tax charge of $73 million ($0.05 per share) to write off the value of this call option. See “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The write-off of this call option did not impact the value of our 5% indirect equity interest in TAB, which was $538 million as of December 26, 2015. We continue to monitor the impact of economic and other developments on our investment in TAB.

Fair Value Measurements

The fair values of our financial assets and liabilities as of December 26, 2015 and December 27, 2014 are categorized as follows:



	2015				2014
	Assets(a)		Liabilities(a)		Assets(a)		Liabilities(a)
Available-for-sale securities:
Equity securities (b)	$	127	$	—	$	124	$	—
Debt securities (c)	7,231		—		3,167		—
	$	7,358	$	—	$	3,291	$	—
Short-term investments (d)	$	193	$	—	$	197	$	—
Prepaid forward contracts (e)	$	27	$	—	$	26	$	—
Deferred compensation (f)	$	—	$	474	$	—	$	504
Derivatives designated as fair value hedging instruments:
Interest rate (g)	$	129	$	12	$	140	$	—
Derivatives designated as cash flow hedging instruments:
Foreign exchange (h)	$	76	$	6	$	76	$	12
Interest rate (g)	—		311		1		117
Commodity (i)	—		7		3		10
	$	76	$	324	$	80	$	139
Derivatives not designated as hedging instruments:
Foreign exchange (h)	$	8	$	10	$	12	$	13
Interest rate (g)	44		56		57		75
Commodity (i)	12		141		18		166
	$	64	$	207	$	87	$	254
Total derivatives at fair value(j)	$	269	$	543	$	307	$	393
Total	$	7,847	$	1,017	$	3,821	$	897

(a)

Unless otherwise noted, financial assets are classified on our Consolidated Balance Sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our Consolidated Balance Sheet within accounts payable and other current liabilities and other liabilities. Unless specifically indicated, all financial assets and liabilities are categorized as Level 2 assets or liabilities.


(b)	Based on the price of common stock. Categorized as a Level 1 asset. These equity securities are classified as investments in noncontrolled affiliates.

(c)

Based on quoted broker prices or other significant inputs derived from or corroborated by observable market data. As of December 26, 2015, $4.5 billion and $2.7 billion of debt securities were classified as cash equivalents and short-term investments, respectively. As of December 27, 2014, $0.8 billion and $2.4 billion of debt securities were classified as cash equivalents and short-term investments, respectively. All of the Company’s available-for-sale debt securities have maturities of one year or less.


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


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


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


(g)	Based on LIBOR forward rates. As of December 26, 2015 and December 27, 2014, amounts related to non-designated instruments are presented on a net basis on our Consolidated Balance Sheet.


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


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


(j)	Unless otherwise noted, derivative assets and liabilities are presented on a gross basis on our Consolidated Balance Sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the Consolidated Balance Sheet as of December 26, 2015 and December 27, 2014 were immaterial. Collateral received against any of our asset positions was immaterial.

The carrying amounts of our cash and cash equivalents and short-term investments approximate fair value due to their short-term maturity. The fair value of our debt obligations as of December 26, 2015 and December 27, 2014 was $35 billion and $31 billion, respectively, based upon prices of similar instruments in the marketplace, which are considered Level 2 inputs.

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



	Fair Value/Non- designated Hedges							Cash Flow Hedges
	Losses/(Gains) Recognized in Income Statement(a)							Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss								Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement(b)
2015				2014			2015				2014				2015				2014
Foreign exchange	$	(14	)		$	2		$	(112	)		$	(70	)		$	(97	)		$	(16	)
Interest rate	17				21			195				135				174				233
Commodity	218				170			12				23				20				32
Total	$	221			$	193		$	95			$	88			$	97			$	249

(a)

Foreign exchange derivative gains/losses are primarily included in selling, general and administrative expenses. Interest rate derivative gains/losses are primarily from fair value hedges and are included in interest expense. These gains/losses are substantially offset by increases/decreases in the value of the underlying debt, which are also included in interest expense. Commodity derivative gains/losses are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.


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

Based on current market conditions, we expect to reclassify net gains of $33 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.

Note 11 — Net Income Attributable to PepsiCo per Common Share

Basic net income attributable to PepsiCo per common share is net income available for PepsiCo common shareholders divided by the weighted average of common shares outstanding during the period. Diluted net income attributable to PepsiCo per common share is calculated using the weighted average of common shares outstanding adjusted to include the effect that would occur if in-the-money employee stock options were exercised and RSUs, PSUs, PEPunits and preferred shares were converted into common shares. Options to purchase 1.5 million shares in 2015 and 0.6 million shares in 2013 were not included in the calculation of diluted earnings per common share because these options were out-of-the-money. Out-of-the-money options during 2014 were nominal. These out-of-the-money options had average exercise prices of $99.25 in 2015, $82.25 in 2014 and $75.69 in 2013.

The computations of basic and diluted net income attributable to PepsiCo per common share are as follows:



	2015				2014				2013
	Income			Shares(a)	Income			Shares(a)	Income			Shares(a)
Net income attributable to PepsiCo	$	5,452			$	6,513			$	6,740
Preferred shares:
Dividends	(1		)		(1		)		(1		)
Redemption premium	(5		)		(9		)		(7		)
Net income available for PepsiCo common shareholders	$	5,446		1,469	$	6,503		1,509	$	6,732		1,541
Basic net income attributable to PepsiCo per common share	$	3.71			$	4.31			$	4.37
Net income available for PepsiCo common shareholders	$	5,446		1,469	$	6,503		1,509	$	6,732		1,541
Dilutive securities:
Stock options, RSUs, PSUs, PEPunits and Other	—			15	—			17	—			18
ESOP convertible preferred stock	6			1	10			1	8			1
Diluted	$	5,452		1,485	$	6,513		1,527	$	6,740		1,560
Diluted net income attributable to PepsiCo per common share	$	3.67			$	4.27			$	4.32


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

Note 12 — Preferred Stock

As of December 26, 2015 and December 27, 2014, there were 3 million shares of convertible preferred stock authorized. The preferred stock was issued for an ESOP established by Quaker and these shares are redeemable for common stock by the ESOP participants. Quaker made the final award to its ESOP in June 2001. The preferred stock accrues dividends at an annual rate of $5.46 per share. As of December 26, 2015 and December 27, 2014, there were 803,953 preferred shares issued and 135,053 and 145,453 shares outstanding, respectively. The outstanding preferred shares had a fair value of $67 million as of December 26, 2015 and $70 million as of December 27, 2014. Each share is convertible at the option of the holder into 4.9625 shares of common stock. The preferred shares may be called by us upon written notice for redemption under certain conditions, including, among other things, upon termination of the ESOP in accordance with the ESOP’s terms, at the greater of $78 per share plus accrued and unpaid dividends or the fair market value of the preferred stock.

Activities of our preferred stock are included in the Consolidated Statement of Equity.

Note 13 — Accumulated Other Comprehensive Loss Attributable to PepsiCo

Comprehensive income is a measure of income which includes both net income and other comprehensive income or loss. Other comprehensive income or loss results from items deferred from recognition into our income statement. Accumulated other comprehensive income or loss is separately presented on our balance sheet as part of common shareholders’ equity. Other comprehensive (loss)/income attributable to PepsiCo was $(2,650) million in 2015, $(5,542) million in 2014 and $360 million in 2013. The accumulated balances for each component of other comprehensive loss attributable to PepsiCo are as follows:



	2015			2014			2013
Currency translation adjustment (a) (b)	$	(11,080	)	$	(8,255	)	$	(3,247	)
Cash flow hedges, net of tax	37			34			(76		)
Unamortized pension and retiree medical, net of tax (c)	(2,329		)	(2,500		)	(1,861		)
Unrealized gain on securities, net of tax	88			87			93
Other	(35		)	(35		)	(36		)
Accumulated other comprehensive loss attributable to PepsiCo	$	(13,319	)	$	(10,669	)	$	(5,127	)


(a)	The change from 2013 to 2014 primarily reflects depreciation of the Russian ruble.


(b)	The change from 2014 to 2015 primarily reflects the depreciation of the Russian ruble, Brazilian real and the Canadian dollar.


(c)	Net of taxes of $1,253 million in 2015, $1,260 million in 2014 and $945 million in 2013.

The following table summarizes the reclassifications from accumulated other comprehensive loss to the Consolidated Statement of Income:



	Amount Reclassified from Accumulated Other Comprehensive Loss									Affected Line Item in the Consolidated Statement of Income
	2015			2014			2013
Currency Translation:
Venezuelan entities	$	111		$	—		$	—		Venezuela impairment charges

(Gains)/Losses on cash flow hedges:
Foreign exchange contracts	$	(3	)	$	—		$	—		Net revenue
Foreign exchange contracts	(94		)	(16		)	—			Cost of sales
Interest rate derivatives	174			233			3			Interest expense
Commodity contracts	9			31			44			Cost of sales
Commodity contracts	11			1			(2		)	Selling, general and administrative expenses
Net losses before tax	97			249			45
Tax amounts	(47		)	(95		)	(17		)
Net losses after tax	$	50		$	154		$	28

Pension and retiree medical items:
Amortization of net prior service credit (a)	$	(41	)	$	(6	)	$	(2	)
Amortization of net losses (a)	281			226			357
Settlement/curtailment (a)	6			149			(2		)
Net losses before tax	246			369			353
Tax amounts	(74		)	(122		)	(123		)
Net losses after tax	$	172		$	247		$	230

Venezuelan entities	$	20		$	—		$	—		Venezuela impairment charges
Tax amount	(4		)	—			—
Net losses after tax	$	16		$	—		$	—

Total net losses reclassified for the year, net of tax	$	349		$	401		$	258


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

Note 14 — Supplemental Financial Information

Supplemental information for accounts and notes receivable and inventories is summarized as follows:



	2015			2014			2013
Accounts and notes receivable
Trade receivables	$	5,497		$	5,817
Other receivables	1,070			971
	6,567			6,788
Allowance, beginning of year	137			145			$	157
Net amounts charged to expense	43			38			29
Deductions (a)	(27		)	(27		)	(34		)
Other (b)	(23		)	(19		)	(7		)
Allowance, end of year	130			137			$	145
Net receivables	$	6,437		$	6,651

Inventories (c)
Raw materials	$	1,312		$	1,593
Work-in-process	161			173
Finished goods	1,247			1,377
	$	2,720		$	3,143


(a)	Includes accounts written off.


(b)	Includes adjustments related primarily to currency translation and other adjustments.


(c)	Approximately 4% and 3% of the inventory cost in 2015 and 2014, respectively, were computed using the LIFO method. The differences between LIFO and FIFO methods of valuing these inventories were not material.

Supplemental information for other assets and accounts payable and other current liabilities is summarized as follows:



	2015		2014
Other assets
Noncurrent notes and accounts receivable	$	140	$	93
Deferred marketplace spending	159		179
Pension plans (a)	60		141
Other	391		447
	$	750	$	860
Accounts payable and other current liabilities
Accounts payable	$	5,546	$	5,127
Accrued marketplace spending	2,319		2,222
Accrued compensation and benefits	1,759		1,746
Dividends payable	1,041		1,009
Other current liabilities	2,842		2,912
	$	13,507	$	13,016


(a)	See Note 7 for additional information regarding our pension plans.

The following table summarizes other supplemental information:



	2015		2014		2013
Other supplemental information
Rent expense	$	696	$	707	$	639
Interest paid	$	952	$	925	$	1,007
Income taxes paid, net of refunds	$	1,808	$	1,847	$	3,076

Note 15 — Divestitures

Suntory Holdings Limited

During our second quarter of 2013, as part of the refranchising of our beverage business in Vietnam, we completed a transaction with Suntory Holdings Limited. Under the terms of the agreement, we sold a controlling interest in our Vietnam bottling operations. The alliance serves as the franchise bottler for both companies. As a result of this transaction, we recorded a pre- and after-tax gain of $137 million (or $0.09 per share) in our 2013 results.

Management’s Responsibility for Financial Reporting

To Our Shareholders:

At PepsiCo, our actions – the actions of all our associates – are governed by our Global Code of Conduct. This Code is clearly aligned with our stated values – a commitment to deliver sustained growth through empowered people acting with responsibility and building trust. Both the Code and our core values enable us to operate with integrity – both within the letter and the spirit of the law. Our Code of Conduct is reinforced consistently at all levels and in all countries. We have maintained strong governance policies and practices for many years.

The management of PepsiCo is responsible for the objectivity and integrity of our consolidated financial statements. The Audit Committee of the Board of Directors has engaged independent registered public accounting firm, KPMG LLP, to audit our consolidated financial statements, and they have expressed an unqualified opinion.

We are committed to providing timely, accurate and understandable information to investors. Our commitment encompasses the following:

Maintaining strong controls over financial reporting. Our system of internal control is based on the control criteria framework of the Committee of Sponsoring Organizations of the Treadway Commission published in their report titled Internal Control – Integrated Framework (2013). The system is designed to provide reasonable assurance that transactions are executed as authorized and accurately recorded; that assets are safeguarded; and that accounting records are sufficiently reliable to permit the preparation of financial statements that conform in all material respects with accounting principles generally accepted in the U.S. We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the specified time periods. We monitor these internal controls through self-assessments and an ongoing program of internal audits. Our internal controls are reinforced through our Global Code of Conduct, which sets forth our commitment to conduct business with integrity, and within both the letter and the spirit of the law.

Exerting rigorous oversight of the business. We continuously review our business results and strategies. This encompasses financial discipline in our strategic and daily business decisions. Our Executive Committee is actively involved – from understanding strategies and alternatives to reviewing key initiatives and financial performance. The intent is to ensure we remain objective in our assessments, constructively challenge our approach to potential business opportunities and issues, and monitor results and controls.

Engaging strong and effective Corporate Governance from our Board of Directors. We have an active, capable and diligent Board that meets the required standards for independence, and we welcome the Board’s oversight as a representative of our shareholders. Our Audit Committee is comprised of independent directors with the financial literacy, knowledge and experience to provide appropriate oversight. We review our critical accounting policies, financial reporting and internal control matters with them and encourage their direct communication with KPMG LLP, with our Internal Auditor, and with our General Counsel. We also have a Compliance & Ethics Department, led by our Chief Compliance & Ethics Officer, to coordinate our compliance policies and practices.

Providing investors with financial results that are complete, transparent and understandable. The consolidated financial statements and financial information included in this report are the responsibility of management. This includes preparing the financial statements in accordance with accounting principles generally accepted in the U.S., which require estimates based on management’s best judgment.

PepsiCo has a strong history of doing what’s right. We realize that great companies are built on trust, strong ethical standards and principles. Our financial results are delivered from that culture of accountability, and we take responsibility for the quality and accuracy of our financial reporting.

February 11, 2016




	/s/ MARIE T. GALLAGHER
	Marie T. Gallagher
	Senior Vice President and Controller

	/s/ HUGH F. JOHNSTON
	Hugh F. Johnston
	Vice Chairman, Executive Vice President and Chief Financial Officer

	/s/ INDRA K. NOOYI
	Indra K. Nooyi
	Chairman of the Board of Directors and Chief Executive Officer

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

PepsiCo, Inc.:

We have audited the accompanying Consolidated Balance Sheets of PepsiCo, Inc. and Subsidiaries (“PepsiCo, Inc.” or “the Company”) as of December 26, 2015 and December 27, 2014, and the related Consolidated Statements of Income, Comprehensive Income, Cash Flows and Equity for each of the fiscal years in the three-year period ended December 26, 2015. We also have audited PepsiCo, Inc.’s internal control over financial reporting as of December 26, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). PepsiCo, Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PepsiCo, Inc. as of December 26, 2015 and December 27, 2014, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended December 26, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, PepsiCo, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 26, 2015, based on criteria established in Internal Control − Integrated Framework (2013) issued by COSO.

/s/ KPMG LLP

New York, New York

February 11, 2016

GLOSSARY

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

Bottler Case Sales (BCS): measure of physical beverage volume shipped to retailers and independent distributors from both PepsiCo and our independent bottlers.

Bottler funding: financial incentives we give to our independent bottlers to assist in the distribution and promotion of our beverage products.

Concentrate Shipments and Equivalents (CSE): measure of our physical beverage volume shipments to independent bottlers, retailers and independent distributors.

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.

Consumers: people who eat and drink our products.

CSD: carbonated soft drinks.

Customers: authorized independent bottlers, distributors and retailers.

Derivatives: financial instruments, such as futures, swaps, Treasury locks, cross currency swaps, options and forward contracts that we use to manage our risk arising from changes in commodity prices, interest rates and foreign exchange rates.

Direct-Store-Delivery (DSD): delivery system used by us and our independent bottlers to deliver snacks and beverages directly to retail stores where our products are merchandised.

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.

Hedge accounting: treatment for qualifying hedges that allows fluctuations in a hedging instrument’s fair value to offset corresponding fluctuations in the hedged item in the same reporting period. Hedge accounting is allowed only in cases where the hedging relationship between the hedging instruments and hedged items is highly effective, and only prospectively from the date a hedging relationship is formally documented.

Independent bottlers: customers to whom we have granted exclusive contracts to sell and manufacture certain beverage products bearing our trademarks within a specific geographical area.

Mark-to-market net gain or loss: change in market value for commodity derivative 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 prices on national exchanges and recently reported transactions in the marketplace.

Organic: a measure that adjusts for impacts of acquisitions, divestitures and other structural changes, including the Venezuela deconsolidation, and foreign exchange translation. This measure excludes the fourth quarter 2014 results of our Venezuelan businesses, which were deconsolidated effective as of the end of the third quarter of 2015. 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.

Servings: common metric reflecting our consolidated physical unit volume. Our divisions’ physical unit measures are converted into servings based on U.S. Food and Drug Administration guidelines for single-serving sizes of our products.

Total marketplace spending: includes sales incentives and discounts offered through various programs to our customers, consumers or independent bottlers, as well as advertising and other marketing activities.

Transaction gains and losses: the impact on our consolidated financial statements of exchange rate changes arising from specific transactions.

Translation adjustment: the impact of converting our foreign affiliates’ financial statements into U.S. dollars for the purpose of consolidating our financial statements.

Previous: Item 6. Selected Financial Data. · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk.