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

OUR BUSINESS
Executive Overview	42
Our Operations	42
Other Relationships	43
Our Business Risks	43
OUR FINANCIAL RESULTS
Results of Operations – Consolidated Review	47
Results of Operations – Division Review	48
FLNA	51
QFNA	52
PBNA	52
LatAm	53
Europe	53
AMESA	54
APAC	55
Results of Operations – Other Consolidated Results	56
Non-GAAP Measures	57
Items Affecting Comparability	59
Our Liquidity and Capital Resources	63
Return on Invested Capital	66
OUR CRITICAL ACCOUNTING POLICIES
Revenue Recognition	67
Goodwill and Other Intangible Assets	68
Income Tax Expense and Accruals	69
Pension and Retiree Medical Plans	70
Consolidated Statement of Income	73
Consolidated Statement of Comprehensive Income	74
Consolidated Statement of Cash Flows	75
Consolidated Balance Sheet	76
Consolidated Statement of Equity	77
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation and Our Divisions	78
Note 2 – Our Significant Accounting Policies	82
Note 3 – Restructuring and Impairment Charges	86
Note 4 – Property, Plant and Equipment and Intangible Assets	90
Note 5 – Income Taxes	93
Note 6 – Share-Based Compensation	97
Note 7 – Pension, Retiree Medical and Savings Plans	100
Note 8 – Debt Obligations	107
Note 9 – Financial Instruments	109
Note 10 – Net Income Attributable to PepsiCo per Common Share	114
Note 11 – Preferred Stock	114
Note 12 – Accumulated Other Comprehensive Loss Attributable to PepsiCo	115
Note 13 – Leases	116
Note 14 – Acquisitions and Divestitures	118
Note 15 – Supplemental Financial Information	120
Note 16 – Selected Quarterly Financial Data (unaudited)	121
Report of Independent Registered Public Accounting Firm	123
GLOSSARY	127

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. Unless otherwise noted, tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common stock per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Percentage changes are based on unrounded amounts.

OUR BUSINESS

Executive Overview

PepsiCo is a leading global food and beverage company with a complementary portfolio of 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 beverages, foods and snacks, serving customers and consumers in more than 200 countries and territories

Everything we do is driven by an approach we call Winning with Purpose. Winning with Purpose is our guide for achieving accelerated, sustainable growth that includes our mission, to Create More Smiles with Every Sip and Every Bite; our vision, to Be the Global Leader in Convenient Foods and Beverages by Winning with Purpose; and The PepsiCo Way, seven behaviors that define our shared culture.

Winning with Purpose is designed to help us meet the needs of our shareholders, customers, consumers, partners and communities, while caring for our planet and inspiring our associates.

This strategy is also designed to address key challenges facing our Company, including: shifting consumer preferences and behaviors; a highly competitive operating environment; a rapidly changing retail landscape, including the growth in e-commerce; continued macroeconomic and political volatility; and an evolving regulatory landscape.

To adapt to these challenges, we intend to continue to focus on becoming Faster, Stronger, and Better:

•	Faster by winning in the marketplace, being more consumer-centric and accelerating investment for topline growth. This includes broadening our portfolios to win locally in convenient foods and beverages, fortifying our North American businesses, and accelerating our international expansion, with disciplined focus on markets where we see a strong likelihood of prevailing over our competition.

•

Stronger by continuing to transform our capabilities, cost, and culture by leveraging scale and technology in global markets across our operations and winning locally. This includes continuing to focus on driving savings through holistic cost management to reinvest to succeed in the marketplace, developing and scaling core capabilities through technology, and building differentiated talent and culture.

•	Better by continuing to focus our sustainability agenda on helping to build a more sustainable food system and investing in six priority areas: next generation agriculture, water stewardship, plastic packaging, products, climate change, and people.

We believe these priorities will position our Company for long-term sustainable growth.

See also “Item 1A. Risk Factors” for further information about risks and uncertainties that the Company faces.

Our Operations

See “Item 1. Business” for 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.

Other Relationships

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.

Our Business Risks

We are subject to risks in the normal course of business. During the periods presented in this report, certain jurisdictions in which our products are made, manufactured, distributed or sold operated in a challenging environment, experiencing unstable economic, political and social conditions, civil unrest, natural disasters, debt and credit issues, and currency controls or fluctuations. We continue to monitor the economic, operating and political environment in these markets closely and to identify actions to potentially mitigate any unfavorable impacts on our future results.

In addition, certain jurisdictions in which our products are made, manufactured, distributed or sold have either imposed, or are considering imposing, new or increased taxes or regulations on the manufacture, distribution or sale of our products or their packaging, ingredients or substances contained in, or attributes of, our products or their packaging, commodities used in the production of our products or their packaging or the recyclability or recoverability of our packaging. These taxes and regulations vary in scope and form. For example, some taxes apply to all beverages, including non-caloric beverages, while others apply only to beverages with a caloric sweetener (e.g., sugar). In addition, some regulations apply to all products using certain types of packaging (e.g., plastic), while others are designed to increase the sustainability of packaging, encourage waste reduction and increased recycling rates or facilitate waste management process or restrict the sale of products in certain packaging.

We sell a wide variety of beverages, foods and snacks in more than 200 countries and territories and the profile of the products we sell, the amount of revenue attributable to such products and the type of packaging used varies by jurisdiction. Because of this, we cannot predict the scope or form potential taxes, regulations or other limitations on our products or their packaging may take, and therefore cannot predict the impact of such taxes, regulations or limitations on our financial results. In addition, taxes, regulations and limitations may impact us and our competitors differently. We continue to monitor existing and proposed taxes and regulations in the jurisdictions in which our products are made, manufactured, distributed and sold and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such taxes, regulations or limitations, including advocating alternative measures with respect to the imposition, form and scope of any such taxes, regulations or limitations.

In addition, our industry continues to be affected by disruption of the retail landscape, including the rapid growth in sales through e-commerce websites and mobile commerce applications, including through subscription services, the integration of physical and digital operations among retailers and the international expansion of hard discounters. We continue to monitor changes in the retail landscape and to identify actions we may take to build our global e-commerce and digital capabilities, distribute our products effectively through all existing and emerging channels of trade and potentially mitigate any unfavorable impacts on our future results.

During the fourth quarter of 2017, the TCJ Act was enacted in the United States. Our provisional measurement period ended in the fourth quarter of 2018 and while our accounting for the recorded impact of the TCJ Act was deemed to be complete, additional guidance issued by the IRS impacted, and may continue to impact, our recorded amounts after December 29, 2018. For further information, see “Our Liquidity and Capital Resources,” “Our Critical Accounting Policies” and Note 5 to our consolidated financial statements.

On May 19, 2019, a public referendum held in Switzerland passed the TRAF, effective January 1, 2020. The enactment of certain provisions of the TRAF in 2019 resulted in adjustments to our deferred taxes. During 2019, we recorded net tax expense of $24 million related to the impact of the TRAF. Enactment of the TRAF provisions subsequent to December 28, 2019 is expected to result in adjustments to our consolidated financial statements and related disclosures in future periods. The future impact of the TRAF cannot currently be reasonably estimated; we will continue to monitor and assess the impact the TRAF may have on our business and financial results. See “Our Critical Accounting Policies” and Note 5 to our consolidated financial statements for further information.

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 and that those risks may evolve over time. 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, including risks related to cybersecurity. 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 the Board’s oversight of financial, compliance and employee safety risks facing PepsiCo;

◦	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 Nominating and Corporate Governance Committee assists the Board in its oversight of the Company’s governance structure and other corporate governance matters, including succession planning; and

◦	The Public Policy and Sustainability Committee of the Board assists the Board in its oversight of PepsiCo’s policies, programs and related risks that concern key sustainability and public policy matters.

•

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 top strategic, financial, operating, 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, the Audit Committee of the Board and other Committees 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 and Law Departments lead and coordinate 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. 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 “Item 1A. Risk Factors” for further discussion of our market risks, and see “Our Liquidity and Capital Resources” 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 9 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 commodity derivatives had a total notional value of $1.1 billion as of December 28, 2019 and December 29, 2018. At the end of 2019, 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 2019 by $106 million.

Foreign Exchange

Our operations outside of the United States generated 42% of our consolidated net revenue in 2019, with Mexico, Russia, Canada, the United Kingdom, China and Brazil, collectively, comprising approximately 22% of our consolidated net revenue in 2019. As a result, we are exposed to foreign exchange risks in the international markets in which our products are made, manufactured, distributed or sold. Additionally, we are exposed to foreign exchange risk from net investments in foreign subsidiaries, foreign currency purchases, foreign currency assets and liabilities created in the normal course of business, as well as the proposed acquisition of Pioneer Foods. During 2019, unfavorable foreign exchange reduced net revenue growth by 2 percentage points, reflecting declines in the euro, Turkish lira, Brazilian real, Russian ruble and Argentine peso. Currency declines against the U.S. dollar which are not offset could adversely impact our future financial results.

In addition, volatile economic, political and social conditions and civil unrest in certain markets in which our products are made, manufactured, distributed or sold, including in Argentina, Brazil, China, Mexico, the Middle East, Russia and Turkey, and currency controls or fluctuations in certain of these international markets, continue to, and the threat or imposition of new or increased tariffs or sanctions or other impositions in or related to these international markets may, result in challenging operating environments. We also continue to monitor the economic and political developments related to the United Kingdom’s withdrawal from the European Union, including how the United Kingdom will interact with other European Union countries following its departure, as well as the economic, operating and political environment in Russia and the potential impact for the Europe segment and our other businesses.

Our foreign currency derivatives had a total notional value of $1.9 billion as of December 28, 2019 and $2.0 billion as of December 29, 2018. At the end of 2019, we estimate that an unfavorable 10% change in the underlying exchange rates would have increased our net unrealized losses in 2019 by $135 million.

The total notional amount of our debt instruments designated as net investment hedges was $2.5 billion as of December 28, 2019 and $0.9 billion as of December 29, 2018.

Interest Rates

Our interest rate derivatives had a total notional value of $5.0 billion as of December 28, 2019 and $10.5 billion as of December 29, 2018. Assuming year-end 2019 investment levels and variable rate debt, a 1-percentage-point increase in interest rates would have decreased our net interest expense in 2019 by $25 million due to higher cash and cash equivalents as compared with our variable rate debt.

OUR FINANCIAL RESULTS

Results of Operations — Consolidated Review

Volume

Beverage volume reflects sales of concentrate and beverage products bearing company-owned or licensed trademarks to authorized bottlers, independent distributors and retailers. Concentrate beverage volume is sold to franchised-owned bottlers and independent distributors. Finished goods beverage volume is sold to retailers and independent distributors and includes direct shipments to retailers. Beverage volume is measured in bottler case sales (BCS), which converts all beverage volume to an 8-ounce-case metric. We believe that BCS is a valuable measure as it quantifies the sell-through of our beverage products at the customer level. In our franchised-owned business, beverage revenue is based on concentrate shipments and equivalents (CSE), representing physical concentrate volume shipments to such customers. As a result, for our franchise-owned businesses, BCS and CSE are not typically equal during any given period due to seasonality, timing of product launches, product mix, bottler inventory practices and other factors. Sales of products from our unconsolidated joint ventures are reflected in our reported volume. PBNA, LatAm, Europe, AMESA and APAC, 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 PBNA, 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, APAC licenses the Tropicana brand for use in China on co-branded juice products in connection with a strategic alliance with Tingyi.

Food and snack volume 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. In addition, FLNA makes, markets, distributes and sells Sabra refrigerated dips and spreads through a joint venture with Strauss Group.

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 2019, total servings increased 4% compared to 2018, primarily reflecting our acquisition of SodaStream. In 2018, total servings increased 1% compared to 2017.

Consolidated Net Revenue and Operating Profit

													Change
	2019				2018				2017				2019			2018
Net revenue	$	67,161			$	64,661			$	63,525			4	%		2	%
Operating profit	$	10,291			$	10,110			$	10,276			2	%		(2	)%
Operating profit margin	15.3		%		15.6		%		16.2		%		(0.3	)		(0.5	)

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

2019

Operating profit grew 2% and operating profit margin declined 0.3 percentage points. Operating profit growth was driven by productivity savings of more than $1 billion and net revenue growth, partially offset by certain operating cost increases, a 5-percentage-point impact of higher commodity costs and higher advertising and marketing expenses. The operating profit margin decline primarily reflects higher advertising and marketing expenses.

Favorable mark-to-market net impact on commodity derivatives included in corporate unallocated expenses (see “Items Affecting Comparability”) contributed 3 percentage points to operating profit growth. Gains on the refranchising of a portion of our beverage business in Thailand and our entire beverage bottling operations and snack distribution operations in CHS in the prior year reduced operating profit growth by 2 percentage points.

2018

Operating profit decreased 2% and operating profit margin declined 0.5 percentage points. The operating profit performance was driven by certain operating cost increases and a 6-percentage-point impact of higher commodity costs, partially offset by productivity savings of more than $1 billion and net revenue growth.

The impact of refranchising a portion of our beverage business in Jordan in 2017 and a 2017 gain associated with the sale of our minority stake in Britvic negatively impacted operating profit performance by 2.5 percentage points. These impacts were offset by a 2-percentage-point positive impact of refranchising a portion of our beverage business in Thailand and our entire beverage bottling operations and snack distribution operations in CHS in 2018. Items affecting comparability (see “Items Affecting Comparability”) negatively impacted operating profit performance by 3 percentage points and decreased operating profit margin by 0.5 percentage points, primarily due to higher mark-to-market net impact on commodity derivatives included in corporate unallocated expenses.

Results of Operations — Division Review

During the fourth quarter of 2019, we realigned certain of our reportable segments to be consistent with a recent strategic realignment of our organizational structure and how our Chief Executive Officer assesses the performance of, and allocates resources to, our reportable segments. Our historical segment reporting presented in this report has been retrospectively revised to reflect the new organizational structure. See “Our Operations” in “Item 1. Business” for further information.

See “Non-GAAP Measures” and “Items Affecting Comparability” for a discussion of items to consider when evaluating our results and related information regarding measures not in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

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” 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.

Net Revenue and Organic Revenue Growth

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

	2019
				Impact of								Impact of
	Reported % Change, GAAP Measure			Foreign exchange translation		Acquisitions and divestitures			Organic % Change, Non-GAAP Measure**(a**)			Volume**(b)**			Effective net pricing
FLNA	4.5	%		—		—			4.5	%		2			3
QFNA	1	%		—		—			1	%		—			1
PBNA	3	%		—		(1	)		3	%		(1	)		4
LatAm	3	%		4		—			7	%		—			7
Europe	7	%		5		(6	)		5.5	%		(1	)		6
AMESA	—	%		2		4			6	%		4			2.5
APAC	4.5	%		3		2			9	%		7			2
Total	4	%		2		(1	)		4.5	%		0.5			4

	2018
				Impact of											Impact of
	Reported % Change, GAAP Measure			Foreign exchange translation			Acquisitions and divestitures			Sales and certain other taxes		Organic % Change, Non-GAAP Measure(a)			Volume(b)			Effective net pricing
FLNA	3.5	%		—			—			—		3	%		1			2
QFNA	(1.5	)%		—			—			—		(2	)%		(0.5	)		(1	)
PBNA	1	%		—			—			—		0.5	%		(1	)		2
LatAm	2	%		6			—			—		8	%		1			7
Europe	4	%		2			—			0.5		7	%		5			3
AMESA	(0.5	)%		2			4			—		5	%		1.5			4
APAC	(3	)%		(1	)		11			0.5		8	%		6			2
Total	2	%		1			1			—		4	%		1			3

(a)	Amounts may not sum due to rounding.

(b)

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 franchise-owned bottlers. Our net revenue excludes nonconsolidated joint venture volume, and, for our franchise-owned beverage businesses, is based on CSE.

Operating Profit, Operating Profit Adjusted for Items Affecting Comparability and Operating Profit Growth Adjusted for Items Affecting Comparability on a Constant Currency Basis

Operating profit adjusted for items affecting comparability and operating profit growth adjusted for items affecting comparability on a constant currency basis are both non-GAAP financial measures. For further information on these measures see “Non-GAAP Measures” and “Items Affecting Comparability.”

Operating Profit and Operating Profit Adjusted for Items Affecting Comparability

	2019
					Items Affecting Comparability**(a)**
	Reported, GAAP Measure				Mark-to-market net impact				Restructuring and impairment charges				Inventory fair value adjustments and merger and integration charges				Core, Non-GAAP Measure
FLNA	$	5,258			$	—			$	22			$	—			$	5,280
QFNA	544				—				2				—				546
PBNA	2,179				—				51				—				2,230
LatAm	1,141				—				62				—				1,203
Europe	1,327				—				99				46				1,472
AMESA	671				—				38				7				716
APAC	477				—				47				—				524
Corporate unallocated expenses	(1,306		)		(112		)		47				2				(1,369		)
Total	$	10,291			$	(112	)		$	368			$	55			$	10,602

	2018
					Items Affecting Comparability(a)
	Reported, GAAP Measure				Mark-to-market net impact				Restructuring and impairment charges				Merger and integration charges				Core, Non-GAAP Measure
FLNA	$	5,008			$	—			$	36			$	—			$	5,044
QFNA	637				—				7				—				644
PBNA	2,276				—				88				—				2,364
LatAm	1,049				—				40				—				1,089
Europe	1,256				—				59				57				1,372
AMESA	661				—				18				—				679
APAC	619				—				14				—				633
Corporate unallocated expenses	(1,396		)		163				10				18				(1,205		)
Total	$	10,110			$	163			$	272			$	75			$	10,620

	2017
					Items Affecting Comparability(a)
	Reported, GAAP Measure				Mark-to-market net impact				Restructuring and impairment charges				Core, Non-GAAP Measure
FLNA	$	4,793			$	—			$	54			$	4,847
QFNA	640				—				9				649
PBNA	2,700				—				43				2,743
LatAm	924				—				56				980
Europe	1,199				—				53				1,252
AMESA	789				—				2				791
APAC	401				—				(5		)		396
Corporate unallocated expenses	(1,170		)		(15		)		17				(1,168		)
Total	$	10,276			$	(15	)		$	229			$	10,490

(a)	See “Items Affecting Comparability.”

Operating Profit Growth and Operating Profit Growth Adjusted for Items Affecting Comparability on a Constant Currency Basis

	2019
				Impact of Items Affecting Comparability**(a)**												Impact of
	Reported % Change, GAAP Measure			Mark-to-market net impact			Restructuring and impairment charges			Inventory fair value adjustments and merger and integration charges			Core % Change, Non-GAAP Measure**(b)**			Foreign exchange translation		Core Constant Currency % Change, Non-GAAP Measure**(b)**
FLNA	5	%		—			—			—			5	%		—		5	%
QFNA	(15	)%		—			(0.5	)		—			(15	)%		—		(15	)%
PBNA	(4	)%		—			(1	)		—			(6	)%		—		(6	)%
LatAm	9	%		—			2			—			10	%		2		13	%
Europe	6	%		—			2			(1	)		7	%		5		13	%
AMESA	1.5	%		—			3			1			5.5	%		2.5		8	%
APAC	(23	)%		—			6			—			(17	)%		2		(16	)%
Corporate unallocated expenses	(6	)%		22			(3	)		1			14	%		—		14	%
Total	2	%		(3	)		1			—			—	%		1		1	%

	2018
				Impact of Items Affecting Comparability(a)												Impact of
	Reported % Change, GAAP Measure			Mark-to-market net impact			Restructuring and impairment charges			Merger and integration charges			Core % Change, Non-GAAP Measure(b)			Foreign exchange translation			Core Constant Currency % Change, Non-GAAP Measure(b)
FLNA	4.5	%		—			—			—			4	%		—			4	%
QFNA	—	%		—			—			—			(1	)%		—			(1	)%
PBNA	(16	)%		—			2			—			(14	)%		—			(14	)%
LatAm	13	%		—			(2	)		—			11	%		2			13	%
Europe	5	%		—			—			4			10	%		3			13	%
AMESA	(16	)%		—			2			—			(14	)%		—			(14	)%
APAC	54	%		—			5			—			60	%		(2	)		58	%
Corporate unallocated expenses	19	%		(15	)		1			(1.5	)		3	%		—			3	%
Total	(2	)%		2			—			1			1	%		0.5			2	%

(a)	See “Items Affecting Comparability” for further information.

(b)	Amounts may not sum due to rounding.

FLNA

2019

Net revenue grew 4.5% and volume grew 1%. The net revenue growth was driven by effective net pricing and volume growth. The volume growth reflects mid-single-digit growth in trademark Doritos, Cheetos and Ruffles and low-single-digit growth in variety packs, partially offset by a double-digit decline in trademark Santitas.

Operating profit grew 5%, primarily reflecting the net revenue growth and productivity savings, partially offset by certain operating cost increases and higher advertising and marketing expenses. Additionally, a prior-year bonus extended to certain U.S. employees in connection with the TCJ Act contributed 1 percentage point to operating profit growth.

2018

Net revenue grew 3.5%, primarily reflecting effective net pricing and volume growth. Volume grew 1%, reflecting mid-single-digit growth in variety packs and low-single-digit growth in trademark Doritos, partially offset by a double-digit decline in trademark Santitas.

Operating profit grew 4.5%, primarily reflecting the net revenue growth and productivity savings, partially offset by certain operating cost increases and a 1-percentage-point impact of a bonus extended to certain U.S. employees related to the TCJ Act.

QFNA

2019

Net revenue grew 1% and volume was flat. The net revenue growth primarily reflects favorable mix. The volume performance was driven by double-digit growth in trademark Gamesa and mid-single-digit growth in Aunt Jemima mixes and syrups, offset by a mid-single-digit decline in oatmeal and a low-single-digit decline in ready-to-eat cereals.

Operating profit decreased 15%, reflecting certain operating cost increases, a 5-percentage-point impact of higher commodity costs, and higher advertising and marketing expenses. These impacts were partially offset by productivity savings.

2018

Net revenue declined 1.5% and volume declined 0.5%. The net revenue performance reflects unfavorable net pricing and mix and the volume decline. The volume decline was driven by a double-digit decline in trademark Gamesa and a mid-single-digit decline in ready-to-eat cereals, partially offset by mid-single-digit growth in oatmeal.

Operating profit decreased slightly, reflecting certain operating cost increases, the net revenue performance and a 3-percentage-point impact of higher commodity costs. These impacts were partially offset by productivity savings, lower advertising and marketing expenses and a 1-percentage-point positive contribution from insurance settlement recoveries related to the 2017 earthquake in Mexico.

PBNA

2019

Net revenue grew 3%, driven by effective net pricing, partially offset by a decline in volume. Acquisitions contributed 1 percentage point to the net revenue growth. Volume decreased 1%, driven by a 3% decline in CSD volume, partially offset by a 2% increase in non-carbonated beverage (NCB) volume. The NCB volume increase primarily reflected a mid-single-digit increase in our overall water portfolio, partially offset by a low-single-digit decrease in our juice and juice drinks portfolio.

Operating profit decreased 4%, reflecting certain operating cost increases, higher advertising and marketing expenses, an 8-percentage-point impact of higher commodity costs and the volume decline. These impacts were partially offset by the effective net pricing and productivity savings. Year-over-year gains on asset sales negatively contributed 1 percentage point to operating profit performance. A gain associated with an insurance recovery positively contributed 1 percentage point to current-year operating profit performance and was offset by less-favorable insurance adjustments compared to the prior year, which negatively impacted the current-year operating profit performance by 1 percentage point. Additionally, a prior-year bonus extended to certain U.S. employees in connection with the TCJ Act positively contributed 2 percentage points to operating profit performance.

2018

Net revenue grew 1%, driven by effective net pricing, partially offset by a decline in volume. Volume decreased 1%, driven by a 3% decline in CSD volume, partially offset by a 2% increase in non-carbonated beverage volume. The non-carbonated beverage volume increase primarily reflected a high-single-digit increase in our overall water portfolio. Additionally, a low-single-digit increase in Gatorade sports drinks was offset by a low-single-digit decline in our juice and juice drinks portfolio.

Operating profit decreased 16%, reflecting certain operating cost increases, including increased transportation costs, a 7-percentage-point impact of higher commodity costs and higher advertising and marketing expenses. These impacts were partially offset by productivity savings and the net revenue growth. Higher gains on asset sales positively contributed 1.5 percentage points to operating profit performance. A bonus extended to certain U.S. employees related to the TCJ Act negatively impacted operating profit performance by 1.5 percentage points and was partially offset by 2017 costs related to hurricanes which positively contributed 1 percentage point to operating profit performance.

LatAm

2019

Net revenue increased 3%, primarily reflecting effective net pricing, partially offset by a 4-percentage-point impact of unfavorable foreign exchange.

Snacks volume experienced a slight decline, reflecting a high-single-digit decline in Brazil, partially offset by low-single-digit growth in Mexico.

Beverage volume grew 4%, reflecting high-single-digit growth in Brazil and Guatemala, partially offset by a mid-single-digit decline in Argentina and a low-single-digit decline in Colombia. Additionally, Honduras experienced low-single-digit growth and Mexico and Chile each experienced mid-single-digit growth.

Operating profit increased 9%, reflecting the effective net pricing and productivity savings, partially offset by certain operating cost increases and a 10-percentage-point impact of higher commodity costs largely due to transaction-related foreign exchange. Unfavorable foreign exchange and higher restructuring and impairment charges each reduced operating profit growth by 2 percentage points.

2018

Net revenue grew 2%, reflecting effective net pricing, partially offset by a 6-percentage-point impact of unfavorable foreign exchange.

Snacks volume grew 1%, reflecting low-single-digit growth in Mexico, partially offset by a mid-single-digit decline in Brazil.

Beverage volume declined 1%, reflecting a high-single-digit decline in Brazil, a low-single-digit decline in Mexico and a mid-single-digit decline in Argentina, partially offset by double-digit growth in Colombia, mid-single-digit growth in Guatemala and low-single-digit growth in Honduras.

Operating profit increased 13%, reflecting the net revenue growth, productivity savings and a 4-percentage-point impact of insurance settlement recoveries related to the 2017 earthquake in Mexico. These impacts were partially offset by certain operating cost increases, a 14-percentage-point impact of higher commodity costs and higher advertising and marketing expenses.

Europe

2019

Net revenue increased 7%, reflecting an 8-percentage-point impact of our SodaStream acquisition and effective net pricing, partially offset by a 5-percentage-point impact of unfavorable foreign exchange.

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

Beverage volume grew 23%, primarily reflecting a 24-percentage-point impact of our SodaStream acquisition, mid-single-digit growth in Poland and low-single-digit growth in the United Kingdom and Germany, partially offset by a mid-single-digit decline in Russia, a high-single-digit decline in Turkey and a slight decline in France.

Operating profit increased 6%, reflecting the net revenue growth, productivity savings and a 10-percentage-point net impact of our SodaStream acquisition. These impacts were partially offset by certain operating cost increases, a 10-percentage-point impact of higher commodity costs largely due to transaction-related foreign exchange, higher advertising and marketing expenses, and a 4-percentage-point impact of a prior-year gain on the refranchising of our entire beverage bottling operations and snack distribution operations in CHS. Unfavorable foreign exchange reduced operating profit growth by 5 percentage points.

2018

Net revenue increased 4%, reflecting volume growth and effective net pricing, partially offset by a 2-percentage-point impact of unfavorable foreign exchange.

Snacks volume grew 4%, reflecting high-single-digit growth in Poland and France and mid-single-digit growth in the Netherlands, partially offset by a low-single-digit decline in the United Kingdom. Additionally, Spain, Russia, and Turkey each experienced low-single-digit growth.

Beverage volume grew 6%, reflecting double-digit growth in Germany and Poland and high-single-digit growth in France, partially offset by a low-single-digit decline in the United Kingdom. Additionally, Russia and Turkey each experienced mid-single-digit growth.

Operating profit increased 5%, reflecting the net revenue growth, productivity savings and a 4-percentage-point net impact of refranchising our entire beverage bottling operations and snack distribution operations in CHS. These impacts were partially offset by certain operating cost increases and a 9-percentage-point impact of higher commodity costs. Additionally, a 2017 gain on the sale of our minority stake in Britvic and the merger and integration charges related to our acquisition of SodaStream reduced operating profit growth by 8 percentage points and 4 percentage points, respectively.

AMESA

2019

Net revenue decreased slightly, reflecting a 3-percentage-point impact of refranchising a portion of our beverage business in India, partially offset by volume growth and effective net pricing.

Snacks volume grew 7%, reflecting double-digit growth in Pakistan and high-single-digit growth in the Middle East and India, partially offset by a low-single-digit decline in South Africa.

Beverage volume grew 4%, reflecting high-single-digit growth in India and Nigeria, partially offset by low-single-digit declines in the Middle East and Pakistan.

Operating profit increased 1.5%, reflecting productivity savings, the volume growth and the effective net pricing. These impacts were partially offset by certain operating cost increases, a 5-percentage-point impact of higher commodity costs and higher advertising and marketing expenses. Higher restructuring and impairment charges and unfavorable foreign exchange reduced operating profit growth by 3 percentage points and 2.5 percentage points, respectively.

2018

Net revenue decreased 0.5%, reflecting a 4-percentage-point impact of the 2017 refranchising of a portion of our beverage business in Jordan, partially offset by effective net pricing and volume growth.

Snacks volume grew 2.5%, reflecting double-digit growth in India and Pakistan, partially offset by a mid-single-digit decline in the Middle East and a low-single-digit decline in South Africa.

Beverage volume grew 1%, reflecting mid-single-digit growth in India, high-single-digit growth in Nigeria and low-single-digit growth in Pakistan, partially offset by a mid-single-digit decline in the Middle East.

Operating profit decreased 16%, reflecting a 22-percentage-point impact of the 2017 refranchising of a portion of our beverage business in Jordan, certain operating cost increases and a 6-percentage-point impact of higher commodity costs. These impacts were partially offset by the effective net pricing and productivity savings.

APAC

2019

Net revenue increased 4.5%, reflecting volume growth and effective net pricing, partially offset by a 3-percentage-point impact of unfavorable foreign exchange and a 2-percentage-point impact of the prior-year refranchising of a portion of our beverage business in Thailand.

Snacks volume grew 6%, reflecting double-digit growth in China and mid-single-digit growth in Thailand, partially offset by a low-single-digit decline in Indonesia. Additionally, Australia and Taiwan each experienced low-single-digit growth.

Beverage volume grew 4%, reflecting double-digit growth in Vietnam and Thailand and mid-single-digit growth in the Philippines. Additionally, China experienced low-single-digit growth.

Operating profit decreased 23%, primarily reflecting a 23-percentage-point impact of the gain on the prior-year refranchising of a portion of our beverage business in Thailand. Additionally, certain operating cost increases and higher advertising and marketing expenses negatively impacted operating profit performance. These impacts were partially offset by the net revenue growth and productivity savings. Higher restructuring and impairment charges negatively impacted operating profit performance by 6 percentage points.

2018

Net revenue decreased 3%, reflecting an 11-percentage-point impact of refranchising a portion of our beverage business in Thailand, partially offset by net volume growth and effective net pricing.

Snacks volume grew 7%, reflecting double-digit growth in China, partially offset by a slight decline in Taiwan. Additionally, Thailand experienced high-single-digit growth and Indonesia and Australia each experienced low-single-digit growth.

Beverage volume declined slightly, reflecting a double-digit decline in the Philippines, partially offset by double-digit growth in Vietnam, low-single-digit growth in China and mid-single-digit growth in Thailand.

Operating profit increased 54%, reflecting a 35-percentage-point net impact of refranchising a portion of our beverage business in Thailand. The net volume growth, productivity savings and the effective net pricing also contributed to operating profit growth. These impacts were partially offset by higher advertising and marketing expenses and certain operating cost increases. Higher restructuring and impairment charges reduced operating profit growth by 5 percentage points.

Other Consolidated Results

													Change
	2019				2018				2017				2019				2018
Other pension and retiree medical benefits (expense)/income	$	(44	)		$	298			$	233			$	(342	)		$	65
Net interest expense	$	(935	)		$	(1,219	)		$	(907	)		$	284			$	(312	)
Annual tax rate (a)	21.0		%		(36.7		)%		48.9		%
Net income attributable to PepsiCo	$	7,314			$	12,515			$	4,857			(42		)%		158		%
Net income attributable to PepsiCo per common share – diluted	$	5.20			$	8.78			$	3.38			(41		)%		160		%
Mark-to-market net impact	(0.06		)		0.09				(0.01		)
Restructuring and impairment charges	0.21				0.18				0.16
Inventory fair value adjustments and merger and integration charges	0.03				0.05				—
Pension-related settlement charges	0.15				—				—
Net tax related to the TCJ Act (a)	(0.01		)		(0.02		)		1.70
Other net tax benefits (a)	—				(3.55		)		—
Charges related to cash tender and exchange offers	—				0.13				—
Net income attributable to PepsiCo per common share – diluted, excluding above items (b)	$	5.53		(c)	$	5.66			$	5.23			(2		)%		8		%
Impact of foreign exchange translation													1				1
Growth in net income attributable to PepsiCo per common share – diluted, excluding above items, on a constant currency basis (b)													(1		)%		9		%

(a)	See Note 5 to our consolidated financial statements for further information.

(b)	See “Non-GAAP Measures.”

(c)	Does not sum due to rounding.

2019

Other pension and retiree medical benefits expense increased $342 million, primarily reflecting settlement charges of $220 million related to the purchase of a group annuity contract and settlement charges of $53 million related to one-time lump sum payments to certain former employees who had vested benefits.

Net interest expense decreased $284 million reflecting the prior-year charge of $253 million in connection with our cash tender and exchange offers, primarily representing the tender price paid over the carrying value of the tendered notes, as well as gains on the market value of investments used to economically hedge a portion of our deferred compensation liability. This decrease also reflects lower interest expense due to lower average debt balances. These impacts were partially offset by lower interest income due to lower average cash balances.

The reported tax rate increased 57.7 percentage points, primarily reflecting the prior-year other net tax benefits related to the reorganization of our international operations, which increased the current-year reported tax rate by 47 percentage points. Additionally, the prior-year favorable conclusion of certain international tax audits and the favorable resolution with the IRS of all open matters related to the audits of taxable years 2012 and 2013, collectively, increased the current-year reported tax rate by 8 percentage points. See Note 5 to our consolidated financial statements for further information.

Net income attributable to PepsiCo decreased 42% and net income attributable to PepsiCo per common share decreased 41%. Items affecting comparability (see “Items Affecting Comparability”) negatively impacted

both net income attributable to PepsiCo performance and net income attributable to PepsiCo per common share performance by 38 percentage points.

2018

Other pension and retiree medical benefits income increased $65 million, reflecting the impact of the $1.4 billion discretionary pension contribution to the PepsiCo Employees Retirement Plan A (Plan A) in the United States, as well as the recognition of net asset gains, partially offset by higher amortization of net losses.

Net interest expense increased $312 million reflecting a charge of $253 million in connection with our cash tender and exchange offers, primarily representing the tender price paid over the carrying value of the tendered notes. This increase also reflects higher interest rates on debt balances, as well as losses on the market value of investments used to economically hedge a portion of our deferred compensation liability. These impacts were partially offset by higher interest income due to higher interest rates on cash balances.

The reported tax rate decreased 85.6 percentage points, reflecting both other net tax benefits related to the reorganization of our international operations, which reduced the reported tax rate by 45 percentage points, and the 2017 provisional net tax expense related to the TCJ Act, which reduced the 2018 reported tax rate by 25 percentage points. Additionally, the favorable conclusion of certain international tax audits and the favorable resolution with the IRS of all open matters related to the audits of taxable years 2012 and 2013, collectively, reduced the reported tax rate by 7 percentage points. See Note 5 to our consolidated financial statements for further information.

Net income attributable to PepsiCo increased 158% and net income attributable to PepsiCo per common share increased 160%. Items affecting comparability (see “Items Affecting Comparability”) positively contributed 150 percentage points to net income attributable to PepsiCo growth and 152 percentage points to net income attributable to PepsiCo per common share growth.

Non-GAAP Measures

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

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

Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP.

In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies.

The following non-GAAP financial measures contained in this Form 10-K are discussed below.

Cost of sales, gross profit, selling, general and administrative expenses, other pension and retiree medical benefits expense/income, interest expense, provision for/benefit from income taxes, net income attributable to noncontrolling interests and net income attributable to PepsiCo, each adjusted for items affecting comparability, operating profit, adjusted for items affecting comparability, and net income attributable to PepsiCo per common share – diluted, adjusted for items affecting comparability, and the corresponding constant currency growth rates

These measures exclude the net impact of mark-to-market gains and losses on centrally managed commodity derivatives that do not qualify for hedge accounting, restructuring and impairment charges related to our 2019 and 2014 Productivity Plans, inventory fair value adjustments and merger and integration charges primarily associated with our acquisition of SodaStream, pension-related settlement charges, net tax related to the TCJ Act, other net tax benefits and charges related to cash tender and exchange offers (see “Items Affecting Comparability” for a detailed description of each of these items). We also evaluate performance on operating profit, adjusted for items affecting comparability, and net income attributable to PepsiCo per common share – diluted, adjusted for items affecting comparability, on a constant currency basis, which measure our financial results assuming constant foreign currency exchange rates used for translation based on the rates in effect for the comparable prior-year period. In order to compute our constant currency results, we multiply or divide, as appropriate, our current-year U.S. dollar results by the current-year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior-year average foreign exchange rates. We believe these measures provide useful information in evaluating the results of our business because they exclude items that we believe are not indicative of our ongoing performance.

Organic revenue growth

We define organic revenue growth as net revenue growth adjusted for the impact of foreign exchange translation, as well as the impact from acquisitions, divestitures and other structural changes. Starting in 2018, our reported results reflected the accounting policy election taken in conjunction with the adoption of the revenue recognition guidance to exclude from net revenue and cost of sales all sales, use, value-added and certain excise taxes assessed by governmental authorities on revenue-producing transactions not already excluded. Our 2018 organic revenue growth excluded the impact of approximately $75 million of these taxes previously recognized in net revenue.

We believe organic revenue growth provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior year.

See “Net Revenue and Organic Revenue Growth” in “Results of Operations – Division Review” for further information.

Free cash flow

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

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

Return on invested capital (ROIC) and net ROIC, excluding items affecting comparability

We define ROIC as net income attributable to PepsiCo plus interest expense after-tax divided by the sum of quarterly average debt obligations and quarterly average common shareholders’ equity. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used by management to calculate ROIC may differ from the methods other companies use to calculate their ROIC.

We believe this metric serves as a measure of how well we use our capital to generate returns. 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 we believe are not indicative of our ongoing performance and reflects how management evaluates our operating results and trends. We define net ROIC, excluding items affecting comparability, as ROIC, adjusted for quarterly average cash, cash equivalents and short-term investments, after-tax interest income and items affecting comparability. We believe the calculation of ROIC and 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 efficiency.

See “Return on Invested Capital” in “Our Liquidity and Capital Resources” for further information.

Items Affecting Comparability

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

	2019
	Cost of sales				Gross profit				Selling, general and administrative expenses				Operating profit				Other pension and retiree medical benefits (expense)/income				Provision for income taxes**(a)**				Net income attributable to noncontrolling interests				Net income attributable to PepsiCo
Reported, GAAP Measure	$	30,132			$	37,029			$	26,738			$	10,291			$	(44	)		$	1,959			$	39			$	7,314
Items Affecting Comparability
Mark-to-market net impact	57				(57		)		55				(112		)		—				(25		)		—				(87		)
Restructuring and impairment charges	(115		)		115				(253		)		368				2				67				5				298
Inventory fair value adjustments and merger and integration charges	(34		)		34				(21		)		55				—				8				—				47
Pension-related settlement charges	—				—				—				—				273				62				—				211
Net tax related to the TCJ Act	—				—				—				—				—				8				—				(8		)
Core, Non-GAAP Measure	$	30,040			$	37,121			$	26,519			$	10,602			$	231			$	2,079			$	44			$	7,775

	2018
	Cost of sales				Gross profit				Selling, general and administrative expenses				Operating profit				Other pension and retiree medical benefits income				Interest expense				(Benefit from)/provision for income taxes(a)				Net income attributable to noncontrolling interests				Net income attributable to PepsiCo
Reported, GAAP Measure	$	29,381			$	35,280			$	25,170			$	10,110			$	298			$	1,525			$	(3,370	)		$	44			$	12,515
Items Affecting Comparability
Mark-to-market net impact	(83		)		83				(80		)		163				—				—				38				—				125
Restructuring and impairment charges	(3		)		3				(269		)		272				36				—				56				1				251
Merger and integration charges	—				—				(75		)		75				—				—				—				—				75
Net tax related to the TCJ Act	—				—				—				—				—				—				28				—				(28		)
Other net tax benefits	—				—				—				—				—				—				5,064				—				(5,064		)
Charges related to cash tender and exchange offers	—				—				—				—				—				(253		)		62				—				191
Core, Non-GAAP Measure	$	29,295			$	35,366			$	24,746			$	10,620			$	334			$	1,272			$	1,878			$	45			$	8,065

	2017
	Cost of sales				Gross profit				Selling, general and administrative expenses				Operating profit				Other pension and retiree medical benefits income				Provision for income taxes(a)				Net income attributable to PepsiCo
Reported, GAAP Measure	$	28,796			$	34,729			$	24,453			$	10,276			$	233			$	4,694			$	4,857
Items Affecting Comparability
Mark-to-market net impact	8				(8		)		7				(15		)		—				(7		)		(8		)
Restructuring and impairment charges	—				—				(229		)		229				66				71				224
Provisional net tax related to the TCJ Act	—				—				—				—				—				(2,451		)		2,451
Core, Non-GAAP Measure	$	28,804			$	34,721			$	24,231			$	10,490			$	299			$	2,307			$	7,524

(a)	Provision for income taxes is the expected tax charge/benefit on the underlying item based on the tax laws and income tax rates applicable to the underlying item in its corresponding tax jurisdiction.

Mark-to-Market Net Impact

We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, agricultural products 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.

Restructuring and Impairment Charges

2019 Multi-Year Productivity Plan

The 2019 Productivity Plan, publicly announced on February 15, 2019, will leverage new technology and business models to further simplify, harmonize and automate processes; re-engineer our go-to-market and

information systems, including deploying the right automation for each market; and simplify our organization and optimize our manufacturing and supply chain footprint. In connection with this plan, we expect to incur pre-tax charges of approximately $2.5 billion, of which we have incurred $508 million plan to date through December 28, 2019 and cash expenditures of approximately $1.6 billion, of which we have incurred approximately $261 million plan to date through December 28, 2019. We expect to incur pre-tax charges of approximately $450 million and cash expenditures of approximately $400 million in our 2020 financial results, with the balance to be reflected in our 2021 through 2023 financial results. These charges will be funded primarily through cash from operations. We expect to incur the majority of the remaining pre-tax charges and cash expenditures in our 2020 and 2021 results.

2014 Multi-Year Productivity Plan

The 2014 Productivity Plan was completed in 2019. The total plan pre-tax charges and cash expenditures approximated the previously disclosed plan estimates of $1.3 billion and $960 million, respectively.

See Note 3 to our consolidated financial statements for further information related to our 2019 and 2014 Productivity Plans.

We regularly evaluate productivity initiatives beyond the productivity plans and other initiatives discussed above and in Note 3 to our consolidated financial statements.

Inventory Fair Value Adjustments and Merger and Integration Charges

In 2019, we recorded inventory fair value adjustments and merger and integration charges of $55 million ($47 million after-tax or $0.03 per share), including $46 million in our Europe segment, $7 million in our AMESA segment and $2 million in corporate unallocated expenses. These charges are primarily related to fair value adjustments to the acquired inventory included in SodaStream’s balance sheet at the acquisition date, as well as merger and integration charges, including employee-related costs.

In 2018, we recorded merger and integration charges of $75 million ($0.05 per share), including $57 million in our Europe segment and $18 million in corporate unallocated expenses, related to our acquisition of SodaStream. These charges include closing costs, advisory fees and employee-related costs.

See Note 14 to our consolidated financial statements for further information.

Pension-Related Settlement Charges

In 2019, we recorded pension settlement charges of $273 million ($211 million after-tax or $0.15 per share), reflecting settlement charges of $220 million ($170 million after-tax or $0.12 per share) related to the purchase of a group annuity contract and settlement charges of $53 million ($41 million after-tax or $0.03 per share) related to one-time lump sum payments to certain former employees who had vested benefits.

See Note 7 to our consolidated financial statements for further information.

Net Tax Related to the TCJ Act

During the fourth quarter of 2017, the TCJ Act was enacted in the United States. Among its many provisions, the TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings and reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018.

In 2017, we recorded a provisional net tax expense of $2.5 billion ($1.70 per share) associated with the enactment of the TCJ Act.

We recognized net tax benefits of $8 million ($0.01 per share) and $28 million ($0.02 per share) in 2019 and 2018, respectively, related to the TCJ Act.

See Note 5 to our consolidated financial statements for further information.

Other Net Tax Benefits

In 2018, we reorganized our international operations, including the intercompany transfer of certain intangible assets. As a result, we recognized other net tax benefits of $4.3 billion ($3.05 per share). Also in 2018, we recognized non-cash tax benefits associated with both the conclusion of certain international tax audits and our agreement with the IRS resolving all open matters related to the audits of taxable years 2012 and 2013. The conclusion of certain international tax audits and the resolution with the IRS, collectively, resulted in non-cash tax benefits totaling $717 million ($0.50 per share).

See Note 5 to our consolidated financial statements for further information.

Charges Related to Cash Tender and Exchange Offers

In 2018, we recorded a pre-tax charge of $253 million ($191 million after-tax or $0.13 per share) to interest expense in connection with our cash tender and exchange offers, primarily representing the tender price paid over the carrying value of the tendered notes.

See Note 8 to our consolidated financial statements for further information.

Our Liquidity and Capital Resources

We believe that our cash generating capability and financial condition, together with our revolving credit facilities, bridge loan facilities, working capital lines and other available methods of debt financing, such as commercial paper borrowings and long-term debt financing, will be adequate to meet our operating, investing and financing needs. Our primary sources of cash available to fund cash outflows, such as our anticipated share repurchases, dividend payments, debt repayments, the proposed acquisition of Pioneer Foods and the transition tax liability under the TCJ Act, include cash from operations, proceeds obtained from issuances of commercial paper, bridge loan facilities and long-term debt and cash and cash equivalents. 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 8 to our consolidated financial statements for a description of our revolving credit facilities and bridge loan facilities. See also “Item 1A. Risk Factors” and “Our Business Risks” for further discussion.

As of December 28, 2019, cash, cash equivalents and short-term investments in our consolidated subsidiaries subject to currency controls or currency exchange restrictions were not material.

The TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings, including $18.9 billion held in our consolidated subsidiaries outside the United States as of December 30, 2017. As of December 28, 2019, our mandatory transition tax liability was $3.3 billion, which must be paid through 2026 under the provisions of the TCJ Act; we currently expect to pay approximately $0.1 billion of this liability in 2020. See “Credit Facilities and Long-Term Contractual Commitments.” Any additional guidance issued by the IRS may impact our recorded amounts for this transition tax liability. See Note 5 to our consolidated financial statements for further discussion of the TCJ Act.

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, dividends, 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:

	2019				2018				2017
Net cash provided by operating activities	$	9,649			$	9,415			$	10,030
Net cash (used for)/provided by investing activities	$	(6,437	)		$	4,564			$	(4,403	)
Net cash used for financing activities	$	(8,489	)		$	(13,769	)		$	(4,186	)

Operating Activities

During 2019, net cash provided by operating activities was $9.6 billion, compared to $9.4 billion in the prior year. The operating cash flow performance primarily reflects lower pre-tax pension and retiree medical plan contributions in the current year, partially offset by higher net cash tax payments in the current year.

During 2018, net cash provided by operating activities was $9.4 billion, compared to $10.0 billion in 2017. The operating cash flow performance primarily reflects discretionary contributions of $1.5 billion to our pension and retiree medical plans in 2018, partially offset by lower net cash tax payments in 2018.

Investing Activities

During 2019, net cash used for investing activities was $6.4 billion, primarily reflecting $4.1 billion of net capital spending, as well as $1.9 billion of the remaining cash paid in connection with our acquisition of SodaStream.

During 2018, net cash provided by investing activities was $4.6 billion, primarily reflecting net maturities and sales of debt securities with maturities greater than three months of $8.7 billion, partially offset by net capital spending of $3.1 billion and $1.2 billion of cash paid, net of cash and cash equivalents acquired, in connection with our acquisition of SodaStream.

See Note 1 to our consolidated financial statements for further discussion of capital spending by division; see Note 9 to our consolidated financial statements for further discussion of our investments in debt securities.

We expect 2020 net capital spending to be approximately $5 billion.

Financing Activities

During 2019, net cash used for financing activities was $8.5 billion, primarily reflecting the return of operating cash flow to our shareholders through dividend payments and share repurchases of $8.3 billion, payments of long-term debt borrowings of $4.0 billion and debt redemptions of $1.0 billion, partially offset by proceeds from issuances of long-term debt of $4.6 billion.

During 2018, net cash used for financing activities was $13.8 billion, primarily reflecting the return of operating cash flow to our shareholders through dividend payments and share repurchases of $6.9 billion, payments of long-term debt borrowings of $4.0 billion, cash tender and exchange offers of $1.6 billion and net payments of short-term borrowings of $1.4 billion.

See Note 8 to our consolidated financial statements for further discussion of debt obligations.

We annually review our capital structure with our Board of Directors, including our dividend policy and share repurchase activity. On February 13, 2018, we announced the 2018 share repurchase program providing for the repurchase of up to $15.0 billion of PepsiCo common stock which commenced on July 1, 2018 and will expire on June 30, 2021. On February 13, 2020, we announced a 7% increase in our annualized dividend to $4.09 per share from $3.82 per share, effective with the dividend expected to be paid in June 2020. We expect to return a total of approximately $7.5 billion to shareholders in 2020 through share repurchases of approximately $2 billion and dividends of approximately $5.5 billion.

Free Cash Flow

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

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

													% Change
	2019				2018				2017				2019			2018
Net cash provided by operating activities	$	9,649			$	9,415			$	10,030			2.5			(6	)
Capital spending	(4,232		)		(3,282		)		(2,969		)
Sales of property, plant and equipment	170				134				180
Free cash flow	$	5,587			$	6,267			$	7,241			(11	)		(13	)

We use free cash flow primarily for financing activities, including debt repayments, dividends and share repurchases. We expect to continue to return free cash flow to our shareholders through dividends and share repurchases while maintaining Tier 1 commercial paper access, which we believe will facilitate appropriate financial flexibility and ready access to global capital and credit markets at favorable interest rates. However, see “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 “Item 1A. Risk Factors,” “Our Business Risks” and Note 8 to our consolidated financial statements for further discussion.

Credit Facilities and Long-Term Contractual Commitments

See Note 8 to our consolidated financial statements for a description of our credit facilities.

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

	Payments Due by Period(a)
	Total				2020				2021 – 2022				2023 – 2024				2025 and beyond
Recorded Liabilities:
Long-term debt obligations (b)	$	29,142			$	—			$	7,156			$	3,110			$	18,876
Operating leases (c)	1,763				501				654				300				308
One-time mandatory transition tax - TCJ Act (d)	3,317				75				617				888				1,737
Other:
Interest on debt obligations (e)	12,403				996				1,730				1,388				8,289
Purchasing commitments (f)	2,032				874				844				213				101
Marketing commitments (g)	1,308				403				548				188				169
Total contractual commitments	$	49,965			$	2,849			$	11,549			$	6,087			$	29,480

(a)	Based on year-end foreign exchange rates.

(b)	Excludes $2,848 million related to current maturities of debt, $6 million related to the fair value adjustments for debt acquired in acquisitions and interest rate swaps and payments of $163 million related to unamortized net discounts.

(c)	Primarily reflects building leases. See Note 13 to our consolidated financial statements for further information on operating leases.

(d)	Reflects our transition tax liability as of December 28, 2019, which must be paid through 2026 under the provisions of the TCJ Act.

(e)	Interest payments on floating-rate debt are estimated using interest rates effective as of December 28, 2019. Includes accrued interest of $305 million as of December 28, 2019.

(f)	Reflects non-cancelable commitments, primarily for the purchase of commodities and outsourcing services in the normal course of business and does not include purchases that we are likely to make based on our plans, but are not obligated to incur.

(g)	Reflects non-cancelable commitments, primarily for sports marketing in the normal course of business.

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. Bottler funding to independent bottlers is not reflected in the table above as it is negotiated on an annual basis. Accrued liabilities for pension and retiree medical plans are not reflected in the table above. See Note 7 to our consolidated financial statements for further information regarding our pension and retiree medical obligations.

Off-Balance-Sheet Arrangements

We do not have guarantees or other off-balance-sheet financing arrangements, including variable interest entities, that we believe could have a material impact on our financial condition or liquidity.

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, transactions between our independent bottlers and suppliers 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 independent bottlers, but we consider this exposure to be remote.

Return on Invested Capital

ROIC is a non-GAAP financial measure. For further information on ROIC, see “Non-GAAP Measures.”

	2019				2018				2017
Net income attributable to PepsiCo (a)	$	7,314			$	12,515			$	4,857
Interest expense	1,135				1,525				1,151
Tax on interest expense	(252		)		(339		)		(415		)
	$	8,197			$	13,701			$	5,593
Average debt obligations (b)	$	31,975			$	38,169			$	38,707
Average common shareholders’ equity (c)	14,317				11,368				12,004
Average invested capital	$	46,292			$	49,537			$	50,711
Return on invested capital	17.7			%	27.7			%	11.0			%

(a)	Results include the impact of the TCJ Act. Additionally, our 2018 results included other net tax benefits related to the reorganization of our international operations. See Note 5 to our consolidated financial statements for further information.

(b)	Average debt obligations includes a quarterly average of short-term and long-term debt obligations.

(c)	Average common shareholders’ equity includes a quarterly average of common stock, capital in excess of par value, retained earnings, accumulated other comprehensive loss and repurchased common stock.

The table below reconciles ROIC as calculated above to net ROIC, excluding items affecting comparability.

	2019			2018			2017
ROIC	17.7		%	27.7		%	11.0		%
Impact of:
Average cash, cash equivalents and short-term investments	3.0			7.8			7.6
Interest income	(0.5	)		(0.6	)		(0.5	)
Tax on interest income	0.1			0.1			0.2
Mark-to-market net impact	(0.2	)		0.2			—
Restructuring and impairment charges	0.5			0.4			0.3
Inventory fair value adjustments and merger and integration charges	0.1			0.1			—
Pension-related settlement charges	0.5			—			—
Net tax related to the TCJ Act	(1.0	)		(1.1	)		4.5
Other net tax benefits	2.2			(9.7	)		0.1
Charges related to cash tender and exchange offers	(0.1	)		(0.1	)		—
Charges related to the transaction with Tingyi (a)	—			—			(0.1	)
Venezuela impairment charges (a)	—			—			(0.2	)
Net ROIC, excluding items affecting comparability	22.3		%	24.8		%	22.9		%

(a)	See “Item 6. Selected Financial Data” for further information.

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. We have discussed our critical accounting 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

We recognize revenue when our performance obligation is satisfied. Our primary performance obligation (the distribution and sales of beverage products and food and snack products) is satisfied upon the shipment or delivery of products to our customers, which is also when control is transferred. The transfer of control of products to our customers is typically 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. As a result, we record reserves, based on estimates, for anticipated damaged and out-of-date products.

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 United States, and generally within 30 to 90 days internationally, and may allow discounts for early payment.

We estimate and reserve for our bad debt exposure based on our experience with past due accounts and collectibility, write-off history, the aging of accounts receivable and our analysis of customer data.

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 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, as products are delivered, for the expected payout, which may occur after year-end once reconciled and settled. These accruals are based on contract terms and our historical experience with similar programs and require management judgment with respect to estimating customer and consumer 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.

See Note 2 to our consolidated financial statements for further information on our revenue recognition and related policies, including total marketplace spending.

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 indefinite-lived brand criteria are not met, brands are amortized over their expected useful lives, which generally range from 20 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. Franchise rights that are not considered indefinite-lived are 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, as a result, are assessed for impairment at least annually, using either a qualitative or quantitative approach. We perform this annual assessment during our third quarter, or more frequently if circumstances indicate that the carrying value may not be recoverable. 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.

In the quantitative assessment for indefinite-lived intangible assets and goodwill, estimated fair value is determined using discounted cash flows and 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 indefinite-lived intangible assets and goodwill, 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.”

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.

See Note 2 and Note 4 to our consolidated financial statements for further information.

Income Tax Expense and Accruals

Our annual tax rate is based on our income, statutory tax rates and tax structure and transactions, including transfer pricing arrangements, 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, new tax laws or tax authority settlements. See “Item 1A. Risk Factors” for further discussion.

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 consolidated financial statements. As a result, our annual tax rate reflected in our consolidated 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 on our consolidated financial statements. 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 consolidated 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 consolidated financial statements.

During the fourth quarter of 2017, the TCJ Act was enacted in the United States. Among its many provisions, the TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings and reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of the enactment of the TCJ Act, we recognized a provisional net tax expense of $2.5 billion ($1.70 per share) in the fourth quarter of 2017.

We recorded a net tax benefit of $28 million ($0.02 per share) in 2018, related to the TCJ Act. Our provisional measurement period ended in the fourth quarter of 2018 and while our accounting for the recorded impact of the TCJ Act was deemed to be complete, additional guidance issued by the IRS impacted, and may continue to impact, our recorded amounts after December 29, 2018. In 2019, we recognized a net tax benefit totaling $8 million ($0.01 per share) related to the TCJ Act, including the impact of additional guidance issued by the IRS in the first quarter of 2019 and adjustments related to the filing of our 2018 U.S. federal tax return. See further information in “Items Affecting Comparability.”

On May 19, 2019, a public referendum held in Switzerland passed the TRAF, effective January 1, 2020. The enactment of certain provisions of the TRAF in 2019 resulted in adjustments to our deferred taxes. During 2019, we recorded net tax expense of $24 million related to the impact of the TRAF. Enactment of the TRAF provisions subsequent to December 28, 2019 is expected to result in adjustments to our consolidated financial

statements and related disclosures in future periods. The future impact of the TRAF cannot currently be reasonably estimated; we will continue to monitor and assess the impact the TRAF may have on our business and financial results.

In 2019, our annual tax rate was 21.0% compared to (36.7)% in 2018, as discussed in “Other Consolidated Results.” The tax rate increased 57.7 percentage points compared to 2018, primarily reflecting the prior-year other net tax benefits related to the reorganization of our international operations, which increased the current-year reported tax rate by 47 percentage points. Additionally, the prior-year favorable conclusion of certain international tax audits and the favorable resolution with the IRS of all open matters related to the audits of taxable years 2012 and 2013, collectively, increased the current-year reported tax rate by 8 percentage points.

See Note 5 to our consolidated financial statements for further information.

Pension and Retiree Medical Plans

Our pension plans cover certain 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, we have been phasing out certain subsidies of retiree medical benefits.

In 2019, Plan A purchased a group annuity contract whereby a third-party insurance company assumed the obligation to pay and administer future annuity payments for certain retirees. This transaction triggered a pre-tax settlement charge in 2019 of $220 million ($170 million after-tax or $0.12 per share).

Also in 2019, certain former employees who had vested benefits in our U.S. defined benefit pension plans were offered the option of receiving a one-time lump sum payment equal to the present value of the participant’s pension benefit. This transaction triggered a pre-tax settlement charge in 2019 of $53 million ($41 million after-tax or $0.03 per share). Collectively, the group annuity contract and one-time lump sum payments to certain former employees who had vested benefits resulted in settlement charges in 2019 of $273 million ($211 million after-tax or $0.15 per share).

Effective January 1, 2017, the U.S. qualified defined benefit pension plans were reorganized into Plan A and the PepsiCo Employees Retirement Plan I (Plan I) to facilitate a targeted investment strategy over time and provide additional flexibility in evaluating opportunities to reduce risk and volatility. Actuarial gains and losses associated with Plan A are amortized over the average remaining service life of the active participants, while the actuarial gains and losses associated with Plan I are amortized over the remaining life expectancy of the inactive participants. As a result of these changes, the pre-tax net periodic benefit cost decreased by $42 million ($27 million after-tax, reflecting tax rates effective for the 2017 tax year, or $0.02 per share) in 2017, primarily impacting corporate unallocated expenses.

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 projected benefit obligation 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:

•	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;

•	for retiree medical expense, health care cost trend rates; and

•	for pension and retiree medical expense, the spot rates along the yield curve used to determine service and interest costs and the present value of liabilities.

Certain assumptions reflect our historical experience and management’s best judgment regarding future expectations. All actuarial assumptions are reviewed annually, except in the case of an interim remeasurement due to a significant event such as a curtailment or settlement. Due to the significant management judgment involved, these 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.

See Note 7 to our consolidated financial statements for information about the expected rate of return on plan assets and our plans’ investment strategy. Although we review our expected long-term rates of return on an annual basis, our asset returns in a given year do not significantly influence our evaluation of long-term rates of return.

The health care trend rate used to determine our retiree medical plans’ 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:

	2020			2019			2018
Pension
Service cost discount rate	3.4	%		4.4	%		3.7	%
Interest cost discount rate	2.8	%		3.9	%		3.2	%
Expected rate of return on plan assets	6.6	%		6.8	%		6.9	%
Expected rate of salary increases	3.2	%		3.2	%		3.2	%
Retiree medical
Service cost discount rate	3.2	%		4.3	%		3.6	%
Interest cost discount rate	2.6	%		3.8	%		3.0	%
Expected rate of return on plan assets	5.8	%		6.6	%		6.5	%
Current health care cost trend rate	5.6	%		5.7	%		5.8	%

In 2019, we incurred pension settlement charges related to the purchase of a group annuity contract of $220 million and one-time lump sum settlements of $53 million to certain former employees who had vested benefits. In addition, based on our assumptions, we expect our total pension and retiree medical expense to decrease in 2020 primarily driven by the recognition of fixed income gains on plan assets and the impact of approved plan contributions, primarily offset by the decrease in discount rates.

Sensitivity of Assumptions

A decrease in each of the collective discount rates or in the expected rate of return assumptions would increase expense for our benefit plans. A 25-basis-point decrease in each of the above discount rates and expected rate of return assumptions would individually increase 2020 pre-tax pension and retiree medical expense as follows:

Assumption		Amount
Discount rates used in the calculation of expense		$	48
Expected rate of return		$	44

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.

We made discretionary contributions to Plan A in the United States of $150 million in January 2020, $400 million in 2019 and $1.4 billion in 2018.

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. We regularly evaluate different opportunities to reduce risk and volatility associated with our pension and retiree medical plans. See Note 7 to our consolidated financial statements for our past and expected contributions and estimated future benefit payments.

Consolidated Statement of Income

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017

(in millions except per share amounts)

	2019				2018				2017
Net Revenue	$	67,161			$	64,661			$	63,525
Cost of sales	30,132				29,381				28,796
Gross profit	37,029				35,280				34,729
Selling, general and administrative expenses	26,738				25,170				24,453
Operating Profit	10,291				10,110				10,276
Other pension and retiree medical benefits (expense)/income	(44		)		298				233
Interest expense	(1,135		)		(1,525		)		(1,151		)
Interest income and other	200				306				244
Income before income taxes	9,312				9,189				9,602
Provision for/(benefit from) income taxes (See Note 5)	1,959				(3,370		)		4,694
Net income	7,353				12,559				4,908
Less: Net income attributable to noncontrolling interests	39				44				51
Net Income Attributable to PepsiCo	$	7,314			$	12,515			$	4,857
Net Income Attributable to PepsiCo per Common Share
Basic	$	5.23			$	8.84			$	3.40
Diluted	$	5.20			$	8.78			$	3.38
Weighted-average common shares outstanding
Basic	1,399				1,415				1,425
Diluted	1,407				1,425				1,438

See accompanying notes to the consolidated financial statements.

Consolidated Statement of Comprehensive Income

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017

(in millions)

	2019				2018				2017
Net income	$	7,353			$	12,559			$	4,908
Other comprehensive income/(loss), net of taxes:
Net currency translation adjustment	628				(1,641		)		1,109
Net change on cash flow hedges	(90		)		40				(36		)
Net pension and retiree medical adjustments	283				(467		)		(159		)
Net change on available-for-sale securities	(2		)		6				(68		)
Other	—				—				16
	819				(2,062		)		862
Comprehensive income	8,172				10,497				5,770
Comprehensive income attributable to noncontrolling interests	(39		)		(44		)		(51		)
Comprehensive Income Attributable to PepsiCo	$	8,133			$	10,453			$	5,719

See accompanying notes to the consolidated financial statements.

Consolidated Statement of Cash Flows

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017

(in millions)

	2019				2018				2017
Operating Activities
Net income	$	7,353			$	12,559			$	4,908
Depreciation and amortization	2,432				2,399				2,369
Share-based compensation expense	237				256				292
Restructuring and impairment charges	370				308				295
Cash payments for restructuring charges	(350		)		(255		)		(113		)
Pension and retiree medical plan expenses	519				221				221
Pension and retiree medical plan contributions	(716		)		(1,708		)		(220		)
Deferred income taxes and other tax charges and credits	453				(531		)		619
Net tax related to the TCJ Act	(8		)		(28		)		2,451
Tax payments related to the TCJ Act	(423		)		(115		)		—
Other net tax benefits related to international reorganizations	(2		)		(4,347		)		—
Change in assets and liabilities:
Accounts and notes receivable	(650		)		(253		)		(202		)
Inventories	(190		)		(174		)		(168		)
Prepaid expenses and other current assets	(87		)		9				20
Accounts payable and other current liabilities	735				882				201
Income taxes payable	(287		)		448				(338		)
Other, net	263				(256		)		(305		)
Net Cash Provided by Operating Activities	9,649				9,415				10,030
Investing Activities
Capital spending	(4,232		)		(3,282		)		(2,969		)
Sales of property, plant and equipment	170				134				180
Acquisition of SodaStream, net of cash and cash equivalents acquired	(1,939		)		(1,197		)		—
Other acquisitions and investments in noncontrolled affiliates	(778		)		(299		)		(61		)
Divestitures	253				505				267
Short-term investments, by original maturity:
More than three months - purchases	—				(5,637		)		(18,385		)
More than three months - maturities	16				12,824				15,744
More than three months - sales	62				1,498				790
Three months or less, net	19				16				2
Other investing, net	(8		)		2				29
Net Cash (Used for)/Provided by Investing Activities	(6,437		)		4,564				(4,403		)
Financing Activities
Proceeds from issuances of long-term debt	4,621				—				7,509
Payments of long-term debt	(3,970		)		(4,007		)		(4,406		)
Debt redemption/cash tender and exchange offers	(1,007		)		(1,589		)		—
Short-term borrowings, by original maturity:
More than three months - proceeds	6				3				91
More than three months - payments	(2		)		(17		)		(128		)
Three months or less, net	(3		)		(1,352		)		(1,016		)
Cash dividends paid	(5,304		)		(4,930		)		(4,472		)
Share repurchases - common	(3,000		)		(2,000		)		(2,000		)
Share repurchases - preferred	—				(2		)		(5		)
Proceeds from exercises of stock options	329				281				462
Withholding tax payments on restricted stock units (RSUs), performance stock units (PSUs) and PepsiCo equity performance units (PEPunits) converted	(114		)		(103		)		(145		)
Other financing	(45		)		(53		)		(76		)
Net Cash Used for Financing Activities	(8,489		)		(13,769		)		(4,186		)
Effect of exchange rate changes on cash and cash equivalents and restricted cash	78				(98		)		47
Net (Decrease)/Increase in Cash and Cash Equivalents and Restricted Cash	(5,199		)		112				1,488
Cash and Cash Equivalents and Restricted Cash, Beginning of Year	10,769				10,657				9,169
Cash and Cash Equivalents and Restricted Cash, End of Year	$	5,570			$	10,769			$	10,657

See accompanying notes to the consolidated financial statements.

Consolidated Balance Sheet

PepsiCo, Inc. and Subsidiaries

December 28, 2019 and December 29, 2018

(in millions except per share amounts)

	2019				2018
ASSETS
Current Assets
Cash and cash equivalents	$	5,509			$	8,721
Short-term investments	229				272
Restricted cash	—				1,997
Accounts and notes receivable, net	7,822				7,142
Inventories	3,338				3,128
Prepaid expenses and other current assets	747				633
Total Current Assets	17,645				21,893
Property, Plant and Equipment, net	19,305				17,589
Amortizable Intangible Assets, net	1,433				1,644
Goodwill	15,501				14,808
Other indefinite-lived intangible assets	14,610				14,181
Indefinite-Lived Intangible Assets	30,111				28,989
Investments in Noncontrolled Affiliates	2,683				2,409
Deferred Income Taxes	4,359				4,364
Other Assets	3,011				760
Total Assets	$	78,547			$	77,648
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt obligations	$	2,920			$	4,026
Accounts payable and other current liabilities	17,541				18,112
Total Current Liabilities	20,461				22,138
Long-Term Debt Obligations	29,148				28,295
Deferred Income Taxes	4,091				3,499
Other Liabilities	9,979				9,114
Total Liabilities	63,679				63,046
Commitments and contingencies
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: 1,391 and 1,409 shares, respectively)	23				23
Capital in excess of par value	3,886				3,953
Retained earnings	61,946				59,947
Accumulated other comprehensive loss	(14,300		)		(15,119		)
Repurchased common stock, in excess of par value (476 and 458 shares, respectively)	(36,769		)		(34,286		)
Total PepsiCo Common Shareholders’ Equity	14,786				14,518
Noncontrolling interests	82				84
Total Equity	14,868				14,602
Total Liabilities and Equity	$	78,547			$	77,648

See accompanying notes to the consolidated financial statements.

Consolidated Statement of Equity

PepsiCo, Inc. and Subsidiaries

Fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017

(in millions)

	2019							2018							2017
	Shares			Amount				Shares			Amount				Shares			Amount
Preferred Stock
Balance, beginning of year	—			$	—			0.8			$	41			0.8			$	41
Conversion to common stock	—			—				(0.1	)		(6		)		—			—
Retirement of preferred stock	—			—				(0.7	)		(35		)		—			—
Balance, end of year	—			—				—			—				0.8			41
Repurchased Preferred Stock
Balance, beginning of year	—			—				(0.7	)		(197		)		(0.7	)		(192		)
Redemptions	—			—				—			(2		)		—			(5		)
Retirement of preferred stock	—			—				0.7			199				—			—
Balance, end of year	—			—				—			—				(0.7	)		(197		)
Common Stock
Balance, beginning of year	1,409			23				1,420			24				1,428			24
Shares issued in connection with preferred stock conversion to common stock	—			—				1			—				—			—
Change in repurchased common stock	(18	)		—				(12	)		(1		)		(8	)		—
Balance, end of year	1,391			23				1,409			23				1,420			24
Capital in Excess of Par Value
Balance, beginning of year				3,953							3,996							4,091
Share-based compensation expense				235							250							290
Equity issued in connection with preferred stock conversion to common stock				—							6							—
Stock option exercises, RSUs, PSUs and PEPunits converted				(188		)					(193		)					(236		)
Withholding tax on RSUs, PSUs and PEPunits converted				(114		)					(103		)					(145		)
Other				—							(3		)					(4		)
Balance, end of year				3,886							3,953							3,996
Retained Earnings
Balance, beginning of year				59,947							52,839							52,518
Cumulative effect of accounting changes				8							(145		)					—
Net income attributable to PepsiCo				7,314							12,515							4,857
Cash dividends declared - common (a)				(5,323		)					(5,098		)					(4,536		)
Retirement of preferred stock				—							(164		)					—
Balance, end of year				61,946							59,947							52,839
Accumulated Other Comprehensive Loss
Balance, beginning of year				(15,119		)					(13,057		)					(13,919		)
Other comprehensive income/(loss) attributable to PepsiCo				819							(2,062		)					862
Balance, end of year				(14,300		)					(15,119		)					(13,057		)
Repurchased Common Stock
Balance, beginning of year	(458	)		(34,286		)		(446	)		(32,757		)		(438	)		(31,468		)
Share repurchases	(24	)		(3,000		)		(18	)		(2,000		)		(18	)		(2,000		)
Stock option exercises, RSUs, PSUs and PEPunits converted	6			516				6			469				10			708
Other	—			1				—			2				—			3
Balance, end of year	(476	)		(36,769		)		(458	)		(34,286		)		(446	)		(32,757		)
Total PepsiCo Common Shareholders’ Equity				14,786							14,518							11,045
Noncontrolling Interests
Balance, beginning of year				84							92							104
Net income attributable to noncontrolling interests				39							44							51
Distributions to noncontrolling interests				(42		)					(49		)					(62		)
Other, net				1							(3		)					(1		)
Balance, end of year				82							84							92
Total Equity				$	14,868						$	14,602						$	10,981

(a) Cash dividends declared per common share were $3.7925, $3.5875 and $3.1675 for 2019, 2018 and 2017, respectively.

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 consolidated 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. As a result of exchange restrictions and other operating restrictions, we do not have control over our Venezuelan subsidiaries. As such, our Venezuelan subsidiaries are not included within our consolidated financial results for any period presented.

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, including merchandising activities, 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 indefinite-lived 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.

Our fiscal year ends on the last Saturday of each December, resulting in an additional week of results every five or six years. While our North America results are reported on a weekly calendar basis, substantially all of our international operations report on a monthly calendar basis. Certain operations in our Europe segment report on a weekly calendar basis. The following chart details our quarterly reporting schedule for the three years presented:

Quarter		United States 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

Unless otherwise noted, tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Certain reclassifications were made to the prior years’ consolidated financial statements to conform to the current year presentation.

Our Divisions

During the fourth quarter of 2019, we realigned our ESSA and AMENA reportable segments to be consistent

with a recent strategic realignment of our organizational structure and how our Chief Executive Officer assesses the performance of, and allocates resources to, our reportable segments. As a result, our beverage, food and snack businesses in North Africa, the Middle East and South Asia that were part of our former AMENA segment and our businesses in Sub-Saharan Africa that were part of our former ESSA segment are now reported together as our AMESA segment. The remaining beverage, food and snack businesses that were part of our former AMENA segment are now reported together as our APAC segment and our beverage, food and snack businesses in Europe are now reported as our Europe segment.

These changes did not impact our FLNA, QFNA, PBNA or LatAm reportable segments or our consolidated financial results.

Our historical segment reporting presented in this report has been retrospectively revised to reflect the new organizational structure.

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

1)	FLNA, which includes our branded food and snack businesses in the United States and Canada;

2)	QFNA, which includes our cereal, rice, pasta and other branded food businesses in the United States and Canada;

3)	PBNA, which includes our beverage businesses in the United States and Canada;

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

5)	Europe, which includes all of our beverage, food and snack businesses in Europe;

6)	AMESA, which includes all of our beverage, food and snack businesses in Africa, the Middle East and South Asia; and

7)	APAC, which includes all of our beverage, food and snack businesses in Asia Pacific, Australia and New Zealand and China region.

Through our operations, authorized bottlers, contract manufacturers and other third parties, we make, market, distribute and sell a wide variety of convenient beverages, foods and snacks, serving customers and consumers in more than 200 countries and territories with our largest operations in the United States, Mexico, Russia, Canada, the United Kingdom, China and Brazil.

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 of each division is as follows:

	2019			2018			2017
FLNA	13	%		13	%		13	%
QFNA	1	%		1	%		1	%
PBNA	17	%		18	%		18	%
LatAm	7	%		8	%		7	%
Europe	17	%		9	%		9	%
AMESA	3	%		4	%		5	%
APAC	5	%		4	%		4	%
Corporate unallocated expenses	37	%		43	%		43	%

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 are reflected in division results. The variance between the fixed discount rate used to determine the service cost reflected in division results and the discount rate as disclosed in Note 7 is reflected in corporate unallocated expenses.

Derivatives

We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, agricultural products 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. These derivatives hedge underlying commodity price risk and were not entered into for trading or speculative purposes.

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

	Net Revenue												Operating Profit
	2019(a)				2018(a)				2017				2019				2018				2017
FLNA	$	17,078			$	16,346			$	15,798			$	5,258			$	5,008			$	4,793
QFNA	2,482				2,465				2,503				544				637				640
PBNA	21,730				21,072				20,936				2,179				2,276				2,700
LatAm	7,573				7,354				7,208				1,141				1,049				924
Europe	11,728				10,973				10,522				1,327				1,256				1,199
AMESA	3,651				3,657				3,674				671				661				789
APAC	2,919				2,794				2,884				477				619				401
Total division	67,161				64,661				63,525				11,597				11,506				11,446
Corporate unallocated expenses	—				—				—				(1,306		)		(1,396		)		(1,170		)
Total	$	67,161			$	64,661			$	63,525			$	10,291			$	10,110			$	10,276

(a)

Our primary performance obligation is the distribution and sales of beverage products and food and snack products to our customers, with our food and snack business representing approximately 55% of our consolidated net revenue. Internationally, LatAm’s food and snack business is approximately 90% of the segment’s net revenue, Europe’s beverage business and food and snack business are approximately 55% and 45%, respectively, of the segment’s net revenue, AMESA’s beverage business and food and snack business are approximately 40% and 60%, respectively, of the segment’s net revenue and APAC’s beverage business and food and snack business are approximately 25% and 75%, respectively, of the segment’s net revenue. Beverage revenue from company-owned bottlers, which primarily includes our consolidated bottling operations in our PBNA and Europe segments, is approximately 40% of our consolidated net revenue. Generally, our

finished goods beverage operations produce higher net revenue, but lower operating margins as compared to concentrate sold to authorized bottling partners for the manufacture of finished goods beverages. See Note 2 for further information.

Corporate Unallocated Expenses

Corporate unallocated expenses include costs of our corporate headquarters, centrally managed initiatives such as commodity derivative gains and losses, foreign exchange transaction gains and losses, our ongoing business transformation initiatives, unallocated research and development costs, unallocated insurance and benefit programs, and certain other items.

Other Division Information

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

	Total Assets								Capital Spending
	2019				2018				2019				2018				2017
FLNA	$	7,519			$	6,577			$	1,227			$	840			$	665
QFNA	941				870				104				53				44
PBNA	31,449				29,878				1,053				945				904
LatAm	7,007				6,458				557				492				481
Europe	17,814				16,887				613				466				463
AMESA	3,672				3,252				267				198				181
APAC	4,113				3,704				195				138				145
Total division	72,515				67,626				4,016				3,132				2,883
Corporate (a)	6,032				10,022				216				150				86
Total	$	78,547			$	77,648			$	4,232			$	3,282			$	2,969

(a)	Corporate assets consist principally of certain cash and cash equivalents, restricted cash, short-term investments, derivative instruments, property, plant and equipment and tax assets. In 2019, the change in assets was primarily due to a decrease in cash and cash equivalents and restricted cash. Refer to the cash flow statement for additional information.

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

	Amortization of Intangible Assets												Depreciation and Other Amortization
	2019				2018				2017				2019				2018				2017
FLNA	$	7			$	7			$	7			$	492			$	457			$	449
QFNA	—				—				—				44				45				47
PBNA	29				31				31				857				821				780
LatAm	5				5				5				270				253				245
Europe	37				23				22				341				319				317
AMESA	2				2				2				116				169				170
APAC	1				1				1				76				80				99
Total division	81				69				68				2,196				2,144				2,107
Corporate	—				—				—				155				186				194
Total	$	81			$	69			$	68			$	2,351			$	2,330			$	2,301

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

	Net Revenue												Long-Lived Assets**(a)**
	2019				2018				2017				2019				2018
United States	$	38,644			$	37,148			$	36,546			$	30,601			$	29,169
Mexico	4,190				3,878				3,650				1,666				1,404
Russia	3,263				3,191				3,232				4,314				3,926
Canada	2,831				2,736				2,691				2,695				2,565
United Kingdom	1,723				1,743				1,650				827				759
China	1,300				1,164				963				705				509
Brazil	1,295				1,335				1,427				590				639
All other countries	13,915				13,466				13,366				12,134				11,660
Total	$	67,161			$	64,661			$	63,525			$	53,532			$	50,631

(a)	Long-lived assets represent property, plant and equipment, indefinite-lived intangible assets, amortizable intangible assets and investments in noncontrolled affiliates. These assets are reported in the country where they are primarily used.

Note 2 — Our Significant Accounting Policies

Revenue Recognition

We recognize revenue when our performance obligation is satisfied. Our primary performance obligation (the distribution and sales of beverage products and food and snack products) is satisfied upon the shipment or delivery of products to our customers, which is also when control is transferred. Merchandising activities are performed after a customer obtains control of the product, are accounted for as fulfillment of our performance obligation to ship or deliver product to our customers and are recorded in selling, general and administrative expenses. Merchandising activities are immaterial in the context of our contracts.

The transfer of control of products to our customers is typically 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. As a result, we record reserves, based on estimates, for anticipated damaged and out-of-date products.

As a result of the implementation of the revenue recognition guidance adopted in the first quarter of 2018, which did not have a material impact on our accounting policies, we recorded an adjustment in the first quarter of 2018 of $137 million to beginning retained earnings to reflect marketplace spending that our customers and independent bottlers expect to be entitled to in line with revenue recognition. In addition, starting in 2018, we excluded from net revenue and cost of sales all sales, use, value-added and certain excise taxes assessed by governmental authorities on revenue-producing transactions. The impact of these taxes previously recognized in net revenue and cost of sales was approximately $75 million for the fiscal year ended December 30, 2017, with no impact on operating profit.

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 United States, and generally within 30 to 90 days internationally, and may allow discounts for early payment.

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

We are exposed to concentration of credit risk from our major customers, including Walmart. In 2019, sales to Walmart and its affiliates (including Sam’s) represented approximately 13% of our consolidated net revenue, including concentrate sales to our independent bottlers, which were used in finished goods sold by them to Walmart. 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 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, as products are delivered, for the expected payout, which may occur after year end once reconciled and settled. These accruals are based on contract terms and our historical experience with similar programs and require management judgment with respect to estimating customer and consumer 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. Upfront payments to customers under these arrangements are recognized over the shorter of the economic or contractual life, primarily as a reduction of revenue, and the remaining balances of $272 million as of December 28, 2019 and $218 million as of December 29, 2018 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. Our annual consolidated financial statements are not impacted by this interim allocation methodology.

Advertising and other marketing activities, reported as selling, general and administrative expenses, totaled $4.7 billion in 2019, $4.2 billion in 2018 and $4.1 billion in 2017, including advertising expenses of $3.0 billion in 2019, $2.6 billion in 2018 and $2.4 billion in 2017. 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 $55 million and $47 million as of December 28, 2019 and December 29, 2018, 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, which include certain merchandising activities, are reported as selling, general and administrative expenses. Shipping and handling expenses were $10.9 billion in 2019, $10.5 billion in 2018 and $9.9 billion in 2017.

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 (1) external direct costs of materials and services utilized in developing or obtaining computer software, (2) compensation and related benefits for employees who are directly associated with the software projects and (3) 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 five to 10 years. Software amortization totaled $166 million in 2019, $204 million in 2018 and $224 million in 2017. Net capitalized software and development costs were $572 million and $577 million as of December 28, 2019 and December 29, 2018, 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.

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 $711 million, $680 million and $737 million in 2019, 2018 and 2017, respectively, and are reported within selling, general and administrative expenses.

Goodwill and Other Intangible Assets

Indefinite-lived intangible assets and goodwill are not amortized and, as a result, are assessed for impairment at least annually, using either a qualitative or quantitative approach. We perform this annual assessment during our third quarter, or more frequently if circumstances indicate that the carrying value may not be recoverable. 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.

In the quantitative assessment for indefinite lived-intangible assets and goodwill, an assessment is performed to determine the fair value of the indefinite-lived intangible asset and the reporting unit, respectively. Estimated fair value is determined using discounted cash flows and 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 indefinite-lived intangible assets and goodwill, such as forecasted growth rates (including perpetuity growth assumptions) and weighted-average cost of capital, are based on the best available market

information and are consistent with our internal forecasts and operating plans. A deterioration in these assumptions could adversely impact our results.

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.

See Note 4 for further information.

Other Significant Accounting Policies

Our other significant accounting policies are disclosed as follows:

•	Basis of Presentation – Note 1 includes a description of our policies regarding use of estimates, basis of presentation and consolidation.

•	Property, Plant and Equipment – Note 4.

•	Income Taxes – Note 5.

•	Share-Based Compensation – Note 6.

•	Pension, Retiree Medical and Savings Plans – Note 7.

•	Financial Instruments – Note 9.

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

•	Inventories – Note 15. Inventories are valued at the lower of cost or net realizable value. Cost is determined using the average; first-in, first-out (FIFO) or, in limited instances, 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 2018, the Financial Accounting Standards Board (FASB) issued guidance related to the TCJ Act for the optional reclassification of the residual tax effects, arising from the change in corporate tax rate, in accumulated other comprehensive loss to retained earnings. The reclassification is the difference between the amount previously recorded in other comprehensive income at the historical U.S. federal tax rate that remains in accumulated other comprehensive loss at the time the TCJ Act was effective and the amount that would have been recorded using the newly enacted rate. This guidance became effective during the first quarter of 2019; however, we did not elect to make the optional reclassification.

In 2017, the FASB issued guidance to amend and simplify the application of hedge accounting guidance to better portray the economic results of risk management activities in the financial statements. The guidance expands the ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. Under this guidance, certain of our derivatives used to hedge commodity price risk that did not previously qualify for hedge accounting treatment can now qualify prospectively. We adopted this guidance during the first quarter of 2019; the adoption did not have a material impact on our consolidated financial statements or disclosures. See Note 9 for further information.

In 2016, the FASB issued guidance on leases, with amendments issued in 2018. The guidance requires lessees to recognize most leases on the balance sheet, but does not change the manner in which expenses are recorded

in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The two permitted transition methods under the guidance are the modified retrospective transition approach, which requires application of the guidance for all comparative periods presented, and the cumulative effect adjustment approach, which requires prospective application at the adoption date.

We utilized a comprehensive approach to assess the impact of this guidance on our consolidated financial statements and related disclosures, including the increase in the assets and liabilities on our balance sheet and the impact on our current lease portfolio from both a lessor and lessee perspective. We completed our comprehensive review of our lease portfolio, including significant leases by geography and by asset type that were impacted by the new guidance, and enhanced our controls. In addition, we implemented a new software platform, and corresponding controls, for administering our leases and facilitating compliance with the new guidance.

We adopted the guidance prospectively during the first quarter of 2019. As part of our adoption, we elected not to reassess historical lease classification, recognize short-term leases on our balance sheet, nor separate lease and non-lease components for our real estate leases. In addition, we utilized the portfolio approach to group leases with similar characteristics and did not use hindsight to determine lease term. The adoption did not have a material impact on our consolidated financial statements, resulting in an increase of 2% to each of our total assets and total liabilities on our balance sheet, and had an immaterial increase to retained earnings as of the beginning of 2019. See Note 13 for further information.

Recently Issued Accounting Pronouncements - Not Yet Adopted

In 2019, the FASB issued guidance to simplify the accounting for income taxes. The guidance primarily addresses how to (1) recognize a deferred tax liability after we transition to or from the equity method of accounting, (2) evaluate if a step–up in the tax basis of goodwill is related to a business combination or is a separate transaction, (3) recognize all the effects of a change in tax law in the period of enactment, including adjusting the estimated annual tax rate, and (4) include the amount of tax based on income in the income tax provision and any incremental amount as a tax not based on income for hybrid tax regimes. The guidance is effective in the first quarter of 2021 with early adoption permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements and the timing of adoption.

In 2016, the FASB issued guidance that changes the impairment model used to measure credit losses for most financial assets. For our trade, certain other receivables and certain other financial instruments, we will be required to use a new forward-looking expected credit loss model that will replace the existing incurred credit loss model, which would generally result in earlier recognition of allowances for credit losses. We will adopt the guidance when it becomes effective in the first quarter of 2020. The guidance is not expected to have a material impact on our consolidated financial statements or disclosures.

Note 3 — Restructuring and Impairment Charges

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

	2019				2018				2017
2019 Productivity Plan	$	370			$	138			$	—
2014 Productivity Plan	—				170				295
Total restructuring and impairment charges	370				308				295
Other productivity initiatives	3				8				16
Total restructuring and impairment charges and other productivity initiatives	$	373			$	316			$	311

2019 Multi-Year Productivity Plan

The 2019 Productivity Plan, publicly announced on February 15, 2019, will leverage new technology and business models to further simplify, harmonize and automate processes; re-engineer our go-to-market and information systems, including deploying the right automation for each market; and simplify our organization and optimize our manufacturing and supply chain footprint. In connection with this plan, we expect to incur pre-tax charges of approximately $2.5 billion and cash expenditures of approximately $1.6 billion. These pre-tax charges are expected to consist of approximately 70% of severance and other employee-related costs, 15% for asset impairments (all non-cash) resulting from plant closures and related actions, and 15% for other costs associated with the implementation of our initiatives. We expect to complete this plan by 2023.

The total expected plan pre-tax charges are expected to be incurred by division approximately as follows:

	FLNA			QFNA			PBNA			LatAm			Europe			AMESA			APAC			Corporate
Expected pre-tax charges	11	%		2	%		30	%		10	%		25	%		8	%		5	%		9	%

A summary of our 2019 Productivity Plan charges is as follows:

	2019				2018
Cost of sales	$	115			$	3
Selling, general and administrative expenses	253				100
Other pension and retiree medical benefits expense	2				35
Total restructuring and impairment charges	$	370			$	138
After-tax amount	$	303			$	109
Net income attributable to PepsiCo per common share	$	0.21			$	0.08

	2019				2018				Plan to Date through 12/28/2019
FLNA	$	22			$	31			$	53
QFNA	2				5				7
PBNA	51				40				91
LatAm	62				9				71
Europe	99				6				105
AMESA	38				3				41
APAC	47				2				49
Corporate	47				7				54
	368				103				471
Other pension and retiree medical benefits expense	2				35				37
Total	$	370			$	138			$	508

	Plan to Date through 12/28/2019
Severance and other employee costs	$	286
Asset impairments	92
Other costs (a)	130
Total	$	508

(a)	Includes other costs associated with the implementation of our initiatives, including contract termination costs, consulting and other professional fees.

A summary of our 2019 Productivity Plan activity is as follows:

	Severance and Other Employee Costs				Asset Impairments				Other Costs				Total
2018 restructuring charges	$	137			$	—			$	1			$	138
Non-cash charges and translation	(32		)		—				—				(32		)
Liability as of December 29, 2018	105				—				1				106
2019 restructuring charges	149				92				129				370
Cash payments (a)	(138		)		—				(119		)		(257		)
Non-cash charges and translation	12				(92		)		10				(70		)
Liability as of December 28, 2019	$	128			$	—			$	21			$	149

(a)	Excludes cash expenditures of $4 million reported in the cash flow statement in pension and retiree medical contributions.

Substantially all of the restructuring accrual at December 28, 2019 is expected to be paid by the end of 2020.

2014 Multi-Year Productivity Plan

The 2014 Productivity Plan, publicly announced on February 13, 2014, included the next generation of productivity initiatives that we believed would strengthen our beverage, food and snack 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. To build on the 2014 Productivity Plan, in the fourth quarter of 2017, we expanded and extended the plan through the end of 2019 to take advantage of additional opportunities within the initiatives described above that further strengthened our beverage, food and snack businesses.

The 2014 Productivity Plan was completed in 2019. In 2019, there were no material pre-tax charges related to this plan and all cash payments were paid at year end. The total plan pre-tax charges and cash expenditures approximated the previously disclosed plan estimates of $1.3 billion and $960 million, respectively. These total plan pre-tax charges consisted of 59% of severance and other employee costs, 15% of asset impairments and 26% of other costs, including costs associated with the implementation of our initiatives, including certain consulting and other contract termination costs. These total plan pre-tax charges were incurred by division as follows: FLNA 14%, QFNA 3%, PBNA 29%, LatAm 15%, Europe 23%, AMESA 3%, APAC 3% and Corporate 10%.

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

	2018				2017
Selling, general and administrative expenses	$	169			$	229
Other pension and retiree medical benefits expense	1				66
Total restructuring and impairment charges	$	170			$	295
After-tax amount	$	143			$	224
Net income attributable to PepsiCo per common share	$	0.10			$	0.16

	2018				2017
FLNA	$	8			$	67
QFNA	2				11
PBNA	51				54
LatAm	30				63
Europe	53				53
AMESA	15				2
APAC (a)	12				(5		)
Corporate (b)	(1		)		50
Total	$	170			$	295

(a)	Income amount primarily reflects a gain on the sale of property, plant and equipment.

(b)	Income amount primarily relates to other pension and retiree medical benefits.

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

	Severance and Other Employee Costs				Asset Impairments				Other Costs				Total
Liability as of December 31, 2016	$	88			$	—			$	8			$	96
2017 restructuring charges	280				21				(6		)	(a)	295
Cash payments	(91		)		—				(22		)		(113		)
Non-cash charges and translation	(65		)		(21		)		34				(52		)
Liability as of December 30, 2017	212				—				14				226
2018 restructuring charges	86				28				56				170
Cash payments (b)	(203		)		—				(52		)		(255		)
Non-cash charges and translation	(4		)		(28		)		5				(27		)
Liability as of December 29, 2018	91				—				23				114
Cash payments	(77		)		—				(16		)		(93		)
Non-cash charges and translation	(14		)		—				(7		)		(21		)
Liability as of December 28, 2019	$	—			$	—			$	—			$	—

(a)	Income amount represents adjustments for changes in estimates and a gain on the sale of property, plant, and equipment.

(b)	Excludes cash expenditures of $11 million reported in the cash flow statement in pension and retiree medical plan contributions.

Other Productivity Initiatives

There were no material charges related to other productivity and efficiency initiatives outside the scope of the 2019 and 2014 Productivity Plans.

We regularly evaluate different productivity initiatives beyond the productivity plans and other initiatives described above.

Note 4 — Property, Plant and Equipment and Intangible Assets

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

	Average Useful Life (Years)		2019				2018				2017
Property, plant and equipment, net
Land			$	1,130			$	1,078
Buildings and improvements	15 - 44		9,314				8,941
Machinery and equipment, including fleet and software	5 - 15		29,390				27,715
Construction in progress			3,169				2,430
			43,003				40,164
Accumulated depreciation			(23,698		)		(22,575		)
Total			$	19,305			$	17,589
Depreciation expense			$	2,257			$	2,241			$	2,227

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:

			2019												2018												2017
	Average Useful Life (Years)		Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization				Net
Amortizable intangible assets, net
Acquired franchise rights	56 – 60		$	846			$	(158	)		$	688			$	838			$	(140	)		$	698
Reacquired franchise rights	5 – 14		106				(105		)		1				106				(105		)		1
Brands	20 – 40		1,326				(1,066		)		260				1,306				(1,032		)		274
Other identifiable intangibles (a)	10 – 24		810				(326		)		484				959				(288		)		671
Total			$	3,088			$	(1,655	)		$	1,433			$	3,209			$	(1,565	)		$	1,644
Amortization expense											$	81											$	69			$	68

(a)	The change from 2018 to 2019 primarily reflects revisions to the purchase price allocation for our acquisition of SodaStream.

Amortization of intangible assets for each of the next five years, based on existing intangible assets as of December 28, 2019 and using average 2019 foreign exchange rates, is expected to be as follows:

	2020				2021				2022				2023				2024
Five-year projected amortization	$	82			$	80			$	77			$	75			$	74

Depreciable and amortizable assets are 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.

Indefinite-Lived Intangible Assets

We did not recognize any impairment charges for goodwill in each of the years ended December 28, 2019, December 29, 2018 and December 30, 2017. We did not recognize any material impairment charges for indefinite-lived intangible assets in each of the years ended December 28, 2019, December 29, 2018 and December 30, 2017. As of December 28, 2019, the estimated fair values of our indefinite-lived reacquired and acquired franchise rights recorded at PBNA exceeded their carrying values. However, there could be an

impairment of the carrying value of PBNA’s reacquired and acquired franchise rights if future revenues and their contribution to the operating results of PBNA’s CSD business do not achieve our expected 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 macroeconomic conditions in Russia and Brazil on the estimated fair value of our indefinite-lived intangible assets in these countries and have concluded that there were no impairments for the year ended December 28, 2019. However, there could be an impairment of the carrying value of certain brands in these countries, including juice and dairy brands in Russia, if there is a deterioration in these conditions, if future revenues and their contributions to the operating results do not achieve our expected future cash flows (including perpetuity growth assumptions), if there are significant changes in the decisions regarding assets that do not perform consistent with our expectations, or if macroeconomic conditions result in a future increase in the weighted-average cost of capital used to estimate fair value. For further information on our policies for indefinite-lived intangible assets, see Note 2.

The change in the book value of indefinite-lived intangible assets is as follows:

	Balance, Beginning 2018				Acquisitions/ (Divestitures)				Translation and Other				Balance, End of 2018				Acquisitions/ (Divestitures)				Translation and Other				Balance, End of 2019
FLNA
Goodwill	$	280			$	28			$	(11	)		$	297			$	(3	)		$	5			$	299
Brands	25				138				(2		)		161				—				1				162
Total	305				166				(13		)		458				(3		)		6				461
QFNA
Goodwill	175				9				—				184				6				(1		)		189
Brands	—				25				—				25				(14		)		—				11
Total	175				34				—				209				(8		)		(1		)		200
PBNA (a)
Goodwill	9,854				—				(41		)		9,813				66				19				9,898
Reacquired franchise rights	7,126				—				(68		)		7,058				—				31				7,089
Acquired franchise rights	1,525				—				(15		)		1,510				—				7				1,517
Brands	353				—				—				353				418				(8		)		763
Total	18,858				—				(124		)		18,734				484				49				19,267
LatAm
Goodwill	555				—				(46		)		509				—				(8		)		501
Brands	141				—				(14		)		127				—				(2		)		125
Total	696				—				(60		)		636				—				(10		)		626
Europe (b) (c)
Goodwill	3,202				526				(367		)		3,361				440				160				3,961
Reacquired franchise rights	549				(1		)		(51		)		497				—				8				505
Acquired franchise rights	195				(25		)		(9		)		161				—				(4		)		157
Brands	2,545				1,993				(350		)		4,188				(139		)		132				4,181
Total	6,491				2,493				(777		)		8,207				301				296				8,804
AMESA
Goodwill	437				—				—				437				11				(2		)		446
Total	437				—				—				437				11				(2		)		446
APAC
Goodwill	241				—				(34		)		207				—				—				207
Brands	111				—				(10		)		101				—				(1		)		100
Total	352				—				(44		)		308				—				(1		)		307
Total goodwill	14,744				563				(499		)		14,808				520				173				15,501
Total reacquired franchise rights	7,675				(1		)		(119		)		7,555				—				39				7,594
Total acquired franchise rights	1,720				(25		)		(24		)		1,671				—				3				1,674
Total brands	3,175				2,156				(376		)		4,955				265				122				5,342
Total	$	27,314			$	2,693			$	(1,018	)		$	28,989			$	785			$	337			$	30,111

(a)	The change in acquisitions/(divestitures) in 2019 is primarily related to our acquisition of CytoSport Inc.

(b)	The change in acquisitions/(divestitures) in 2019 and 2018 is primarily related to our acquisition of SodaStream. See Note 14 for further information.

(c)	The change in translation and other in 2019 primarily reflects the appreciation of the Russian ruble. The change in translation and other in 2018 primarily reflects the depreciation of the Russian ruble, euro and Pound sterling.

Note 5 — Income Taxes

The components of income before income taxes are as follows:

		2019				2018				2017
United States		$	4,123			$	3,864			$	3,452
Foreign		5,189				5,325				6,150
		$	9,312			$	9,189			$	9,602

The provision for/(benefit from) income taxes consisted of the following:

		2019				2018				2017
Current:	U.S. Federal	$	652			$	437			$	4,925
	Foreign	807				378				724
	State	196				63				136
		1,655				878				5,785
Deferred:	U.S. Federal	325				140				(1,159		)
	Foreign	(31		)		(4,379		)		(9		)
	State	10				(9		)		77
		304				(4,248		)		(1,091		)
		$	1,959			$	(3,370	)		$	4,694

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

		2019			2018			2017
U.S. Federal statutory tax rate		21.0	%		21.0	%		35.0	%
State income tax, net of U.S. Federal tax benefit		1.6			0.5			0.9
Lower taxes on foreign results		(0.9	)		(2.2	)		(9.4	)
One-time mandatory transition tax - TCJ Act		(0.1	)		0.1			41.4
Remeasurement of deferred taxes - TCJ Act		—			(0.4	)		(15.9	)
International reorganizations		—			(47.3	)		—
Tax settlements		—			(7.8	)		—
Other, net		(0.6	)		(0.6	)		(3.1	)
Annual tax rate		21.0	%		(36.7	)%		48.9	%

Tax Cuts and Jobs Act

During the fourth quarter of 2017, the TCJ Act was enacted in the United States. Among its many provisions, the TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings and reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018.

In 2017, the SEC issued guidance related to the TCJ Act which allowed recording of provisional tax expense using a measurement period, not to exceed one year, when information necessary to complete the accounting for the effects of the TCJ Act is not available. We elected to apply the measurement period provisions of this guidance to certain income tax effects of the TCJ Act when it became effective in the fourth quarter of 2017.

As a result of the enactment of the TCJ Act, we recognized a provisional net tax expense of $2.5 billion ($1.70 per share) in the fourth quarter of 2017. Included in the provisional net tax expense of $2.5 billion recognized in 2017, was a provisional mandatory one-time transition tax of approximately $4 billion on undistributed international earnings, included in other liabilities. This provisional mandatory one-time transition tax was partially offset by a provisional $1.5 billion benefit resulting from the required

remeasurement of our deferred tax assets and liabilities to the new, lower U.S. corporate income tax rate, effective January 1, 2018. The effect of the remeasurement was recorded in the fourth quarter of 2017, consistent with the enactment date of the TCJ Act, and reflected in our provision for income taxes.

The provisional measurement period allowed by the SEC ended in the fourth quarter of 2018. As a result, in 2018, we recognized a net tax benefit of $28 million ($0.02 per share) related to the TCJ Act, primarily reflecting the impact of the final analysis of certain foreign exchange gains or losses, substantiation of foreign tax credits, as well as cash and cash equivalents as of November 30, 2018, the tax year-end of our foreign subsidiaries, partially offset by additional transition tax guidance issued by the United States Department of Treasury, as well as the TCJ Act impact of both the conclusion of certain international tax audits and the resolution with the IRS of all open matters related to the audits of taxable years 2012 and 2013, each discussed below.

While our accounting for the recorded impact of the TCJ Act was deemed to be complete, additional guidance issued by the IRS impacted, and may continue to impact, our recorded amounts after December 29, 2018. In 2019, we recognized a net tax benefit totaling $8 million ($0.01 per share) related to the TCJ Act, including the impact of additional guidance issued by the IRS in the first quarter of 2019 and adjustments related to the filing of our 2018 U.S. federal tax return.

As of December 28, 2019, our mandatory transition tax liability was $3.3 billion, which must be paid through 2026 under the provisions of the TCJ Act. We reduced our liability through cash payments and application of tax overpayments by $663 million in 2019 and $150 million in 2018. We currently expect to pay approximately $0.1 billion of this liability in 2020.

The TCJ Act also created a requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income (GILTI), must be included in the gross income of their U.S. shareholder. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. During the first quarter of 2018, we elected to treat the tax effect of GILTI as a current-period expense when incurred.

Other Tax Matters

On May 19, 2019, a public referendum held in Switzerland passed the TRAF, effective January 1, 2020. The enactment of certain provisions of the TRAF in 2019 resulted in adjustments to our deferred taxes. During 2019, we recorded net tax expense of $24 million related to the impact of the TRAF. Enactment of the TRAF provisions subsequent to December 28, 2019 is expected to result in adjustments to our consolidated financial statements and related disclosures in future periods. The future impact of the TRAF cannot currently be reasonably estimated; we will continue to monitor and assess the impact the TRAF may have on our business and financial results.

In 2018, we reorganized certain of our international operations, including the intercompany transfer of certain intangible assets. As a result, we recognized other net tax benefits of $4.3 billion ($3.05 per share) in 2018. The related deferred tax asset of $4.4 billion is being amortized over a period of 15 years beginning in 2019. Additionally, the reorganization generated significant net operating loss carryforwards and related deferred tax assets that are not expected to be realized, resulting in the recording of a full valuation allowance.

Deferred tax liabilities and assets are comprised of the following:

	2019				2018
Deferred tax liabilities
Debt guarantee of wholly-owned subsidiary	$	578			$	578
Property, plant and equipment	1,583				1,303
Recapture of net operating losses	335				414
Right-of-use assets	345				—
Other	167				71
Gross deferred tax liabilities	3,008				2,366
Deferred tax assets
Net carryforwards	4,168				4,353
Intangible assets other than nondeductible goodwill	793				985
Share-based compensation	94				106
Retiree medical benefits	154				167
Other employee-related benefits	350				303
Pension benefits	104				221
Deductible state tax and interest benefits	126				110
Lease liabilities	345				—
Other	741				739
Gross deferred tax assets	6,875				6,984
Valuation allowances	(3,599		)		(3,753		)
Deferred tax assets, net	3,276				3,231
Net deferred tax assets	$	(268	)		$	(865	)

A summary of our valuation allowance activity is as follows:

	2019				2018				2017
Balance, beginning of year	$	3,753			$	1,163			$	1,110
Provision	(124		)		2,639				33
Other (deductions)/additions	(30		)		(49		)		20
Balance, end of year	$	3,599			$	3,753			$	1,163

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		2014-2018		2014-2016
Mexico		2017-2018		None
United Kingdom		2017-2018		2017
Canada (Domestic)		2015-2018		2015-2016
Canada (International)		2010-2018		2010-2016
Russia		2016-2018		None

In 2018, we recognized a non-cash tax benefit of $364 million ($0.26 per share) resulting from the conclusion of certain international tax audits. Additionally, in 2018, we recognized non-cash tax benefits of $353 million ($0.24 per share) as a result of our agreement with the IRS resolving all open matters related to the audits

of taxable years 2012 and 2013, including the associated state impact. The conclusion of certain international tax audits and the resolution with the IRS, collectively, resulted in non-cash tax benefits totaling $717 million ($0.50 per share) in 2018.

Our annual tax rate is based on our income, statutory tax rates and tax planning strategies and transactions, including transfer pricing arrangements, 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, new tax laws or tax authority settlements. 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.

As of December 28, 2019, the total gross amount of reserves for income taxes, reported in other liabilities, was $1.4 billion. 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 $250 million as of December 28, 2019, of which $84 million of tax expense was recognized in 2019. The gross amount of interest accrued, reported in other liabilities, was $179 million as of December 29, 2018, of which $64 million of tax benefit was recognized in 2018.

A reconciliation of unrecognized tax benefits is as follows:

	2019				2018
Balance, beginning of year	$	1,440			$	2,212
Additions for tax positions related to the current year	179				142
Additions for tax positions from prior years	93				197
Reductions for tax positions from prior years	(201		)		(822		)
Settlement payments	(74		)		(233		)
Statutes of limitations expiration	(47		)		(42		)
Translation and other	5				(14		)
Balance, end of year	$	1,395			$	1,440

Carryforwards and Allowances

Operating loss carryforwards totaling $24.7 billion at year-end 2019 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 2020, $20.3 billion between 2021 and 2039 and $4.2 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

In 2018, we repatriated $20.4 billion of cash, cash equivalents and short-term investments held in our foreign subsidiaries without such funds being subject to further U.S. federal income tax liability, related to the TCJ Act. As of December 28, 2019, we had approximately $6 billion of undistributed international earnings. We intend to continue to reinvest $6 billion of earnings outside the United States for the foreseeable future and while future distribution of these earnings would not be subject to U.S. federal tax expense, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or state taxes have been recognized. It is not practicable for us to determine the amount of unrecognized 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. PepsiCo has granted stock options, RSUs, PSUs, PEPunits and long-term cash awards to employees under the shareholder-approved PepsiCo, Inc. Long-Term Incentive Plan (LTIP). 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 stock options receive four stock options for every one RSU that would have otherwise been granted. Certain executive officers and other senior executives do not have a choice and are granted 66% PSUs and 34% long-term cash, each of which are subject to pre-established performance targets.

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

As of December 28, 2019, 59 million shares were available for future share-based compensation grants under the LTIP.

The following table summarizes our total share-based compensation expense and excess tax benefits recognized:

	2019				2018				2017
Share-based compensation expense - equity awards	$	237			$	256			$	292
Share-based compensation expense - liability awards	8				20				13
Restructuring charges	(2		)		(6		)		(2		)
Total (a)	$	243			$	270			$	303
Income tax benefits recognized in earnings related to share-based compensation	$	39			$	45			$	89		(b)
Excess tax benefits related to share-based compensation	$	50			$	48			$	115

(a)	Primarily recorded in selling, general and administrative expenses.

(b)	Reflects tax rates effective for the 2017 tax year.

As of December 28, 2019, there was $284 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

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. In addition, we use historical data to estimate forfeiture rates and record share-based compensation expense only for those awards that are expected to vest.

We do not backdate, reprice or grant share-based compensation awards retroactively. Repricing of awards would require shareholder approval under the LTIP.

Stock Options

A stock option permits the holder to purchase shares of PepsiCo common stock at a specified price. 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. 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.

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

	2019			2018			2017
Expected life	5 years			5 years			5 years
Risk-free interest rate	2.4	%		2.6	%		2.0	%
Expected volatility	14	%		12	%		11	%
Expected dividend yield	3.1	%		2.7	%		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 stock option activity for the year ended December 28, 2019 is as follows:

	Options**(a)**			Weighted-Average Exercise Price				Weighted-Average Contractual Life Remaining (years)		Aggregate Intrinsic Value**(b)**
Outstanding at December 29, 2018	15,589			$	79.94
Granted	1,286			$	118.33
Exercised	(4,882	)		$	67.34
Forfeited/expired	(368	)		$	94.30
Outstanding at December 28, 2019	11,625			$	89.03			4.68		$	563,942
Exercisable at December 28, 2019	7,972			$	78.27			3.13		$	472,512
Expected to vest as of December 28, 2019	3,364			$	112.25			8.04		$	85,066

(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.

Restricted Stock Units and Performance Stock Units

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 pursuant to which a number of shares are delivered to the holder upon vesting at the end of the service period based on PepsiCo’s performance against 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. 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.

The fair value of RSUs and PSUs are measured at the market price of the Company’s stock on the date of grant.

A summary of our RSU and PSU activity for the year ended December 28, 2019 is as follows:

	RSUs/PSUs**(a)**			Weighted-Average Grant-Date Fair Value				Weighted-Average Contractual Life Remaining (years)		Aggregate Intrinsic Value**(a)**
Outstanding at December 29, 2018	7,175			$	105.13
Granted (b)	2,754			$	116.87
Converted	(2,642	)		$	99.35
Forfeited	(852	)		$	111.11
Actual performance change (c)	(55	)		$	108.32
Outstanding at December 28, 2019 (d)	6,380			$	111.53			1.22		$	877,487
Expected to vest as of December 28, 2019	5,876			$	111.32			1.19		$	808,220

(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 28, 2019, at the threshold, target and maximum award levels were zero, 0.7 million and 1.3 million, respectively.

PEPunits

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 fair value of PEPunits is measured using the Monte-Carlo simulation model, which incorporates into the fair-value determination the possibility that the market condition may not be satisfied, until actual performance is determined.

PEPunits were last granted in 2015 and all 248,000 units outstanding at December 30, 2017, with a weighted average grant date fair value of $68.94, were converted to 278,000 shares in 2018.

Long-Term Cash

Certain executive officers and other senior executives were granted long-term cash awards for which final payout is based on PepsiCo’s Total Shareholder Return relative to a specific set of peer companies and achievement of a specified performance target over a three-year performance period.

Long-term cash awards that qualify as liability awards under share-based compensation guidance are valued through the end of the performance period on a mark-to-market basis using the Monte Carlo simulation model.

A summary of our long-term cash activity for the year ended December 28, 2019 is as follows:

	Long-Term Cash Award**(a)**				Balance Sheet Date Fair Value**(a)**				Contractual Life Remaining (years)
Outstanding at December 29, 2018	$	54,710
Granted (b)	16,112
Vested	(15,438		)
Forfeited	(9,465		)
Actual performance change (c)	(1,695		)
Outstanding at December 28, 2019 (d)	$	44,224			$	45,875			1.10
Expected to Vest at December 28, 2019	$	42,998			$	44,557			1.10

(a)	In thousands.

(b)	Grant activity for all long-term cash awards are disclosed at target.

(c)	Reflects the net number of long-term cash awards above and below target levels based on actual performance measured at the end of the performance period.

(d)	The outstanding long-term cash awards for which the performance period has not ended as of December 28, 2019, at the threshold, target and maximum award levels were zero, 28.5 million and 57.1 million, respectively.

Other Share-Based Compensation Data

The following is a summary of other share-based compensation data:

	2019				2018				2017
Stock Options
Total number of options granted (a)	1,286				1,429				1,481
Weighted-average grant-date fair value of options granted	$	10.89			$	9.80			$	8.25
Total intrinsic value of options exercised (a)	$	275,745			$	224,663			$	327,860
Total grant-date fair value of options vested (a)	$	9,838			$	15,506			$	23,122
RSUs/PSUs
Total number of RSUs/PSUs granted (a)	2,754				2,634				2,824
Weighted-average grant-date fair value of RSUs/PSUs granted	$	116.87			$	108.75			$	109.92
Total intrinsic value of RSUs/PSUs converted (a)	$	333,951			$	260,287			$	380,269
Total grant-date fair value of RSUs/PSUs vested (a)	$	275,234			$	232,141			$	264,923
PEPunits
Total intrinsic value of PEPunits converted (a)	$	—			$	30,147			$	39,782
Total grant-date fair value of PEPunits vested (a)	$	—			$	9,430			$	18,833

(a)	In thousands.

As of December 28, 2019 and December 29, 2018, there were approximately 269,000 and 248,000 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 2019, Plan A purchased a group annuity contract whereby a third-party insurance company assumed the obligation to pay and administer future annuity payments for certain retirees. This transaction triggered a pre-tax settlement charge in 2019 of $220 million ($170 million after-tax or $0.12 per share).

Also in 2019, certain former employees who had vested benefits in our U.S. defined benefit pension plans were offered the option of receiving a one-time lump sum payment equal to the present value of the participant’s pension benefit. This transaction triggered a pre-tax settlement charge in 2019 of $53 million ($41 million after-tax or $0.03 per share). Collectively, the group annuity contract and one-time lump sum payments to certain former employees who had vested benefits resulted in settlement charges in 2019 of $273 million ($211 million after-tax or $0.15 per share).

Effective January 1, 2017, the U.S. qualified defined benefit pension plans were reorganized into Plan A and Plan I. Actuarial gains and losses associated with Plan A are amortized over the average remaining service life of the active participants, while the actuarial gains and losses associated with Plan I are amortized over the remaining life expectancy of the inactive participants. As a result of this change, the pre-tax net periodic benefit cost decreased by $42 million ($27 million after-tax, reflecting tax rates effective for the 2017 tax year, or $0.02 per share) in 2017, primarily impacting corporate unallocated expenses.

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, as well as changes in our assumptions, are determined at each measurement date. These differences are recognized as a component of net gain or loss in accumulated other comprehensive loss. 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 other pension and retiree medical benefits (expense)/income for the following year based upon the average remaining service life for participants in Plan A (approximately 10 years) and retiree medical (approximately 8 years), or the remaining life expectancy for participants in Plan I (approximately 23 years). The cost or benefit of plan changes that increase or decrease benefits for prior employee service (prior service cost/(credit)) is included in other pension and retiree medical benefits (expense)/income on a straight-line basis over the average remaining service life for participants in Plan A or the remaining life expectancy for participants in Plan I.

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

	Pension																Retiree Medical
	U.S.								International
	2019				2018				2019				2018				2019				2018
Change in projected benefit liability
Liability at beginning of year	$	13,807			$	14,777			$	3,098			$	3,490			$	996			$	1,187
Service cost	381				431				73				92				23				32
Interest cost	543				482				97				93				36				34
Plan amendments	15				83				1				2				—				—
Participant contributions	—				—				2				2				—				—
Experience loss/(gain)	2,091				(972		)		515				(230		)		36				(147		)
Benefit payments	(341		)		(956		)		(100		)		(114		)		(105		)		(108		)
Settlement/curtailment	(1,268		)		(74		)		(31		)		(35		)		—				—
Special termination benefits	2				36				—				2				—				1
Other, including foreign currency adjustment	—				—				98				(204		)		2				(3		)
Liability at end of year	$	15,230			$	13,807			$	3,753			$	3,098			$	988			$	996
Change in fair value of plan assets
Fair value at beginning of year	$	12,258			$	12,582			$	3,090			$	3,460			$	285			$	321
Actual return on plan assets	3,101				(789		)		551				(136		)		78				(21		)
Employer contributions/funding	550				1,495				122				120				44				93
Participant contributions	—				—				2				2				—				—
Benefit payments	(341		)		(956		)		(100		)		(114		)		(105		)		(108		)
Settlement	(1,266		)		(74		)		(31		)		(32		)		—				—
Other, including foreign currency adjustment	—				—				98				(210		)		—				—
Fair value at end of year	$	14,302			$	12,258			$	3,732			$	3,090			$	302			$	285
Funded status	$	(928	)		$	(1,549	)		$	(21	)		$	(8	)		$	(686	)		$	(711	)

Amounts recognized
Other assets	$	744			$	185			$	99			$	81			$	—			$	—
Other current liabilities	(52		)		(107		)		(1		)		(1		)		(58		)		(41		)
Other liabilities	(1,620		)		(1,627		)		(119		)		(88		)		(628		)		(670		)
Net amount recognized	$	(928	)		$	(1,549	)		$	(21	)		$	(8	)		$	(686	)		$	(711	)
Amounts included in accumulated other comprehensive loss (pre-tax)
Net loss/(gain)	$	3,516			$	4,093			$	914			$	780			$	(285	)		$	(287	)
Prior service cost/(credit)	114				109				—				(1		)		(32		)		(51		)
Total	$	3,630			$	4,202			$	914			$	779			$	(317	)		$	(338	)
Changes recognized in net (gain)/loss included in other comprehensive loss
Net (gain)/loss arising in current year	$	(120	)		$	760			$	152			$	103			$	(24	)		$	(107	)
Amortization and settlement recognition	(457		)		(187		)		(44		)		(56		)		27				8
Foreign currency translation loss/(gain)	—				—				26				(49		)		(1		)		1
Total	$	(577	)		$	573			$	134			$	(2	)		$	2			$	(98	)
Accumulated benefit obligation at end of year	$	14,255			$	12,890			$	3,441			$	2,806

The net (gain)/loss arising in the current year is attributed to the change in discount rate, primarily offset by the actual asset returns different from expected returns.

The amount we report in operating profit as pension and retiree medical cost is service cost, which is the

value of benefits earned by employees for working during the year.

The amounts we report below operating profit as pension and retiree medical cost consist of the following components:

•	Interest cost is the accrued interest on the projected benefit obligation due to the passage of time.

•	Expected return on plan assets is the long-term return we expect to earn on plan investments for our funded plans that will be used to settle future benefit obligations.

•	Amortization of prior service cost/(credit) represents the recognition in the income statement of benefit changes resulting from plan amendments.

•	Amortization of net loss/(gain) represents the recognition in the income statement of changes in the amount of plan assets and the projected benefit obligation based on changes in assumptions and actual experience.

•

Settlement/curtailment loss/(gain) represents the result of actions that effectively eliminate all or a portion of related projected benefit obligations. Settlements are triggered when payouts to settle the projected benefit obligation of a plan due to lump sums or other events exceed the annual service and interest cost. Settlements are recognized when actions are irrevocable and we are relieved of the primary responsibility and risk for projected benefit obligations. Curtailments are due to events such as plant closures or the sale of a business resulting in a reduction of future service or benefits. Curtailment losses are recognized when an event is probable and estimable, while curtailment gains are recognized when an event has occurred (when the related employees terminate or an amendment is adopted).

•	Special termination benefits are the additional benefits offered to employees upon departure due to actions such as restructuring.

The components of total pension and retiree medical benefit costs are as follows:

	Pension																								Retiree Medical
	U.S.												International
	2019				2018				2017				2019				2018				2017				2019				2018				2017
Service cost	$	381			$	431			$	401			$	73			$	92			$	91			$	23			$	32			$	28
Other pension and retiree medical benefits expense/(income):
Interest cost	$	543			$	482			$	468			$	97			$	93			$	89			$	36			$	34			$	36
Expected return on plan assets	(892		)		(943		)		(849		)		(188		)		(197		)		(176		)		(18		)		(19		)		(22		)
Amortization of prior service cost/(credits)	10				3				1				—				—				—				(19		)		(20		)		(25		)
Amortization of net losses/(gains)	161				179				123				32				45				53				(27		)		(8		)		(12		)
Settlement/curtailment losses (a)	296				8				8				12				6				11				—				—				—
Special termination benefits	1				36				60				—				2				—				—				1				2
Total other pension and retiree medical benefits expense/(income)	$	119			$	(235	)		$	(189	)		$	(47	)		$	(51	)		$	(23	)		$	(28	)		$	(12	)		$	(21	)
Total	$	500			$	196			$	212			$	26			$	41			$	68			$	(5	)		$	20			$	7

(a)	In 2019, U.S. includes settlement charges related to the purchase of a group annuity contract of $220 million and a pension lump sum settlement charge of $53 million.

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

	Pension																		Retiree Medical
	U.S.									International
	2019			2018			2017			2019			2018			2017			2019			2018			2017
Liability discount rate	3.3	%		4.4	%		3.7	%		2.5	%		3.4	%		3.0	%		3.1	%		4.2	%		3.5	%
Service cost discount rate	4.4	%		3.8	%		4.5	%		4.2	%		3.5	%		3.6	%		4.3	%		3.6	%		4.0	%
Interest cost discount rate	4.1	%		3.4	%		3.7	%		3.2	%		2.8	%		2.8	%		3.8	%		3.0	%		3.2	%
Expected return on plan assets	7.1	%		7.2	%		7.5	%		5.8	%		6.0	%		6.0	%		6.6	%		6.5	%		7.5	%
Liability rate of salary increases	3.1	%		3.1	%		3.1	%		3.3	%		3.7	%		3.7	%
Expense rate of salary increases	3.1	%		3.1	%		3.1	%		3.7	%		3.7	%		3.6	%

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
	2019				2018				2019				2018				2019				2018
Selected information for plans with accumulated benefit obligation in excess of plan assets
Liability for service to date	$	(9,194	)		$	(8,040	)		$	(192	)		$	(155	)
Fair value of plan assets	$	8,497			$	7,223			$	151			$	121
Selected information for plans with projected benefit liability in excess of plan assets
Benefit liability	$	(10,169	)		$	(8,957	)		$	(632	)		$	(514	)		$	(988	)		$	(996	)
Fair value of plan assets	$	8,497			$	7,223			$	512			$	426			$	302			$	285

Of the total projected pension benefit liability as of December 28, 2019, approximately $847 million relates to plans that we do not fund because the funding of such plans does not receive favorable tax treatment.

Future Benefit Payments

Our estimated future benefit payments are as follows:

	2020				2021				2022				2023				2024				2025 - 2029
Pension	$	945			$	915			$	900			$	930			$	970			$	5,275
Retiree medical (a)	$	100			$	95			$	95			$	90			$	85			$	355

(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 million for each of the years from 2020 through 2024 and approximately $4 million in total for 2025 through 2029.

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

Funding

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

	Pension												Retiree Medical
	2019				2018				2017				2019				2018				2017
Discretionary (a)	$	417			$	1,417			$	6			$	—			$	37			$	—
Non-discretionary	255				198				158				44				56				56
Total	$	672			$	1,615			$	164			$	44			$	93			$	56

(a)	Includes $400 million contribution in 2019 and $1.4 billion contribution in 2018 to fund Plan A in the United States.

In January 2020, we made discretionary contributions of $150 million to Plan A in the United States. In addition, in 2020, we expect to make non-discretionary contributions of approximately $150 million to our U.S. and international pension benefit plans and approximately $60 million for retiree medical benefits.

We regularly evaluate opportunities to reduce risk and volatility associated with our pension and retiree medical plans.

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. Assets contributed to our pension plans are no longer controlled by us, but become the property of our individual pension plans. However, we are indirectly impacted by changes in these plan assets as compared to changes in our projected liabilities. 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, such as futures and forward contracts, to reduce interest rate and foreign currency risks. Futures contracts represent commitments to purchase or sell securities at a future date and at a specified price. Forward contracts consist of currency forwards.

For 2020 and 2019, our expected long-term rate of return on U.S. plan assets is 6.8% and 7.1%, respectively. Our target investment allocations for U.S. plan assets are as follows:

	2020			2019
Fixed income	50	%		47	%
U.S. equity	25	%		29	%
International equity	21	%		20	%
Real estate	4	%		4	%

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.

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, such as equity securities, 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.

Plan assets measured at fair value as of year-end 2019 and 2018 are categorized consistently by level, and are as follows:

	2019																2018
	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, including preferred stock (b)	$	6,605			$	6,605			$	—			$	—			$	5,605
Government securities (c)	2,154				—				2,154				—				1,674
Corporate bonds (c)	4,737				—				4,737				—				4,145
Mortgage-backed securities (c)	159				—				159				—				212
Contracts with insurance companies (d)	9				—				—				9				9
Cash and cash equivalents	275				275				—				—				215
Sub-total U.S. plan assets	13,939				$	6,880			$	7,050			$	9			11,860
Real estate commingled funds measured at net asset value (e)	605																618
Dividends and interest receivable, net of payables	60																65
Total U.S. plan assets	$	14,604															$	12,543
International plan assets
Equity securities (b)	$	1,973			$	1,941			$	32			$	—			$	1,651
Government securities (c)	524				—				524				—				433
Corporate bonds (c)	585				—				585				—				478
Fixed income commingled funds (f)	384				384				—				—				356
Contracts with insurance companies (d)	42				—				—				42				36
Cash and cash equivalents	24				24				—				—				27
Sub-total international plan assets	3,532				$	2,349			$	1,141			$	42			2,981
Real estate commingled funds measured at net asset value (e)	193																102
Dividends and interest receivable	7																7
Total international plan assets	$	3,732															$	3,090

(a)	2019 and 2018 amounts include $302 million and $285 million, respectively, of retiree medical plan assets that are restricted for purposes of providing health benefits for U.S. retirees and their beneficiaries.

(b)

The equity securities portfolio was invested in U.S. and international common stock and commingled funds, and the preferred stock portfolio in the U.S. was invested in domestic and international corporate preferred stock investments. The common stock is based on quoted prices in active markets. The commingled funds are based on the published price of the fund and the U.S. commingled funds include one large-cap fund that represents 16% and 15% of total U.S. plan assets for 2019 and 2018, respectively. The preferred stock investments are based on quoted bid prices for comparable securities in the marketplace and broker/dealer quotes in active markets.

(c)	These investments are based on quoted bid prices for comparable securities in the marketplace and broker/dealer quotes in active markets. Corporate bonds of U.S.-based companies represent 28% of total U.S. plan assets for both 2019 and 2018.

(d)	Based on the fair value of the contracts as determined by the insurance companies using inputs that are not observable. The changes in Level 3 amounts were not significant in the years ended December 28, 2019 and December 29, 2018.

(e)	The real estate commingled funds include investments in limited partnerships. These funds are based on the net asset value of the appraised value of investments owned by these funds as determined by independent third parties using inputs that are not observable. The majority of the funds are redeemable quarterly subject to availability of cash and have notice periods ranging from 45 to 90 days.

(f)	Based on the published price of the fund.

Retiree Medical Cost Trend Rates

	2020			2019
Average increase assumed	6	%		6	%
Ultimate projected increase	5	%		5	%
Year of ultimate projected increase	2039			2039

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.

Savings Plan

Certain U.S. employees are eligible to participate in a 401(k) savings plan, which is a voluntary defined contribution plan. The plan is designed to help employees accumulate 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 2019, 2018 and 2017, our total Company contributions were $197 million, $180 million and $176 million, respectively.

Note 8 — Debt Obligations

The following table summarizes our debt obligations:

	2019**(a)**				2018(a)
Short-term debt obligations (b)
Current maturities of long-term debt	$	2,848			$	3,953
Other borrowings (6.4% and 6.0%)	72				73
	$	2,920			$	4,026
Long-term debt obligations (b)
Notes due 2019 (3.1%)	—				3,948
Notes due 2020 (2.7% and 3.9%)	2,840				3,784
Notes due 2021 (2.4% and 3.1%)	3,276				3,257
Notes due 2022 (2.7% and 2.8%)	3,831				3,802
Notes due 2023 (2.8% and 2.9%)	1,272				1,270
Notes due 2024 (3.4% and 3.2%)	1,839				1,816
Notes due 2025-2049 (3.4% and 3.7%)	18,910				14,345
Other, due 2019-2026 (1.3% and 1.3%)	28				26
	31,996				32,248
Less: current maturities of long-term debt obligations	(2,848		)		(3,953		)
Total	$	29,148			$	28,295

(a)	Amounts are shown net of unamortized net discounts of $163 million and $119 million for 2019 and 2018, respectively.

(b)	The interest rates presented reflect weighted-average effective interest rates at year-end. Certain of our fixed rate indebtedness have been swapped to floating rates through the use of interest rate derivative instruments. See Note 9 for further information regarding our interest rate derivative instruments.

As of December 28, 2019, our international debt of $69 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.

In 2019, we issued the following senior notes:

Interest Rate			Maturity Date		Amount**(a)**
0.750	%		March 2027		€	500		(b)
1.125	%		March 2031		€	500		(b)
2.625	%		July 2029		$	1,000
3.375	%		July 2049		$	1,000
0.875	%		October 2039		€	500		(b)
2.875	%		October 2049		$	1,000

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

(b)	These notes, issued in euros, were designated as net investment hedges to partially offset the effects of foreign currency on our investments in certain of our foreign subsidiaries.

The net proceeds from the issuances of the above notes were used for general corporate purposes, including the repayment of commercial paper, except for an amount equivalent to the net proceeds from our 2.875% senior notes due 2049 that will be used to fund, in whole or in part, eligible green projects in the categories of investments in sustainable plastics and packaging, decarbonizing our operations and supply chain and water sustainability, which promote our selected Sustainable Development Goals, as defined by the United Nations.

In 2019, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement) which expires on June 3, 2024. The Five-Year Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.75 billion in U.S. dollars and/or euros, including a $0.75 billion swing line subfacility for euro-denominated borrowings permitted to be borrowed on a same-day basis, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 billion (or the equivalent amount in euros). Additionally, we may, once a year, request renewal of the agreement for an additional one-year period.

In 2019, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement) which expires on June 1, 2020. The 364-Day Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.75 billion in U.S. dollars and/or euros, subject to customary terms and conditions. We may request that commitments under this agreement be increased up to $4.5 billion (or the equivalent amount in euros). 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 $3.75 billion five-year credit agreement and our $3.75 billion 364-day credit agreement, both dated as of June 4, 2018. 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 28, 2019, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement.

In 2019, we entered into two unsecured bridge loan facilities (Bridge Loan Facilities) which together enable one of our consolidated subsidiaries to borrow up to 25.0 billion South African rand, or approximately $1.8 billion, to provide potential funding for our acquisition of Pioneer Foods. Each facility is available from the date the conditions precedent are met for the acquisition up through July 30, 2020 in the case of one facility and July 31, 2020 in the case of the other facility. Borrowings under the facilities are for up to one year once drawn and can be prepaid at any time. Interest rates are reset either every one month or three months. As of December 28, 2019, there were no outstanding borrowings under the Bridge Loan Facilities.

In 2019, we paid $1.0 billion to redeem all $1.0 billion outstanding principal amount of our 4.50% senior notes due 2020.

In 2018, we completed a cash tender offer for certain notes issued by PepsiCo and predecessors to a PepsiCo subsidiary for $1.6 billion in cash to redeem the following amounts:

Interest Rate			Maturity Date		Amount Tendered
7.290	%		September 2026		$	11
7.440	%		September 2026		$	4
7.000	%		March 2029		$	357
5.500	%		May 2035		$	138
4.875	%		November 2040		$	410
5.500	%		January 2040		$	408

Also in 2018, we completed an exchange offer for certain notes issued by predecessors to a PepsiCo subsidiary for the following newly issued PepsiCo notes. These notes were issued in an aggregate principal amount equal to the exchanged notes:

Interest Rate			Maturity Date		Amount Exchanged
7.290	%		September 2026		$	88
7.440	%		September 2026		$	21
7.000	%		March 2029		$	516
5.500	%		May 2035		$	107

As a result of the above transactions, we recorded a pre-tax charge of $253 million ($191 million after-tax or $0.13 per share) to interest expense in 2018, primarily representing the tender price paid over the carrying value of the tendered notes.

Note 9 — Financial Instruments

Derivatives and Hedging

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

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

•	foreign exchange rates and currency restrictions; and

•	interest rates.

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

Our hedging strategies include the use of derivatives and, in the case of our net investment hedges, debt instruments. 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. The accounting for qualifying hedges allows changes in a hedging instrument’s fair value to offset corresponding changes in the hedged item in the same reporting period that the hedged item impacts earnings. Gains or losses on derivatives designated as cash flow hedges are recorded in accumulated other comprehensive loss and reclassified to our income statement when the hedged transaction affects earnings. If it becomes probable that the hedged transaction will not occur, we immediately recognize the related hedging gains or losses in earnings; such gains or losses reclassified during the year ended December 28, 2019 were not material.

Cash flows from derivatives used to manage commodity price, foreign exchange or interest rate risks are classified as operating activities in the cash flow statement. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item.

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.

Certain of our agreements with our counterparties require us to post full collateral on derivative instruments in a net liability position if our credit rating is at A2 (Moody’s Investors Service, Inc.) or A (S&P Global Ratings) and we have been placed on credit watch for possible downgrade or if our credit rating falls below these levels. The fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on December 28, 2019 was $415 million. We have posted no collateral under these contracts and no credit-risk-related contingent features were triggered as of December 28, 2019.

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 primarily 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 hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for energy, agricultural products and metals. 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 commodity derivatives had a total notional value of $1.1 billion as of December 28, 2019 and December 29, 2018.

Foreign Exchange

We are exposed to foreign exchange risks in the international markets in which our products are made, manufactured, distributed or sold. Additionally, we are exposed to foreign exchange risk from net investments in foreign subsidiaries, 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 on our income statement as incurred. We also use net investment hedges to partially offset the effects of foreign currency on our investments in certain of our foreign subsidiaries.

Our foreign currency derivatives had a total notional value of $1.9 billion as of December 28, 2019 and $2.0 billion as of December 29, 2018. The total notional amount of our debt instruments designated as net investment hedges was $2.5 billion as of December 28, 2019 and $0.9 billion as of December 29, 2018. For foreign currency derivatives that do not qualify for hedge accounting treatment, gains and losses were offset by changes in the underlying hedged items, resulting in no material net impact on earnings.

Interest Rates

We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. We use various interest rate derivative instruments including, but not limited to, interest rate swaps, cross-currency interest rate swaps, Treasury locks and swap locks to manage our overall interest expense and foreign exchange risk. These instruments effectively change the interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness have been swapped to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-currency interest rate swaps match the principal, interest payment and maturity date of the related debt. Our cross-currency interest rate swaps have terms of no more than twelve years. Our Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating to forecasted debt transactions.

Our interest rate derivatives had a total notional value of $5.0 billion as of December 28, 2019 and $10.5 billion as of December 29, 2018.

As of December 28, 2019, approximately 9% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to approximately 29% as of December 29, 2018.

Available-for-Sale Securities

Investments in debt securities 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 debt securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of available-for-sale debt 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 28, 2019 and December 29, 2018 were not material. Changes in the fair value of available-for-sale debt securities impact net income only when such securities are sold or an other-than-temporary impairment is recognized. We recorded no other-than-temporary impairment charges on our available-for-sale debt securities for the years ended December 28, 2019, December 29, 2018 and December 30, 2017.

In 2017, we recorded a pre-tax gain of $95 million ($85 million after-tax or $0.06 per share), net of discount and fees, associated with the sale of our minority stake in Britvic. The gain on the sale of this equity investment was recorded in our Europe segment in selling, general and administrative expenses.

Fair Value Measurements

The fair values of our financial assets and liabilities as of December 28, 2019 and December 29, 2018 are categorized as follows:

			2019								2018
	Fair Value Hierarchy Levels**(a)**		Assets**(a)**				Liabilities**(a)**				Assets(a)				Liabilities(a)
Available-for-sale debt securities (b)	2		$	—			$	—			$	3,658			$	—
Short-term investments (c)	1		$	229			$	—			$	196			$	—
Prepaid forward contracts (d)	2		$	17			$	—			$	22			$	—
Deferred compensation (e)	2		$	—			$	468			$	—			$	450
Derivatives designated as fair value hedging instruments:
Interest rate (f)	2		$	—			$	5			$	1			$	108
Derivatives designated as cash flow hedging instruments:
Foreign exchange (g)	2		$	5			$	32			$	44			$	14
Interest rate (g)	2		—				390				—				323
Commodity (h)	1		2				5				—				1
Commodity (i)	2		2				5				—				3
			$	9			$	432			$	44			$	341
Derivatives not designated as hedging instruments:
Foreign exchange (g)	2		$	3			$	2			$	3			$	10
Commodity (h)	1		23				7				2				17
Commodity (i)	2		6				24				5				92
			$	32			$	33			$	10			$	119
Total derivatives at fair value (j)			$	41			$	470			$	55			$	568
Total			$	287			$	938			$	3,931			$	1,018

(a)	Fair value hierarchy levels are defined in Note 7. Unless otherwise noted, financial assets are classified on our balance sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our balance sheet within accounts payable and other current liabilities and other liabilities.

(b)	Based on quoted broker prices or other significant inputs derived from or corroborated by observable market data. As of December 29, 2018, these debt securities were primarily classified as cash equivalents. The decrease in available-for-sale debt securities was due to maturities and sales during the current year.

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

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

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

(f)

Based on LIBOR forward rates. As of December 28, 2019 and December 29, 2018, the carrying amount of hedged fixed-rate debt was $2.2 billion and $7.7 billion, respectively, and classified on our balance sheet within short-term and long-term debt obligations. As of December 28, 2019, the cumulative amount of fair value hedging adjustments to hedged fixed-rate debt was $5 million. As of December 28, 2019, the cumulative amount of fair value hedging adjustments on discontinued hedges was a $49 million loss, which is being amortized over the remaining life of the related debt obligations.

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

(h)	Based on quoted contract prices on futures exchange markets.

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

(j)

Derivative assets and liabilities are presented on a gross basis on our balance sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the balance sheet as of December 28, 2019 and December 29, 2018 were not material. Collateral received or posted against our asset or liability positions is classified as restricted cash. See Note 15 for further information.

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 28, 2019 and

December 29, 2018 was $34 billion and $32 billion, respectively, based upon prices of similar instruments in the marketplace, which are considered Level 2 inputs.

Losses/(gains) on our hedging instruments are categorized as follows:

	Fair Value/Non- designated Hedges								Cash Flow and Net Investment 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)**
2019				2018				2019				2018				2019				2018
Foreign exchange	$	(1	)		$	9			$	57			$	(52	)		$	3			$	(8	)
Interest rate	(64		)		53				67				110				7				119
Commodity	(17		)		117				7				3				4				—
Net investment	—				—				(30		)		(77		)		—				—
Total	$	(82	)		$	179			$	101			$	(16	)		$	14			$	111

(a)

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

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

Based on current market conditions, we expect to reclassify net losses of $47 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.

Note 10 — Net Income Attributable to PepsiCo per Common Share

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

	2019							2018							2017
	Income				Shares**(a)**			Income				Shares(a)			Income				Shares(a)
Net income attributable to PepsiCo	$	7,314						$	12,515						$	4,857
Preferred stock:
Redemption premium (b)	—							(2		)					(4		)
Net income available for PepsiCo common shareholders	$	7,314			1,399			$	12,513			1,415			$	4,853			1,425
Basic net income attributable to PepsiCo per common share	$	5.23						$	8.84						$	3.40
Net income available for PepsiCo common shareholders	$	7,314			1,399			$	12,513			1,415			$	4,853			1,425
Dilutive securities:
Stock options, RSUs, PSUs, PEPunits and Other (c)	—				8			—				10			—				12
Employee stock ownership plan (ESOP) convertible preferred stock	—				—			2				—			4				1
Diluted	$	7,314			1,407			$	12,515			1,425			$	4,857			1,438
Diluted net income attributable to PepsiCo per common share	$	5.20						$	8.78						$	3.38

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

(b)	See Note 11 for further information.

(c)	The dilutive effect of these securities is calculated using the treasury stock method.

Out-of-the-money options excluded from the calculation of diluted earnings per common share are as follows:

	2019				2018				2017
Out-of-the-money options (a)	0.3				0.7				0.4
Average exercise price per option	$	117.55			$	109.83			$	110.12

(a)	In millions.

Note 11 — Preferred Stock

In connection with our merger with The Quaker Oats Company (Quaker) in 2001, shares of our convertible preferred stock were authorized and issued to an ESOP fund established by Quaker. Quaker made the final award to its ESOP in June 2001.

In 2018, all of the outstanding shares of our convertible preferred stock were converted into an aggregate of 550,102 shares of our common stock. As a result, there are no shares of our convertible preferred stock outstanding as of December 29, 2018 and our convertible preferred stock is retired for accounting purposes.

As of December 30, 2017, there were 3 million shares of convertible preferred stock authorized, 803,953 preferred shares issued and 114,753 shares outstanding. The outstanding preferred shares had a fair value of $68 million as of December 30, 2017.

Activities of our preferred stock are included in the equity statement.

Note 12 — Accumulated Other Comprehensive Loss Attributable to PepsiCo

The changes in the balances of each component of accumulated other comprehensive loss attributable to PepsiCo are as follows:

	Currency Translation Adjustment				Cash Flow Hedges				Pension and Retiree Medical				Available-For-Sale Securities				Other				Accumulated Other Comprehensive Loss Attributable to PepsiCo
Balance as of December 31, 2016 (a)	$	(11,386	)		$	83			$	(2,645	)		$	64			$	(35	)		$	(13,919	)
Other comprehensive (loss)/income before reclassifications (b)	1,049				130				(375		)		25				—				829
Amounts reclassified from accumulated other comprehensive loss	—				(171		)		158				(99		)		—				(112		)
Net other comprehensive (loss)/income	1,049				(41		)		(217		)		(74		)		—				717
Tax amounts	60				5				58				6				16				145
Balance as of December 30, 2017 (a)	(10,277		)		47				(2,804		)		(4		)		(19		)		(13,057		)
Other comprehensive (loss)/income before reclassifications (c)	(1,664		)		(61		)		(813		)		6				—				(2,532		)
Amounts reclassified from accumulated other comprehensive loss	44				111				218				—				—				373
Net other comprehensive (loss)/income	(1,620		)		50				(595		)		6				—				(2,159		)
Tax amounts	(21		)		(10		)		128				—				—				97
Balance as of December 29, 2018 (a)	(11,918		)		87				(3,271		)		2				(19		)		(15,119		)
Other comprehensive (loss)/income before reclassifications (d)	636				(131		)		(89		)		(2		)		—				414
Amounts reclassified from accumulated other comprehensive loss	—				14				468				—				—				482
Net other comprehensive (loss)/income	636				(117		)		379				(2		)		—				896
Tax amounts	(8		)		27				(96		)		—				—				(77		)
Balance as of December 28, 2019 (a)	$	(11,290	)		$	(3	)		$	(2,988	)		$	—			$	(19	)		$	(14,300	)

(a)	Pension and retiree medical amounts are net of taxes of $1,280 million as of December 31, 2016, $1,338 million as of December 30, 2017, $1,466 million as of December 29, 2018 and $1,370 million as of December 28, 2019.

(b)	Currency translation adjustment primarily reflects the appreciation of the euro, Russian ruble, Pound sterling and Canadian dollar.

(c)	Currency translation adjustment primarily reflects the depreciation of the Russian ruble, Canadian dollar, Pound sterling and Brazilian real.

(d)	Currency translation adjustment primarily reflects the appreciation of the Russian ruble, Canadian dollar, Mexican peso and Pound sterling.

The following table summarizes the reclassifications from accumulated other comprehensive loss to the income statement:

	Amount Reclassified from Accumulated Other Comprehensive Loss												Affected Line Item in the Income Statement
	2019				2018				2017
Currency translation:
Divestitures	$	—			$	44			$	—			Selling, general and administrative expenses
Cash flow hedges:
Foreign exchange contracts	$	1			$	(1	)		$	—			Net revenue
Foreign exchange contracts	2				(7		)		10				Cost of sales
Interest rate derivatives	7				119				(184		)		Interest expense
Commodity contracts	3				3				4				Cost of sales
Commodity contracts	1				(3		)		(1		)		Selling, general and administrative expenses
Net losses/(gains) before tax	14				111				(171		)
Tax amounts	(2		)		(27		)		64
Net losses/(gains) after tax	$	12			$	84			$	(107	)
Pension and retiree medical items:
Amortization of net prior service credit	$	(9	)		$	(17	)		$	(24	)		Other pension and retiree medical benefits (expense)/income
Amortization of net losses	169				216				167				Other pension and retiree medical benefits (expense)/income
Settlement/curtailment losses	308				19				15				Other pension and retiree medical benefits (expense)/income
Net losses before tax	468				218				158
Tax amounts	(102		)		(45		)		(44		)
Net losses after tax	$	366			$	173			$	114
Available-for-sale securities:
Sale of Britvic securities	$	—			$	—			$	(99	)		Selling, general and administrative expenses
Tax amount	—				—				10
Net gain after tax	$	—			$	—			$	(89	)
Total net losses/(gains) reclassified for the year, net of tax	$	378			$	301			$	(82	)

Note 13 — Leases

Lessee

We determine whether an arrangement is a lease at inception. We have operating leases for plants, warehouses, distribution centers, storage facilities, offices and other facilities, as well as machinery and equipment, including fleet. Our leases generally have remaining lease terms of up to 20 years, some of which include options to extend the lease term for up to five years, and some of which include options to terminate the lease within one year. We consider these options in determining the lease term used to establish our right-of-use

assets and lease liabilities. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

We have lease agreements that contain both lease and non-lease components. For real estate leases, we account for lease components together with non-lease components (e.g., common-area maintenance).

Components of lease cost are as follows:

	2019
Operating lease cost (a)	$	474
Variable lease cost (b)	$	101
Short-term lease cost (c)	$	379

(a)	Includes right-of-use asset amortization of $412 million.

(b)	Primarily related to adjustments for inflation, common-area maintenance and property tax.

(c)	Not recorded on our balance sheet.

In 2019, we recognized gains of $77 million on sale-leaseback transactions with terms under four years.

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

	2019
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	478
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations	$	479

Supplemental balance sheet information related to our operating leases is as follows:

		Balance Sheet Classification		2019
Right-of-use assets		Other assets		$	1,548
Current lease liabilities		Accounts payable and other current liabilities		$	442
Non-current lease liabilities		Other liabilities		$	1,118

Weighted-average remaining lease term and discount rate for our operating leases are as follows:

	2019
Weighted-average remaining lease term	6 years
Weighted-average discount rate	4	%

Maturities of lease liabilities by year for our operating leases are as follows:

2020	$	501
2021	374
2022	280
2023	183
2024	117
2025 and beyond	308
Total lease payments	1,763
Less: Imputed interest	(203		)
Present value of lease liabilities	$	1,560

As of December 29, 2018, minimum lease payments under non-cancelable operating leases by period were expected to be as follows:

2019	$	459
2020	406
2021	294
2022	210
2023	161
2024 and beyond	310
Total	$	1,840

A summary of rent expense for the years ended December 29, 2018 and December 30, 2017 is as follows:

	2018				2017
Rent expense	$	771			$	742

Lessor

We have various arrangements for certain foodservice and vending equipment under which we are the lessor. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.

Note 14 — Acquisitions and Divestitures

Acquisition of Pioneer Food Group Ltd.

On July 19, 2019, we entered into an agreement to acquire all of the outstanding shares of Pioneer Foods, a food and beverage company in South Africa with exports to countries across the globe, for 110.00 South African rand per share in cash, in a transaction valued at approximately $1.7 billion. Also in 2019, one of our consolidated subsidiaries entered into Bridge Loan Facilities to provide potential funding for our acquisition of Pioneer Foods. See Note 8 for further information.

The transaction is subject to certain regulatory approvals and other customary conditions and is expected to be recorded primarily in the AMESA segment. Closing is expected in the first half of 2020.

Acquisition of SodaStream International Ltd.

On December 5, 2018, we acquired all of the outstanding shares of SodaStream, a manufacturer and distributor of sparkling water makers, for $144.00 per share in cash, in a transaction valued at approximately $3.3 billion. The total consideration transferred was approximately $3.3 billion (or $3.2 billion, net of cash and cash equivalents acquired).

We accounted for the transaction as a business combination. We recognized and measured the identifiable assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. The purchase price allocation was finalized in the fourth quarter of 2019.

The following table summarizes the fair value of identifiable assets acquired and liabilities assumed in the acquisition of SodaStream and the resulting goodwill as of the acquisition date, all of which are recorded in the Europe segment.

Inventories	$	176
Property, plant and equipment	193
Amortizable intangible assets	284
Nonamortizable intangible asset (brand)	1,840
Other assets and liabilities	210
Net deferred income taxes	(303		)
Total identifiable net assets	$	2,400
Goodwill	943
Total purchase price	$	3,343

Goodwill is calculated as the excess of the aggregate of the fair value of the consideration transferred over the fair value of the net assets recognized. The goodwill recorded as part of the acquisition of SodaStream primarily reflects the value of expected synergies from our product portfolios and is not deductible for tax purposes.

Refranchising in Thailand

In 2018, we refranchised our beverage business in Thailand by selling a controlling interest in our Thailand bottling operations to form a joint venture, where we now have an equity method investment. We recorded a pre-tax gain of $144 million ($126 million after-tax or $0.09 per share) in selling, general and administrative expenses in our APAC segment as a result of this transaction.

Refranchising in Czech Republic, Hungary, and Slovakia

In 2018, we refranchised our entire beverage bottling operations and snack distribution operations in CHS. We recorded a pre-tax gain of $58 million ($46 million after-tax or $0.03 per share) in selling, general and administrative expenses in our Europe segment as a result of this transaction.

Refranchising in Jordan

In 2017, we refranchised our beverage business in Jordan by selling a controlling interest in our Jordan bottling operations to form a joint venture, where we now have an equity method investment. We recorded a pre-tax gain of $140 million ($107 million after-tax or $0.07 per share) in selling, general and administrative expenses in our AMESA segment as a result of this transaction.

Inventory Fair Value Adjustments and Merger and Integration Charges

In 2019, we recorded inventory fair value adjustments and merger and integration charges of $55 million ($47 million after-tax or $0.03 per share), including $46 million in our Europe segment, $7 million in our AMESA segment and $2 million in corporate unallocated expenses. These charges are primarily related to fair value adjustments to the acquired inventory included in SodaStream’s balance sheet at the acquisition date, recorded in cost of sales, as well as merger and integration charges, including employee-related costs, recorded in selling, general and administrative expenses.

In 2018, we recorded merger and integration charges of $75 million ($0.05 per share), including $57 million in our Europe segment and $18 million in corporate unallocated expenses, related to our acquisition of SodaStream, recorded in selling, general and administrative expenses. These charges include closing costs, advisory fees and employee-related costs.

Note 15 — Supplemental Financial Information

Balance Sheet

	2019				2018				2017
Accounts and notes receivable
Trade receivables	$	6,447			$	6,079
Other receivables	1,480				1,164
Total	7,927				7,243
Allowance, beginning of year	101				129				$	134
Net amounts charged to expense	22				16				26
Deductions (a)	(30		)		(33		)		(35		)
Other (b)	12				(11		)		4
Allowance, end of year	105				101				$	129
Net receivables	$	7,822			$	7,142
Inventories (c)
Raw materials and packaging	$	1,395			$	1,312
Work-in-process	200				178
Finished goods	1,743				1,638
Total	$	3,338			$	3,128
Other assets
Noncurrent notes and accounts receivable	$	85			$	86
Deferred marketplace spending	147				112
Pension plans (d)	846				269
Right-of-use assets (e)	1,548				—
Other	385				293
Total	$	3,011			$	760
Accounts payable and other current liabilities
Accounts payable	$	8,013			$	7,213
Accrued marketplace spending	2,765				2,541
Accrued compensation and benefits	1,835				1,755
Dividends payable	1,351				1,329
SodaStream consideration payable	58				1,997
Current lease liabilities (e)	442				—
Other current liabilities	3,077				3,277
Total	$	17,541			$	18,112

(a)	Includes accounts written off.

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

(c)	Approximately 7% and 5% of the inventory cost in 2019 and 2018, respectively, were computed using the LIFO method. The differences between LIFO and FIFO methods of valuing these inventories were not material.

(d)	See Note 7 for further information.

(e)	See Note 13 for further information.

Statement of Cash Flows

	2019				2018				2017
Interest paid (a)	$	1,076			$	1,388			$	1,123
Income taxes paid, net of refunds (b)	$	2,226			$	1,203			$	1,962

(a)	In 2018, excludes the premiums paid in accordance with the debt transactions discussed in Note 8.

(b)	In 2019 and 2018, includes tax payments of $423 million and $115 million, respectively, related to the TCJ Act.

The following table provides a reconciliation of cash and cash equivalents and restricted cash as reported within the balance sheet to the same items as reported in the cash flow statement.

	2019				2018
Cash and cash equivalents	$	5,509			$	8,721
Restricted cash (a)	—				1,997
Restricted cash included in other assets (b)	61				51
Total cash and cash equivalents and restricted cash	$	5,570			$	10,769

(a)	In 2018, primarily represents consideration held by our paying agent in connection with our acquisition of SodaStream.

(b)	Primarily relates to collateral posted against our derivative asset or liability positions.

Note 16 — Selected Quarterly Financial Data (unaudited)

Selected financial data for 2019 and 2018 is summarized as follows and highlights certain items that impacted our quarterly results:

	2019																2018
	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Net revenue	$	12,884			$	16,449			$	17,188			$	20,640			$	12,562			$	16,090			$	16,485			$	19,524
Gross profit	$	7,196			$	9,045			$	9,494			$	11,294			$	6,907			$	8,827			$	8,958			$	10,588
Operating profit	$	2,008			$	2,729			$	2,855			$	2,699			$	1,807			$	3,028			$	2,844			$	2,431
Mark-to-market net impact (a)	$	60			$	(6	)		$	(4	)		$	62			$	(31	)		$	3			$	(29	)		$	(106	)
Restructuring and impairment charges (b)	$	(26	)		$	(158	)		$	(98	)		$	(88	)		$	(12	)		$	(32	)		$	(35	)		$	(229	)
Inventory fair value adjustments and merger and integration charges (c)	$	(15	)		$	(24	)		$	(7	)		$	(9	)		—				—				—				$	(75	)
Pension-related settlement charges (d)	—				—				—				$	(273	)		—				—				—				—
Net tax related to the TCJ Act (e)	$	29			—				—				$	(21	)		$	(1	)		$	(777	)		$	(76	)		$	882
Gains on sale of assets (f)	—				$	32			—				$	45			$	18			$	9			$	37			$	12
Other net tax benefits (g)	—				—				—				—				—				$	314			$	364			$	4,386
Charges related to cash tender and exchange offers (h)	—				—				—				—				—				—				—				$	(253	)
Tax reform bonus (i)	—				—				—				—				$	(87	)		—				—				—
Gains on beverage refranchising (j)	—				—				—				—				—				$	144			—				$	58
Provision for/(benefit from) income taxes (e)(f)	$	446			$	524			$	559			$	430			$	304			$	1,070			$	188			$	(4,932	)
Net income attributable to PepsiCo	$	1,413			$	2,035			$	2,100			$	1,766			$	1,343			$	1,820			$	2,498			$	6,854
Net income attributable to PepsiCo per common share
Basic	$	1.01			$	1.45			$	1.50			$	1.27			$	0.94			$	1.28			$	1.77			$	4.86
Diluted	$	1.00			$	1.44			$	1.49			$	1.26			$	0.94			$	1.28			$	1.75			$	4.83
Cash dividends declared per common share	$	0.9275			$	0.955			$	0.955			$	0.955			$	0.805			$	0.9275			$	0.9275			$	0.9275

(a)	Mark-to-market net gains and losses on commodity derivatives in corporate unallocated expenses.

(b)	Expenses related to the 2019 and 2014 Productivity Plans. See Note 3 to our consolidated financial statements for further information.

(c)	In 2019, inventory fair value adjustments and merger and integration charges primarily related to our acquisition of SodaStream. In 2018, merger and integration charges related to our acquisition of SodaStream. See Note 14 to our consolidated financial statements for further information.

(d)	In 2019, pension settlement charges of $220 million related to the purchase of a group annuity contract and settlement charges of $53 million related to one-time lump sum payments to certain former employees who had vested benefits, recorded in other pension and retiree medical benefits expense/income. See Note 7 to our consolidated financial statements for further information.

(e)	Net tax related to the TCJ Act. See Note 5 to our consolidated financial statements for further information.

(f)	In 2019, gains associated with the sale of assets in the following segments: $31 million in FLNA and $46 million in PBNA. In 2018, gains associated with the sale of assets in the following segments: $64 million in PBNA and $12 million in AMESA.

(g)

In 2018, other net tax benefits of $4.3 billion resulting from the reorganization of our international operations, including the intercompany transfer of certain intangible assets. Also in 2018, non-cash tax benefits of $717 million associated with both the conclusion of certain international tax audits and our agreement with the IRS resolving all open matters related to the audits of taxable years 2012 and 2013. See Note 5 to our consolidated financial statements for further information.

(h)	In 2018, interest expense in connection with our cash tender and exchange offers, primarily representing the tender price paid over the carrying value of the tendered notes. See Note 8 to our consolidated financial statements for further information.

(i)	In 2018, bonus extended to certain U.S. employees related to the TCJ Act in the following segments: $44 million in FLNA, $2 million in QFNA and $41 million in PBNA.

(j)	In 2018, gains of $58 million and $144 million associated with refranchising our entire beverage bottling operations and snack distribution operations in CHS in the Europe segment and refranchising a portion of our beverage business in Thailand in the APAC segment, respectively. See Note 14 to our consolidated financial statements for further information.

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

PepsiCo, Inc.:

Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries (the Company) as of December 28, 2019 and December 29, 2018, 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 28, 2019 and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended December 28, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Basis for Opinions

The Company’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 Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.

Definition and Limitations of Internal Control over Financial Reporting

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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of certain sales incentive accruals

As discussed in Note 2 of the consolidated financial statements, the Company offers sales incentives and discounts through various programs to customers and consumers. A number of the sales incentives are based on annual targets, resulting in the need to accrue for the expected liability. These incentives are accrued for in the “Accounts payable and other current liabilities” line on the balance sheet. These accruals are based on sales incentive agreements, expectations regarding customer and consumer participation and performance levels, and historical experience and trends.

We identified the evaluation of certain of the Company’s sales incentive accruals as a critical audit matter. Subjective and complex auditor judgment is required in evaluating these sales incentive accruals as a result of the timing difference between when the product is delivered and when the incentive is settled. This specifically related to (1) forecasted customer and consumer participation and performance level assumptions underlying the accrual, and (2) the impact of historical experience and trends.

The primary procedures that we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s sales incentive process, including (1) the accrual methodology, (2) assumptions around forecasted customer and consumer participation, (3) performance levels, and (4) monitoring of actual sales incentives incurred compared to estimated sales incentives in respect of historical periods. To evaluate the timing and amount of certain accrued sales incentives we (1) analyzed the accrual by sales incentive type as compared to historical trends to identify specific sales incentives that may require additional testing, (2) recalculated expenses and closing accruals on a sample basis, based on volumes sold and terms of the sales incentives, (3) assessed the Company’s ability to accurately estimate its sales incentive accrual by comparing previously established accruals

to actual settlements, and (4) tested a sample of settlements or claims that occurred after period end, and compared them to the recorded sales incentive accrual.

Assessment of the carrying value of certain reacquired and acquired franchise rights and certain juice and dairy brands

As discussed in Notes 2 and 4 to the consolidated financial statements, the Company performs impairment testing of its indefinite-lived intangible assets on an annual basis during the third quarter of each fiscal year and whenever events and changes in circumstances indicate that there is a greater than 50% likelihood that the asset is impaired. The carrying value of indefinite-lived intangible assets as of December 28, 2019 was $30.1 billion which represents 38% of total assets, and includes PepsiCo Beverages North America’s (PBNA) reacquired and acquired franchise rights which had a carrying value of $8.6 billion as of December 28, 2019.

We identified the assessment of the carrying value of PBNA’s reacquired and acquired franchise rights and certain of Europe’s juice and dairy brands in Russia as a critical audit matter. Significant auditor judgment is necessary to assess the impact of competitive operating and macroeconomic factors on future levels of sales, operating profit and cash flows. The impairment analysis of these indefinite-lived intangible assets requires significant auditor judgment to evaluate the Company’s forecasted revenue and profitability levels, including the expected long-term growth rates and the selection of the discount rates to be applied to the projected cash flows.

The primary procedures that we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s indefinite-lived assets impairment process to develop the forecasted revenue, profitability levels, and expected long-term growth rates and select the discount rates to be applied to the projected cash flows. We also evaluated the sensitivity of the Company’s conclusion to changes in assumptions, including the assessment of changes in assumptions from prior periods. To assess the Company’s ability to accurately forecast, we compared the Company’s historical forecasted results to actual results. We compared the cash flow projections used in the impairment tests with available external industry data and other internal information. We involved valuation professionals with specialized skills and knowledge who assisted in evaluating (1) the long-term growth rates used in the impairment tests by comparing against economic data and information specific to the respective assets, including projected long-term nominal Gross Domestic Product growth in the respective local countries, and (2) the discount rates used in the impairment tests by comparing them against discount rates that were independently developed using publicly available market data, including that of comparable companies.

Evaluation of unrecognized tax benefits

As discussed in Note 5 to the consolidated financial statements, the Company’s global operating model gives rise to income tax obligations in the United States and in certain foreign jurisdictions in which it operates. As of December 28, 2019, the Company recorded reserves for unrecognized tax benefits of $1.4 billion. The Company establishes reserves if it believes that certain positions taken in its tax returns are subject to challenge and the Company likely will not succeed, even though the Company believes the tax return position is supportable under the tax law. The Company adjusts these reserves, as well as the related interest, in light of new information, such as the progress of a tax examination, or new tax law or tax authority settlements.

We identified the evaluation of the Company’s unrecognized tax benefits as a critical audit matter because the application of tax law and interpretation of a tax authority’s settlement history is complex and involves subjective judgment. Such judgments impact both the timing and amount of the reserves that are recognized, including judgments about re-measuring liabilities for positions taken in prior years’ tax returns in light of new information.

The primary procedures that we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s unrecognized tax benefits process, including controls to (1) identify uncertain income tax positions, (2) evaluate the tax law and tax authority’s settlement history used to estimate the unrecognized tax benefits, and (3) monitor for new information that may give rise to changes to the existing unrecognized tax benefits, such as progress of a tax examination, new tax law or tax authority settlements. We involved tax and valuation professionals with specialized skills and knowledge, who assisted in assessing the unrecognized tax benefits by (1) evaluating the Company’s tax structure and transactions, including transfer pricing arrangements, and (2) assessing the Company’s interpretation of existing tax law as well as new and amended tax laws, tax positions taken, and associated external counsel opinions.

/s/ KPMG LLP

We have served as the Company’s auditor since 1990.

New York, New York

February 13, 2020

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.

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.

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 impact: 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, foreign exchange translation and, when applicable, the impact of the 53rd reporting week. 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 further information. Starting in 2018, our reported results reflect the accounting policy election taken in conjunction with the adoption of the revenue recognition guidance to exclude from net revenue and cost of sales all sales, use, value-added and certain excise taxes assessed by governmental authorities on revenue-producing transactions not already excluded. Our 2018 organic revenue growth excludes the impact of these taxes previously recognized in net revenue.

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.