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 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 intangible assets, 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. Additionally, the business and economic uncertainty resulting from the Russia-Ukraine conflict and the high interest rate and inflationary cost environment has made such estimates and assumptions more difficult to calculate. As future events and their effect cannot be determined with precision, actual results could differ significantly from those estimates.
Our fiscal year ends on the last Saturday of each December, resulting in a 53rd reporting week every five or six years, including in our 2022 financial results. While our North America financial results are reported on a weekly calendar basis, substantially all of our international operations reported on a monthly calendar basis prior to the fourth quarter of 2021. Beginning in the fourth quarter of 2021, all of our international operations reported on a monthly calendar basis. This change did not have a material impact on our consolidated financial statements. The following chart details our quarterly reporting schedule for 2022, reflecting the additional week in the fourth quarter:
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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 | | 17 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 year’s consolidated financial statements to conform to the current year presentation.
Our Divisions
We are organized into seven reportable segments (also referred to as divisions), as follows:
1)Frito-Lay North America (FLNA), which includes our branded convenient food businesses in the United States and Canada;
2)Quaker Foods North America (QFNA), which includes our branded convenient food businesses, such as cereal, rice, pasta and other branded food, in the United States and Canada;
3)PepsiCo Beverages North America (PBNA), which includes our beverage businesses in the United States and Canada;
4)Latin America (LatAm), which includes all of our beverage and convenient food businesses in Latin America;
5)Europe, which includes all of our beverage and convenient food businesses in Europe;
6)Africa, Middle East and South Asia (AMESA), which includes all of our beverage and convenient food businesses in Africa, the Middle East and South Asia; and
7)Asia Pacific, Australia, and New Zealand and China region (APAC), which includes all of our beverage and convenient food 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 beverages and convenient foods, serving customers and consumers in more than 200 countries and territories with our largest operations in the United States, Mexico, Russia, Canada, China, the United Kingdom and South Africa.
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:
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| 2022 | | 2021 | | 2020 |
FLNA | 13 | % | | 13 | % | | 13 | % |
QFNA | 1 | % | | 1 | % | | 1 | % |
PBNA | 20 | % | | 19 | % | | 18 | % |
LatAm | 6 | % | | 5 | % | | 6 | % |
Europe | 11 | % | | 13 | % | | 16 | % |
AMESA | 5 | % | | 6 | % | | 6 | % |
APAC | 3 | % | | 2 | % | | 2 | % |
Corporate unallocated expenses | 41 | % | | 41 | % | | 38 | % |
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 agricultural products, energy and metals. Commodity derivatives that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore, the divisions realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in corporate unallocated expenses. These derivatives hedge underlying commodity price risk and were not entered into for trading or speculative purposes.
Net Revenue and Operating Profit/(Loss)
Net revenue and operating profit/(loss) of each division are as follows:
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| Net Revenue | | Operating Profit/(Loss) |
| 2022 | | 2021 | | 2020 | | 2022(a) | | 2021 | | 2020 |
FLNA | $ | 23,291 | | | $ | 19,608 | | | $ | 18,189 | | | $ | 6,135 | | | $ | 5,633 | | | $ | 5,340 | |
QFNA | 3,160 | | | 2,751 | | | 2,742 | | | 604 | | | 578 | | | 669 | |
PBNA (b) | 26,213 | | | 25,276 | | | 22,559 | | | 5,426 | | | 2,442 | | | 1,937 | |
LatAm | 9,779 | | | 8,108 | | | 6,942 | | | 1,627 | | | 1,369 | | | 1,033 | |
Europe (b) | 12,724 | | | 13,038 | | | 11,922 | | | (1,380) | | | 1,292 | | | 1,353 | |
AMESA (c) | 6,438 | | | 6,078 | | | 4,573 | | | 666 | | | 858 | | | 600 | |
APAC (c) | 4,787 | | | 4,615 | | | 3,445 | | | 537 | | | 673 | | | 590 | |
Total division | 86,392 | | | 79,474 | | | 70,372 | | | 13,615 | | | 12,845 | | | 11,522 | |
Corporate unallocated expenses | — | | | — | | | — | | | (2,103) | | | (1,683) | | | (1,442) | |
Total | $ | 86,392 | | | $ | 79,474 | | | $ | 70,372 | | | $ | 11,512 | | | $ | 11,162 | | | $ | 10,080 | |
(a)See below for impairment and other charges taken related to the Russia-Ukraine conflict, brand portfolio impairment and other impairment.
(b)In 2022, we recorded a gain of $3,029 million and $292 million in our PBNA and Europe divisions, respectively, associated with the Juice Transaction. The total after-tax amount was $2,888 million or $2.08 per share. See Note 13 for further information.
(c)In 2021, the increase in net revenue in our AMESA and APAC divisions reflect our acquisitions of Pioneer Foods and Be & Cheery, respectively. See Note 13 for further information.
Disaggregation of Net Revenue
Our primary performance obligation is the distribution and sales of beverage and convenient food products to our customers. The following table reflects the approximate percentage of net revenue generated between our beverage business and our convenient food business for each of our international divisions, as well as our consolidated net revenue:
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| 2022 | | 2021 | | 2020 |
| Beverages(a) | | Convenient Foods | | Beverages(a) | | Convenient Foods | | Beverages(a) | | Convenient Foods |
LatAm | 10 | % | | 90 | % | | 10 | % | | 90 | % | | 10 | % | | 90 | % |
Europe | 50 | % | | 50 | % | | 55 | % | | 45 | % | | 55 | % | | 45 | % |
AMESA | 30 | % | | 70 | % | | 30 | % | | 70 | % | | 30 | % | | 70 | % |
APAC | 25 | % | | 75 | % | | 20 | % | | 80 | % | | 25 | % | | 75 | % |
PepsiCo | 40 | % | | 60 | % | | 45 | % | | 55 | % | | 45 | % | | 55 | % |
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(a)Beverage revenue from company-owned bottlers, which primarily includes our consolidated bottling operations in our PBNA and Europe divisions, is approximately 35% of our consolidated net revenue in 2022 and approximately 40% of our consolidated net revenue in 2021 and 2020. 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
Impairment and Other Charges
We recognized Russia-Ukraine conflict charges, brand portfolio impairment charges and other impairment charges as described below.
A summary of pre-tax charges taken in 2022 in our Europe division as a result of the Russia-Ukraine conflict is as follows:
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| Russia-Ukraine conflict charges |
| Cost of sales | | Selling, general and administrative expenses | | Impairment of intangible assets(a) | | Total |
Impairment charges related to intangible assets | $ | — | | | $ | — | | | $ | 1,198 | | | $ | 1,198 | |
Impairment charges related to property, plant and equipment | 103 | | | 22 | | | — | | | 125 | |
Allowance for expected credit losses | — | | | 12 | | | — | | | 12 | |
Allowance for inventory write downs | 28 | | | 1 | | | — | | | 29 | |
Other | 9 | | | 42 | | | — | | | 51 | |
Total | $ | 140 | | | $ | 77 | | | $ | 1,198 | | | $ | 1,415 | |
After-tax amount | | | | | | | $ | 1,124 | |
Impact on net income attributable to PepsiCo per common share | | | | | | | $ | (0.81) | |
(a)See Note 4 for further information. For information on our policies for indefinite-lived intangible assets, see Note 2.
A summary of pre-tax charges taken in 2022 as a result of our decision to reposition or discontinue the sale/distribution of certain brands and to sell an investment is as follows:
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| Brand portfolio impairment charges |
| Cost of sales | | Selling, general and administrative expenses | | Impairment of intangible assets(a) | | Total | |
PBNA | $ | 26 | | | $ | 8 | | | $ | 126 | | | $ | 160 | | Impairment and other charges associated with distribution rights and inventory due to the termination of Bang energy drinks distribution agreement |
LatAm | — | | | 35 | | | 36 | | | 71 | | Loss on sale and impairment of intangible assets related to the sale of certain non-strategic brands |
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Europe | 1 | | | 10 | | | 242 | | | 253 | | Primarily impairment of intangible assets related to the discontinuation or repositioning of certain juice and dairy brands in Russia |
AMESA | 29 | | | 121 | | | 9 | | | 159 | | Primarily impairment of investment, property, plant and equipment and intangible assets related to the sale or discontinuation of non-strategic investment and brands |
APAC | 5 | | | — | | | — | | | 5 | | Impairment of property, plant and equipment related to the discontinuation of a non-strategic brand in China |
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Total | $ | 61 | | | $ | 174 | | | $ | 413 | | | $ | 648 | | |
After-tax amount | | | | | | | $ | 522 | | |
Impact on net income attributable to PepsiCo per common share | | | | | | | $ | (0.38) | | |
(a)See Note 4 for further information. For information on our policies for indefinite-lived intangible assets, see Note 2.
A summary of pre-tax impairment charges taken in 2022 as a result of our quantitative assessments of certain of our indefinite-lived intangible assets is as follows:
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| | | | | Other impairment charges |
| | | | | Impairment of intangible assets(a) | | | | |
FLNA | | | | | $ | 88 | | | | | Related to a baked fruit convenient food brand |
Europe | | | | | 1,264 | | | | | Related to the SodaStream brand |
AMESA | | | | | 31 | | | | | Primarily related to certain juice brands from the Pioneer Foods acquisition |
APAC | | | | | 172 | | | | | Related to the Be & Cheery brand |
Total | | | | | $ | 1,555 | | | | | |
After-tax amount | | | | | $ | 1,301 | | | | | |
Impact on net income attributable to PepsiCo per common share | | | | | $ | (0.94) | | | | | |
(a)See Note 4 for further information. For information on our policies for indefinite-lived intangible assets, see Note 2.
COVID-19 Charges
Operating profit includes certain pre-tax charges taken as a result of the COVID-19 pandemic related to incremental employee compensation costs, such as certain leave benefits and labor costs, employee protection costs, allowances for expected credit losses and upfront payments to customers and their related adjustments for changes in estimates as conditions improve, inventory write-downs, product returns and other expenses. These pre-tax charges by division are as follows:
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| COVID-19 charges |
| 2022 | | 2021 | | 2020 |
FLNA | $ | 25 | | | $ | 56 | | | $ | 229 | |
QFNA | 1 | | | 2 | | | 15 | |
PBNA (a) | 23 | | | (11) | | | 304 | |
LatAm | 15 | | | 64 | | | 102 | |
Europe | 5 | | | 21 | | | 88 | |
AMESA | 5 | | | 7 | | | 33 | |
APAC | 21 | | | 9 | | | 3 | |
| | | | | |
Total | $ | 95 | | | $ | 148 | | | $ | 774 | |
(a)Income amount primarily relates to adjustments for changes in estimates of allowances for expected credit losses and upfront payments to customers, due to improved projected default rates and lower at-risk balances.
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, tax-related contingent consideration, certain acquisition and divestiture-related charges, certain gains and losses on equity investments, as well as certain other items.
Other Division Information
Total assets and capital spending of each division are as follows:
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| Total Assets | | Capital Spending |
| 2022 | | 2021 | | 2022 | | 2021 | | 2020 |
FLNA | $ | 11,042 | | | $ | 9,763 | | | $ | 1,464 | | | $ | 1,411 | | | $ | 1,189 | |
QFNA | 1,245 | | | 1,101 | | | 93 | | | 92 | | | 85 | |
PBNA | 40,286 | | | 37,801 | | | 1,714 | | | 1,275 | | | 1,245 | |
LatAm | 7,886 | | | 7,272 | | | 581 | | | 461 | | | 390 | |
Europe | 16,230 | | | 18,472 | | | 668 | | | 752 | | | 730 | |
AMESA | 6,143 | | | 6,125 | | | 307 | | | 325 | | | 252 | |
APAC | 5,452 | | | 5,654 | | | 241 | | | 203 | | | 230 | |
Total division | 88,284 | | | 86,188 | | | 5,068 | | | 4,519 | | | 4,121 | |
Corporate (a) | 3,903 | | | 6,189 | | | 139 | | | 106 | | | 119 | |
Total | $ | 92,187 | | | $ | 92,377 | | | $ | 5,207 | | | $ | 4,625 | | | $ | 4,240 | |
(a)Corporate assets consist principally of certain cash and cash equivalents, restricted cash, short-term investments, derivative instruments, property, plant and equipment, pension plan assets and tax assets. In 2022, the change in assets was primarily due to a decrease in cash and cash equivalents.
Amortization of intangible assets and depreciation and other amortization of each division are as follows:
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| Amortization of Intangible Assets | | Depreciation and Other Amortization |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
FLNA | $ | 11 | | | $ | 11 | | | $ | 10 | | | $ | 653 | | | $ | 594 | | | $ | 550 | |
QFNA | — | | | — | | | — | | | 47 | | | 46 | | | 41 | |
PBNA | 22 | | | 25 | | | 28 | | | 930 | | | 926 | | | 899 | |
LatAm | 3 | | | 4 | | | 4 | | | 306 | | | 283 | | | 251 | |
Europe | 30 | | | 37 | | | 40 | | | 357 | | | 364 | | | 350 | |
AMESA | 4 | | | 5 | | | 3 | | | 179 | | | 181 | | | 149 | |
APAC | 8 | | | 9 | | | 5 | | | 92 | | | 102 | | | 91 | |
Total division | 78 | | | 91 | | | 90 | | | 2,564 | | | 2,496 | | | 2,331 | |
Corporate | — | | | — | | | — | | | 121 | | | 123 | | | 127 | |
Total | $ | 78 | | | $ | 91 | | | $ | 90 | | | $ | 2,685 | | | $ | 2,619 | | | $ | 2,458 | |
Net revenue and long-lived assets by country are as follows:
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| Net Revenue | | Long-Lived Assets(a) |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
United States | $ | 49,390 | | | $ | 44,545 | | | $ | 40,800 | | | $ | 38,240 | | | $ | 36,324 | |
Mexico | 5,472 | | | 4,580 | | | 3,924 | | | 1,933 | | | 1,720 | |
Russia | 4,118 | | | 3,426 | | | 3,009 | | | 2,538 | | | 3,751 | |
Canada | 3,536 | | | 3,405 | | | 2,989 | | | 2,678 | | | 2,846 | |
China (b) | 2,752 | | | 2,679 | | | 1,732 | | | 1,517 | | | 1,745 | |
United Kingdom | 1,844 | | | 2,102 | | | 1,882 | | | 847 | | | 906 | |
South Africa (c) | 1,837 | | | 2,008 | | | 1,282 | | | 1,327 | | | 1,389 | |
All other countries | 17,443 | | | 16,729 | | | 14,754 | | | 12,885 | | | 13,399 | |
Total | $ | 86,392 | | | $ | 79,474 | | | $ | 70,372 | | | $ | 61,965 | | | $ | 62,080 | |
(a)Long-lived assets represent property, plant and equipment, indefinite-lived intangible assets, amortizable intangible assets, investments in noncontrolled affiliates and other investments included in other assets. See Notes 2 and 14 for further information on property, plant and equipment. See Notes 2 and 4 for further information on goodwill and other intangible assets. See Note 14 for further information on other assets. Investments in noncontrolled affiliates are evaluated for impairment upon a significant change in the operating or macroeconomic environment. These assets are reported in the country where they are primarily used.
(b)In 2021, the increase in net revenue reflects our acquisition of Be & Cheery. See Note 13 for further information.
(c)In 2021, the increase in net revenue reflects our acquisition of Pioneer Foods. See Note 13 for further information.
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 and convenient food 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. In addition, we exclude from net revenue all sales, use, value-added and certain excise taxes assessed by government authorities on revenue producing transactions.
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, including 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 expected credit loss exposure based on our experience with past due accounts and collectibility, write-off history, the aging of accounts receivable, our analysis of customer data, and forward-looking information (including the expected impact of a high interest rate and inflationary cost environment), leveraging estimates of creditworthiness and projections of default and recovery rates for certain of our customers.
We are exposed to concentration of credit risk from our major customers, including Walmart. We have not experienced credit issues with these customers. In 2022, sales to Walmart and its affiliates (including Sam’s) represented approximately 14% of our consolidated net revenue, including concentrate sales to our independent bottlers, which were used in finished goods sold by them to Walmart.
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 one 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 $242 million as of December 31, 2022 and $262 million as of December 25, 2021 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 $5.2 billion in 2022, $5.1 billion in 2021 and $4.6 billion in 2020, including advertising expenses of $3.5 billion in both 2022 and 2021, and $3.0 billion in 2020. Deferred advertising costs are not expensed until the year first used and consist of:
•media and personal service prepayments;
•promotional materials in inventory; and
•production costs of future media advertising.
Deferred advertising costs of $40 million and $53 million as of December 31, 2022 and December 25, 2021, 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 $15.0 billion in 2022, $13.7 billion in 2021 and $11.9 billion in 2020.
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 $123 million in 2022, $135 million in 2021 and $152 million in 2020. Net capitalized software and development costs were $1.1 billion and $0.8 billion as of December 31, 2022 and December 25, 2021, 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 $771 million, $752 million and $719 million in 2022, 2021 and 2020, 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 conditions (including those related to the Russia-Ukraine conflict and a high interest rate and inflationary cost environment), 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 (including those related to the Russia-Ukraine conflict and a high interest rate and inflationary cost environment) 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.
•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 14. 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.
•Property, Plant and Equipment – Note 14. Property, plant and equipment is recorded at historical cost. Depreciation is recognized on a straight-line basis over an asset’s estimated useful life. Construction in progress is not depreciated until ready for service.
•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 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 - Not Yet Adopted
In September 2022, the Financial Accounting Standards Board (FASB) issued guidance to enhance the transparency of supplier finance programs to allow financial statement users to understand the effect on working capital, liquidity and cash flows. The new guidance requires disclosure of key terms of the program, including a description of the payment terms, payment timing and assets pledged as security or other forms of guarantees provided to the finance provider or intermediary. Other requirements include the disclosure of the amount that remains unpaid as of the end of the reporting period, a description of where these obligations are presented in the balance sheet and a rollforward of the obligation during the annual period. The guidance is effective in the first quarter of 2023, except for the rollforward, which is effective in 2024. Early adoption is permitted. We will adopt the guidance when effective.
Note 3 — Restructuring and Impairment Charges
2019 Multi-Year Productivity Plan
We publicly announced a multi-year productivity plan on February 15, 2019 (2019 Productivity Plan) that 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. To build on the successful implementation of the 2019 Productivity Plan, in the fourth quarter of 2022, we expanded and extended the plan through the end of 2028 to take advantage of additional opportunities within the initiatives described above. As a result, we expect to incur pre-tax charges of approximately $3.65 billion, including cash expenditures of approximately $2.9 billion. These pre-tax charges are expected to consist of approximately 55% of severance and other employee-related costs, 10% for asset impairments (all non-cash) resulting from plant closures and related actions and 35% for other costs associated with the implementation of our initiatives.
The total 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 | 15 | % | | 1 | % | | 25 | % | | 10 | % | | 25 | % | | 5 | % | | 4 | % | | 15 | % |
A summary of our 2019 Productivity Plan charges is as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Cost of sales | $ | 33 | | | $ | 29 | | | $ | 30 | |
Selling, general and administrative expenses | 347 | | | 208 | | | 239 | |
Other pension and retiree medical benefits expense | 31 | | | 10 | | | 20 | |
Total restructuring and impairment charges | $ | 411 | | | $ | 247 | | | $ | 289 | |
After-tax amount | $ | 334 | | | $ | 206 | | | $ | 231 | |
Impact on net income attributable to PepsiCo per common share | $ | (0.24) | | | $ | (0.15) | | | $ | (0.17) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 | | Plan to Date through 12/31/2022 |
FLNA | $ | 46 | | | $ | 28 | | | $ | 83 | | | $ | 210 | |
QFNA | 7 | | | — | | | 5 | | | 19 | |
PBNA | 68 | | | 20 | | | 47 | | | 226 | |
LatAm | 32 | | | 37 | | | 31 | | | 171 | |
Europe | 109 | | | 81 | | | 48 | | | 343 | |
AMESA | 12 | | | 15 | | | 14 | | | 82 | |
APAC | 16 | | | 7 | | | 5 | | | 77 | |
Corporate | 90 | | | 49 | | | 36 | | | 229 | |
| 380 | | | 237 | | | 269 | | | 1,357 | |
Other pension and retiree medical benefits income | 31 | | | 10 | | | 20 | | | 98 | |
Total | $ | 411 | | | $ | 247 | | | $ | 289 | | | $ | 1,455 | |
| | | | | | | | | |
| | | | | Plan to Date through 12/31/2022 |
Severance and other employee costs | | | | | $ | 807 | |
Asset impairments | | | | | 190 | |
Other costs | | | | | 458 | |
Total | | | | | $ | 1,455 | |
Severance and other employee costs primarily include severance and other termination benefits, as well as voluntary separation arrangements. Other costs primarily include costs associated with the implementation of our initiatives, including contract termination costs, consulting and other professional fees.
A summary of our 2019 Productivity Plan is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Severance and Other Employee Costs | | Asset Impairments | | Other Costs | | Total |
| | | | | | | |
| | | | | | | |
Liability as of December 28, 2019 | $ | 128 | | | $ | — | | | $ | 21 | | | $ | 149 | |
2020 restructuring charges | 158 | | | 33 | | | 98 | | | 289 | |
Cash payments (a) | (138) | | | — | | | (117) | | | (255) | |
Non-cash charges and translation | (26) | | | (33) | | | 3 | | | (56) | |
Liability as of December 26, 2020 | 122 | | | — | | | 5 | | | 127 | |
2021 restructuring charges | 120 | | | 32 | | | 95 | | | 247 | |
Cash payments (a) | (163) | | | — | | | (93) | | | (256) | |
Non-cash charges and translation | (15) | | | (32) | | | — | | | (47) | |
Liability as of December 25, 2021 | 64 | | | — | | | 7 | | | 71 | |
2022 restructuring charges | 243 | | | 33 | | | 135 | | | 411 | |
Cash payments (a) | (90) | | | — | | | (134) | | | (224) | |
Non-cash charges and translation | (29) | | | (33) | | | — | | | (62) | |
Liability as of December 31, 2022 | $ | 188 | | | $ | — | | | $ | 8 | | | $ | 196 | |
(a)Excludes cash expenditures of $1 million in 2022 and $2 million in both 2021 and 2020, reported in the cash flow statement in pension and retiree medical plan contributions.
Substantially all of the restructuring accrual at December 31, 2022 is expected to be paid by the end of 2023.
Other Productivity Initiatives
There were no material charges related to other productivity and efficiency initiatives outside the scope of the 2019 Productivity Plan.
We regularly evaluate different productivity initiatives beyond the productivity plan and other initiatives described above.
For information on additional impairment charges, see Notes 1 and 4 for brand portfolio impairment charges, other impairment charges and Russia-Ukraine conflict charges.
Note 4 — Intangible Assets
A summary of our amortizable intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | 2020 |
| Average Useful Life (Years) | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net | | |
Acquired franchise rights (a) | 56 – 60 | | $ | 837 | | | $ | (200) | | | $ | 637 | | | $ | 976 | | | $ | (187) | | | $ | 789 | | | |
Customer relationships | 10 – 24 | | 571 | | | (237) | | | 334 | | | 623 | | | (227) | | | 396 | | | |
Brands | 20 – 40 | | 1,097 | | | (973) | | | 124 | | | 1,151 | | | (989) | | | 162 | | | |
Other identifiable intangibles | 10 – 24 | | 447 | | | (265) | | | 182 | | | 451 | | | (260) | | | 191 | | | |
Total | | | $ | 2,952 | | | $ | (1,675) | | | $ | 1,277 | | | $ | 3,201 | | | $ | (1,663) | | | $ | 1,538 | | | |
Amortization expense | | | | | | | $ | 78 | | | | | | | $ | 91 | | | $ | 90 | |
(a)Decrease is primarily due to the write-off of our distribution rights for Bang energy drinks. See Note 1 for further information.
Amortization is recognized on a straight-line basis over an intangible asset’s estimated useful life. Amortization of intangible assets for each of the next five years, based on existing intangible assets as of December 31, 2022 and using average 2022 foreign exchange rates, is expected to be as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
Five-year projected amortization | $ | 77 | | | $ | 76 | | | $ | 74 | | | $ | 67 | | | $ | 64 | |
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
In the first quarter of 2022, we discontinued or repositioned certain juice and dairy brands in Russia in our Europe division. As a result, we recognized pre-tax impairment charges (included in brand portfolio impairment charges) of $241 million ($193 million after-tax or $0.14 per share) in impairment of intangible assets, primarily related to indefinite-lived intangible assets in the year ended December 31, 2022. See Note 1 for further information.
In the second quarter of 2022, macroeconomic factors, sanctions and other regulations as a result of the Russia-Ukraine conflict indicated a material deterioration of the significant inputs used to determine the fair value of our indefinite-lived intangible assets in Russia, primarily assumptions underlying the weighted-average cost of capital. These factors required us to perform a quantitative assessment, despite the absence of a material adverse impact on these assets’ financial performance (e.g., sales, operating profit, cash flows). The fair value of our indefinite-lived intangible assets in Russia was estimated using discounted cash flows under the income approach, which we consider to be a Level 3 measurement. We determined that the carrying value exceeds the fair value, with the decrease in the fair value primarily attributable to a significant increase in the weighted-average cost of capital, which reflects the macroeconomic uncertainty in Russia. As a result of the quantitative assessment, we recorded pre-tax impairment charges of $1.2 billion ($958 million after-tax or $0.69 per share) in impairment of intangible assets, related to our juice and dairy brands in Russia in our Europe division, in the year ended December 31, 2022. See Note 1 for further information.
As discussed in Note 2, we perform our annual impairment assessment on indefinite-lived intangible assets during our third quarter. The annual impairment assessment on indefinite-lived intangible assets performed in the third quarter of 2022, based on best available market information and our internal forecasts and operating plans at the time, resulted in no impairment.
In the fourth quarter of 2022, macroeconomic conditions including a high interest rate and inflationary cost environment, coupled with recent business performance, indicated a deterioration of the significant inputs used to determine the fair value of our indefinite-lived intangible assets in various markets, primarily assumptions underlying the weighted-average cost of capital and the impact of economic uncertainty on current and future financial performance, and required us to perform a quantitative assessment on certain assets. The fair value of our indefinite-lived intangible assets was estimated using discounted cash flows under the income approach, which we consider to be a Level 3 measurement. We determined that the carrying value exceeded the fair value, which reflects the increase in the weighted-average cost of capital as well as our most current estimates of future sales and their contributions to operating profit and expected future cash flows (including perpetuity growth assumptions). As a result of the quantitative assessment, we recorded pre-tax impairment charges of $1.6 billion ($1.3 billion after-tax or $0.94 per share) in impairment of intangible assets, primarily related to the SodaStream brand in our Europe division, in the year ended December 31, 2022. See Note 1 for further information.
As of December 31, 2022, 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, as well as further impairment to the carrying value of the SodaStream brand and goodwill, if future sales and their contributions to operating profit do not achieve our expected future cash flows (including perpetuity growth assumptions) or if macroeconomic conditions result in a future increase in the weighted-average cost of capital used to estimate fair value.
We did not recognize any impairment charges for goodwill in each of the years ended December 31, 2022, December 25, 2021 and December 26, 2020. We did not recognize any impairment charges for indefinite-lived intangible assets in the year ended December 25, 2021. In 2020, we recognized pre-tax impairment charges of $42 million, primarily related to a coconut water brand in PBNA.
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 2021 | | Acquisitions/(Divestitures) | | Translation and Other | | Balance, End of 2021 | | Acquisitions/(Divestitures) | | Impairment | | Translation and Other | | Balance, End of 2022 |
FLNA (a) | | | | | | | | | | | | | | | |
Goodwill | $ | 465 | | | $ | (8) | | | $ | 1 | | | $ | 458 | | | $ | — | | | $ | — | | | $ | (7) | | | $ | 451 | |
Brands | 340 | | | — | | | — | | | 340 | | | — | | | (88) | | | (1) | | | 251 | |
Total | 805 | | | (8) | | | 1 | | | 798 | | | — | | | (88) | | | (8) | | | 702 | |
QFNA | | | | | | | | | | | | | | | |
Goodwill | 189 | | | — | | | — | | | 189 | | | — | | | — | | | — | | | 189 | |
Brands | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | 189 | | | — | | | — | | | 189 | | | — | | | — | | | — | | | 189 | |
PBNA (b) | | | | | | | | | | | | | | | |
Goodwill | 12,189 | | | (216) | | | 1 | | | 11,974 | | | — | | | — | | | (27) | | | 11,947 | |
Reacquired franchise rights | 7,107 | | | — | | | — | | | 7,107 | | | — | | | — | | | (46) | | | 7,061 | |
Acquired franchise rights | 1,536 | | | 1 | | | 1 | | | 1,538 | | | 230 | | | — | | | (10) | | | 1,758 | |
Brands (c) | 3,122 | | | (290) | | | (324) | | | 2,508 | | | — | | | — | | | — | | | 2,508 | |
Total | 23,954 | | | (505) | | | (322) | | | 23,127 | | | 230 | | | — | | | (83) | | | 23,274 | |
LatAm | | | | | | | | | | | | | | | |
Goodwill | 458 | | | — | | | (25) | | | 433 | | | — | | | — | | | 3 | | | 436 | |
Brands (d) | 108 | | | (1) | | | (7) | | | 100 | | | — | | | (29) | | | 4 | | | 75 | |
Total | 566 | | | (1) | | | (32) | | | 533 | | | — | | | (29) | | | 7 | | | 511 | |
Europe (e) | | | | | | | | | | | | | | | |
Goodwill (f) | 3,806 | | | (28) | | | (78) | | | 3,700 | | | — | | | — | | | (54) | | | 3,646 | |
Reacquired franchise rights (f) | 496 | | | (23) | | | (32) | | | 441 | | | — | | | — | | | (20) | | | 421 | |
Acquired franchise rights (f) | 172 | | | — | | | (14) | | | 158 | | | — | | | (1) | | | (9) | | | 148 | |
Brands (g) (h) | 4,072 | | | — | | | 182 | | | 4,254 | | | — | | | (2,684) | | | 94 | | | 1,664 | |
Total | 8,546 | | | (51) | | | 58 | | | 8,553 | | | — | | | (2,685) | | | 11 | | | 5,879 | |
AMESA | | | | | | | | | | | | | | | |
Goodwill | 1,096 | | | (2) | | | (31) | | | 1,063 | | | 14 | | | — | | | (62) | | | 1,015 | |
Brands (i) | 214 | | | — | | | (9) | | | 205 | | | — | | | (36) | | | (13) | | | 156 | |
Total | 1,310 | | | (2) | | | (40) | | | 1,268 | | | 14 | | | (36) | | | (75) | | | 1,171 | |
APAC | | | | | | | | | | | | | | | |
Goodwill | 554 | | | 3 | | | 7 | | | 564 | | | — | | | — | | | (46) | | | 518 | |
Brands (c) (j) | 445 | | | — | | | 31 | | | 476 | | | — | | | (172) | | | (37) | | | 267 | |
Total | 999 | | | 3 | | | 38 | | | 1,040 | | | — | | | (172) | | | (83) | | | 785 | |
| | | | | | | | | | | | | | | |
Total goodwill | 18,757 | | | (251) | | | (125) | | | 18,381 | | | 14 | | | — | | | (193) | | | 18,202 | |
Total reacquired franchise rights | 7,603 | | | (23) | | | (32) | | | 7,548 | | | — | | | — | | | (66) | | | 7,482 | |
Total acquired franchise rights | 1,708 | | | 1 | | | (13) | | | 1,696 | | | 230 | | | (1) | | | (19) | | | 1,906 | |
Total brands | 8,301 | | | (291) | | | (127) | | | 7,883 | | | — | | | (3,009) | | | 47 | | | 4,921 | |
Total | $ | 36,369 | | | $ | (564) | | | $ | (297) | | | $ | 35,508 | | | $ | 244 | | | $ | (3,010) | | | $ | (231) | | | $ | 32,511 | |
(a)Acquisitions/divestitures in 2021 primarily reflect purchase price allocation adjustments related to our acquisition of BFY Brands, Inc. (BFY Brands). Impairment in 2022 is related to a baked fruit convenient food brand.
(b)Acquisitions/divestitures in 2021 primarily reflect assets reclassified as held for sale in connection with our Juice Transaction. See Note 13 for further information. Acquisitions/divestitures in 2022 primarily reflect our agreement with Celsius to distribute Celsius energy drinks in the United States. See Note 9 for further information.
(c)Translation and other in 2021 primarily reflects the allocation of the Rockstar brand to the respective divisions, which was finalized in 2021 as part of purchase price allocation.
(d)Impairment in 2022 is related to the sale of certain non-strategic brands. See Note 1 for further information.
(e)Acquisitions/divestitures in 2021 primarily reflect assets reclassified as held for sale in connection with our Juice Transaction. See Note 13 for further information.
(f)Translation and other primarily reflects the depreciation of the euro in 2021 and the depreciation of British pound and euro, partially offset by appreciation of the Russian ruble in 2022.
(g)Impairment in 2022 is related to the SodaStream brand, the decrease in fair value as a result of the Russia-Ukraine conflict and the discontinuation or repositioning of certain juice and dairy brands in Russia.
(h)Translation and other in 2021 reflects the allocation of the Rockstar brand from PBNA, which was finalized in 2021 as part of purchase price allocation, partially offset by the depreciation of the euro.
(i)Impairment in 2022 is primarily related to certain juice brands from the Pioneer Foods acquisition.
(j)Impairment in 2022 is related to the Be & Cheery brand.
Note 5 — Income Taxes
The components of income before income taxes are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
United States | | $ | 7,305 | | | $ | 3,740 | | | $ | 4,070 | |
Foreign | | 3,400 | | | 6,081 | | | 4,999 | |
| | $ | 10,705 | | | $ | 9,821 | | | $ | 9,069 | |
The provision for income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Current: | | | | | |
U.S. Federal | $ | 1,137 | | | $ | 702 | | | $ | 715 | |
Foreign | 1,027 | | | 955 | | | 932 | |
State | 246 | | | 44 | | | 110 | |
| 2,410 | | | 1,701 | | | 1,757 | |
Deferred: | | | | | |
U.S. Federal | 22 | | | 375 | | | 273 | |
Foreign | (709) | | | (14) | | | (167) | |
State | 4 | | | 80 | | | 31 | |
| (683) | | | 441 | | | 137 | |
| $ | 1,727 | | | $ | 2,142 | | | $ | 1,894 | |
A reconciliation of the U.S. Federal statutory tax rate to our annual tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
U.S. Federal statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income tax, net of U.S. Federal tax benefit | 1.8 | | | 1.0 | | | 1.2 | |
Lower taxes on foreign results | (1.5) | | | (1.6) | | | (0.8) | |
One-time mandatory transition tax - TCJ Act | 0.8 | | | 1.9 | | | — | |
| | | | | |
Juice Transaction | (2.4) | | | — | | | — | |
Tax settlements | (3.0) | | | — | | | — | |
Other, net | (0.6) | | | (0.5) | | | (0.5) | |
Annual tax rate | 16.1 | % | | 21.8 | % | | 20.9 | % |
Tax Cuts and Jobs Act
In 2022, we recorded $86 million ($0.06 per share) of net tax expense related to the TCJ Act as a result of correlating adjustments related to a partial audit settlement with the IRS for tax years 2014 through 2019. In 2021, we recorded $190 million ($0.14 per share) of net tax expense related to the TCJ Act as a result of adjustments related to the final assessment of the 2014 through 2016 IRS audit. There were no tax amounts recognized in 2020 related to the TCJ Act.
As of December 31, 2022, our mandatory transition tax liability was $2.6 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 $309 million in 2022, $309 million in 2021 and $78 million in 2020. We currently expect to pay approximately $309 million of this liability in 2023.
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. We elected to treat the tax effect of GILTI as a current-period expense when incurred.
Other Tax Matters
In 2021, we received a final assessment from the IRS audit for the tax years 2014 through 2016. The assessment included both agreed and unagreed issues. On October 29, 2021, we filed a formal written protest of the assessment and requested an appeals conference. As a result of the analysis of the 2014 through 2016 final assessment, we remeasured all applicable reserves for uncertain tax positions for all years open under the statute of limitations, including any correlating adjustments impacting the mandatory transition tax liability under the TCJ Act, resulting in a net non-cash tax expense of $112 million ($0.08 per share) in 2021.
In 2022, we came to an agreement with the IRS to settle one of the issues assessed in the 2014 through 2016 tax audit. The agreement covers tax years 2014 through 2019. As a result, we reduced our reserves for uncertain tax positions, including any correlating adjustments impacting the mandatory transition tax liability under the TCJ Act, resulting in a net non-cash tax benefit of $233 million ($0.17 per share) in 2022. Tax years 2014 through 2019 remain under audit for other issues.
On August 16, 2022, the “Inflation Reduction Act” (H.R. 5376) was signed into law in the United States. We do not currently expect the Inflation Reduction Act to have a material impact on our financial results, including on our annual estimated effective tax rate or on our liquidity.
On May 19, 2019, a public referendum held in Switzerland passed the Federal Act on Tax Reform and AHV Financing (TRAF), effective January 1, 2020. The enactment of certain provisions of the TRAF resulted in adjustments to our deferred taxes. During 2020, we recorded a net tax benefit of $72 million ($0.05 per share) related to the adoption of the TRAF in the Swiss Canton of Bern.
Deferred tax liabilities and assets are comprised of the following:
| | | | | | | | | | | |
| 2022 | | 2021 |
Deferred tax liabilities | | | |
Debt guarantee of wholly-owned subsidiary | $ | 578 | | | $ | 578 | |
Property, plant and equipment | 2,126 | | | 2,036 | |
Recapture of net operating losses | 492 | | | 504 | |
Pension liabilities | 189 | | | 216 | |
Right-of-use assets | 534 | | | 450 | |
Investment in TBG | 186 | | | — | |
Other | 232 | | | 254 | |
Gross deferred tax liabilities | 4,337 | | | 4,038 | |
| | | |
Deferred tax assets | | | |
Net carryforwards | 5,342 | | | 4,974 | |
Intangible assets other than nondeductible goodwill | 1,614 | | | 1,111 | |
Share-based compensation | 120 | | | 98 | |
Retiree medical benefits | 118 | | | 147 | |
Other employee-related benefits | 349 | | | 379 | |
| | | |
Deductible state tax and interest benefits | 144 | | | 149 | |
Lease liabilities | 534 | | | 450 | |
Capitalized research and development | 150 | | | — | |
Other | 1,050 | | | 842 | |
Gross deferred tax assets | 9,421 | | | 8,150 | |
Valuation allowances | (5,013) | | | (4,628) | |
Deferred tax assets, net | 4,408 | | | 3,522 | |
Net deferred tax (assets)/liabilities | $ | (71) | | | $ | 516 | |
A summary of our valuation allowance activity is as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Balance, beginning of year | $ | 4,628 | | | $ | 4,686 | | | $ | 3,599 | |
Provision | 492 | | | (9) | | | 1,082 | |
Other (deductions)/additions | (107) | | | (49) | | | 5 | |
Balance, end of year | $ | 5,013 | | | $ | 4,628 | | | $ | 4,686 | |
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 | | 2014-2021 | | 2014-2019 |
Mexico | | 2014-2021 | | 2014-2017 |
United Kingdom | | 2020-2021 | | None |
Canada (Domestic) | | 2016-2021 | | 2016-2019 |
Canada (International) | | 2010-2021 | | 2010-2019 |
Russia | | 2019-2021 | | None |
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, relevant court cases 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 31, 2022, the total gross amount of reserves for income taxes, reported in other liabilities, was $1.9 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 $292 million as of December 31, 2022, of which $4 million of tax benefit was recognized in 2022. The gross amount of interest accrued, reported in other liabilities, was $326 million as of December 25, 2021, of which $3 million of tax benefit was recognized in 2021.
A reconciliation of unrecognized tax benefits is as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
Balance, beginning of year | $ | 1,900 | | | $ | 1,621 | |
Additions for tax positions related to the current year | 228 | | | 222 | |
Additions for tax positions from prior years | 206 | | | 681 | |
Reductions for tax positions from prior years | (357) | | | (558) | |
Settlement payments | (53) | | | (25) | |
Statutes of limitations expiration | (36) | | | (39) | |
Translation and other | (21) | | | (2) | |
Balance, end of year | $ | 1,867 | | | $ | 1,900 | |
Carryforwards and Allowances
Operating loss carryforwards totaling $32.2 billion as of December 31, 2022 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 2023, $27.6 billion between 2024 and 2041 and $4.4 billion may be carried forward indefinitely. We
establish valuation allowances for our deferred tax assets if, based on the available evidence, it is not more likely than not that some portion or all of the deferred tax assets will be realized.
Undistributed International Earnings
As of December 31, 2022, we had approximately $9 billion of undistributed international earnings. We intend to continue to reinvest $9 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 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 and PSUs.
As of December 31, 2022, 37 million shares were available for future share-based compensation grants under the LTIP.
The following table summarizes our total share-based compensation expense, which is primarily recorded in selling, general and administrative expenses, and excess tax benefits recognized:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Share-based compensation expense - equity awards | $ | 343 | | | $ | 301 | | | $ | 264 | |
Share-based compensation expense - liability awards | 30 | | | 20 | | | 11 | |
Acquisition and divestiture-related charges | 3 | | | — | | | — | |
Restructuring charges | — | | | 1 | | | (1) | |
Total | $ | 376 | | | $ | 322 | | | $ | 274 | |
Income tax benefits recognized in earnings related to share-based compensation | $ | 62 | | | $ | 57 | | | $ | 48 | |
Excess tax benefits related to share-based compensation | $ | 44 | | | $ | 38 | | | $ | 35 | |
As of December 31, 2022, there was $396 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:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Expected life | 7 years | | 7 years | | 6 years |
Risk-free interest rate | 1.9 | % | | 1.1 | % | | 0.9 | % |
Expected volatility | 16 | % | | 14 | % | | 14 | % |
Expected dividend yield | 2.5 | % | | 3.1 | % | | 3.4 | % |
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 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options(a) | | Weighted-Average Exercise Price | | Weighted-Average Contractual Life Remaining (years) | | Aggregate Intrinsic Value(a) |
Outstanding at December 25, 2021 | 10,142 | | | $ | 110.54 | | | | | |
Granted | 2,422 | | | $ | 163.54 | | | | | |
Exercised | (1,578) | | | $ | 87.33 | | | | | |
Forfeited/expired | (482) | | | $ | 146.13 | | | | | |
Outstanding at December 31, 2022 | 10,504 | | | $ | 124.63 | | | 6.08 | | $ | 588,549 | |
Exercisable at December 31, 2022 | 4,892 | | | $ | 101.02 | | | 3.50 | | $ | 389,547 | |
Expected to vest as of December 31, 2022 | 5,267 | | | $ | 144.58 | | | 8.29 | | $ | 190,040 | |
(a)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 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 31, 2022 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 25, 2021 | 5,977 | | | $ | 127.45 | | | | | |
Granted | 2,263 | | | $ | 163.02 | | | | | |
Converted | (2,051) | | | $ | 120.03 | | | | | |
Forfeited | (475) | | | $ | 141.64 | | | | | |
Outstanding at December 31, 2022 (b) | 5,714 | | | $ | 143.02 | | | 1.24 | | $ | 1,032,222 | |
Expected to vest as of December 31, 2022 (c) | 5,979 | | | $ | 141.94 | | | 1.17 | | $ | 1,080,138 | |
(a)In thousands. Outstanding awards are disclosed at target.
(b)The outstanding PSUs for which the vesting period has not ended as of December 31, 2022, at the threshold, target and maximum award levels were zero, 1 million and 2 million, respectively.
(c)Represents the number of outstanding awards expected to vest, including estimated performance adjustments on all outstanding PSUs as of December 31, 2022.
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 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | |
| Long-Term Cash Award(a) | | Balance Sheet Date Fair Value(b) | | Contractual Life Remaining (years) |
Outstanding at December 25, 2021 | $ | 45,792 | | | | | |
Granted | 18,182 | | | | | |
Vested | (11,364) | | | | | |
Forfeited | (2,356) | | | | | |
Outstanding at December 31, 2022 (c) | $ | 50,254 | | | $ | 68,167 | | | 1.17 |
Expected to vest as of December 31, 2022 | $ | 46,841 | | | $ | 65,835 | | | 1.15 |
(a)In thousands, disclosed at target.
(b)In thousands, based on the most recent valuation as of December 31, 2022.
(c)The outstanding awards for which the vesting period has not ended as of December 31, 2022, at the threshold, target and maximum award levels based on the achievement of its market conditions were zero, $50 million and $101 million, respectively.
Other Share-Based Compensation Data
The following is a summary of other share-based compensation data:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Stock Options | | | | | |
Total number of options granted (a) | 2,422 | | | 2,157 | | | 1,847 | |
Weighted-average grant-date fair value of options granted | $ | 19.72 | | | $ | 9.88 | | | $ | 8.31 | |
Total intrinsic value of options exercised (a) | $ | 134,580 | | | $ | 153,306 | | | $ | 155,096 | |
Total grant-date fair value of options vested (a) | $ | 9,661 | | | $ | 10,605 | | | $ | 8,652 | |
RSUs/PSUs | | | | | |
Total number of RSUs/PSUs granted (a) | 2,263 | | | 2,636 | | | 2,496 | |
Weighted-average grant-date fair value of RSUs/PSUs granted | $ | 163.02 | | | $ | 131.81 | | | $ | 131.21 | |
Total intrinsic value of RSUs/PSUs converted (a) | $ | 329,705 | | | $ | 273,878 | | | $ | 303,165 | |
Total grant-date fair value of RSUs/PSUs vested (a) | $ | 196,649 | | | $ | 198,469 | | | $ | 235,523 | |
| | | | | |
| | | | | |
| | | | | |
(a)In thousands.
As of December 31, 2022 and December 25, 2021, there were approximately 307,000 and 299,000 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
Effective December 31, 2022, we merged two U.S. qualified defined benefit pension plans, PepsiCo Employees Retirement Plan I (Plan I), mostly inactive participants, and PepsiCo Employees Retirement Plan A (Plan A), mostly active participants, with Plan I remaining. The accrued benefits offered to the plans’ participants were unchanged. The merger was made to provide additional flexibility in evaluating opportunities to reduce risk and volatility. Actuarial gains and losses of the merged plan will be amortized over the average remaining life expectancy of participants. There is no material impact to pre-tax pension benefits expense from this merger.
In 2022, we transferred pension and retiree medical obligations of $145 million and related assets to TBG in connection with the Juice Transaction. See Note 13 for further information.
In 2021, we adopted a change to the Canadian defined benefit plans to freeze pension accruals for salaried participants, effective January 1, 2024, and to close the hourly plan to new non-union employees hired on or after January 1, 2022. After the effective date, all salaried participants receive an employer contribution to the defined contribution plan based on age and years of service regardless of employee contribution and the opportunity to receive employer contributions to match employee contributions up to defined limits. We also adopted a change to the U.K. defined benefit plan to freeze pension accruals for all participants effective March 31, 2022. After the effective date, participants have the opportunity to receive employer contributions to match employee contributions up to defined limits. Pre-tax pension benefits expense will decrease after the effective dates, partially offset by contributions to defined contribution plans.
In 2021, we adopted a change to the U.S. qualified defined benefit plans to transfer certain participants from Plan A to Plan I, effective January 1, 2022. The accrued benefits offered to the plans’ participants were unchanged. There was no material impact to pre-tax pension benefits expense from this transaction.
In 2020, we adopted an amendment to the U.S. defined benefit pension plans to freeze benefit accruals for salaried participants, effective December 31, 2025. Since 2011, salaried new hires are not eligible to participate in the defined benefit plan. After the effective date, all salaried participants receive an employer contribution to the 401(k) savings plan based on age and years of service regardless of employee contribution and the opportunity to receive employer contributions to match employee contributions up to defined limits. As a result of this amendment, pre-tax pension benefits expense decreased $70 million in 2021, primarily impacting corporate unallocated expenses.
In 2020, we approved an amendment to reorganize the U.S. qualified defined benefit pension plans that resulted in the transfer of certain participants from Plan A to Plan I and to a newly created plan, PepsiCo Employees Retirement Hourly Plan (Plan H), effective January 1, 2021. The accrued benefits offered to the plans’ participants were unchanged. The reorganization facilitated a more targeted investment strategy and provided additional flexibility in evaluating opportunities to reduce risk and volatility. There was no material impact to pre-tax pension benefits expense as a result of this reorganization.
In 2020, we adopted an amendment, effective January 1, 2021, to enhance the pay credit benefits of certain participants in Plan H. As a result of this amendment, pre-tax pension benefits expense increased $45 million in 2021, primarily impacting service cost expense.
Gains and losses resulting from actual experience differing from our assumptions, including the difference between the actual and 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 within common shareholders’ equity. If this net accumulated gain or loss exceeds 10% of the greater of the market-related value of plan assets or plan obligations, 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 9 years), Plan H (approximately 11 years) and retiree medical (approximately 9 years), and the remaining life expectancy for participants in Plan I (approximately 27 years). In 2023, we expect the average remaining service life for participants in Plan H to be approximately 11 years and the average remaining life expectancy for participants in Plan I to be approximately 26 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 H, and the remaining life expectancy for participants in Plan I, except that prior service cost/(credit) for salaried participants subject to the freeze is amortized on a straight-line basis over the period up to the effective date of the freeze.
Selected financial information for our pension and retiree medical plans is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Retiree Medical |
| U.S. | | International | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Change in projected benefit obligation | | | | | | | | | | | |
Obligation at beginning of year | $ | 16,216 | | | $ | 16,753 | | | $ | 4,175 | | | $ | 4,430 | | | $ | 954 | | | $ | 1,006 | |
Service cost | 487 | | | 518 | | | 64 | | | 104 | | | 37 | | | 33 | |
Interest cost | 434 | | | 324 | | | 90 | | | 74 | | | 19 | | | 15 | |
Plan amendments | 10 | | | 23 | | | — | | | 3 | | | — | | | — | |
Participant contributions | — | | | — | | | 2 | | | 3 | | | — | | | — | |
Experience gain | (3,989) | | | (215) | | | (1,284) | | | (178) | | | (198) | | | (17) | |
Benefit payments | (412) | | | (976) | | | (127) | | | (106) | | | (81) | | | (83) | |
Settlement/curtailment | (1,109) | | | (220) | | | (5) | | | (99) | | | (14) | | | — | |
Special termination benefits | 37 | | | 9 | | | — | | | — | | | — | | | — | |
Other, including foreign currency adjustment | (131) | | | — | | | (312) | | | (56) | | | (3) | | | — | |
Obligation at end of year | $ | 11,543 | | | $ | 16,216 | | | $ | 2,603 | | | $ | 4,175 | | | $ | 714 | | | $ | 954 | |
| | | | | | | | | | | |
Change in fair value of plan assets | | | | | | | | | | | |
Fair value at beginning of year | $ | 15,904 | | | $ | 15,465 | | | $ | 4,624 | | | $ | 4,303 | | | $ | 299 | | | $ | 315 | |
Actual return on plan assets | (3,337) | | | 1,052 | | | (1,026) | | | 387 | | | (68) | | | 20 | |
Employer contributions/funding | 235 | | | 580 | | | 101 | | | 158 | | | 48 | | | 47 | |
Participant contributions | — | | | — | | | 2 | | | 3 | | | — | | | — | |
Benefit payments | (412) | | | (976) | | | (127) | | | (106) | | | (81) | | | (83) | |
Settlement | (1,117) | | | (217) | | | (5) | | | (52) | | | — | | | — | |
Other, including foreign currency adjustment | (125) | | | — | | | (374) | | | (69) | | | (2) | | | — | |
Fair value at end of year | $ | 11,148 | | | $ | 15,904 | | | $ | 3,195 | | | $ | 4,624 | | | $ | 196 | | | $ | 299 | |
Funded status | $ | (395) | | | $ | (312) | | | $ | 592 | | | $ | 449 | | | $ | (518) | | | $ | (655) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | |
| | | | | | | | | | | |
Amounts recognized | | | | | | | | | | | |
Other assets | $ | 225 | | | $ | 692 | | | $ | 708 | | | $ | 564 | | | $ | — | | | $ | — | |
Other current liabilities | (56) | | | (48) | | | (7) | | | (1) | | | (54) | | | (57) | |
Other liabilities | (564) | | | (956) | | | (109) | | | (114) | | | (464) | | | (598) | |
Net amount recognized | $ | (395) | | | $ | (312) | | | $ | 592 | | | $ | 449 | | | $ | (518) | | | $ | (655) | |
| | | | | | | | | | | |
Amounts included in accumulated other comprehensive loss (pre-tax) | | | | | | | | |
Net loss/(gain) | $ | 3,337 | | | $ | 3,550 | | | $ | 571 | | | $ | 696 | | | $ | (320) | | | $ | (220) | |
Prior service credit | (21) | | | (63) | | | (9) | | | (11) | | | (25) | | | (34) | |
Total | $ | 3,316 | | | $ | 3,487 | | | $ | 562 | | | $ | 685 | | | $ | (345) | | | $ | (254) | |
| | | | | | | | | | | |
Changes recognized in net (gain)/loss included in other comprehensive loss | | |
Net loss/(gain) arising in current year | $ | 254 | | | $ | (301) | | | $ | (40) | | | $ | (355) | | | $ | (114) | | | $ | (22) | |
Amortization and settlement recognition | (467) | | | (265) | | | (30) | | | (95) | | | 14 | | | 14 | |
Foreign currency translation gain | — | | | — | | | (55) | | | (3) | | | — | | | — | |
Total | $ | (213) | | | $ | (566) | | | $ | (125) | | | $ | (453) | | | $ | (100) | | | $ | (8) | |
| | | | | | | | | | | |
Accumulated benefit obligation at end of year | $ | 11,104 | | | $ | 15,489 | | | $ | 2,483 | | | $ | 4,021 | | | | | |
The net loss arising in the current year is primarily attributable to a decrease in the actual return on plan assets offset by the impact of higher discount rates.
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 total of 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. Lump sum payouts are generally higher when interest rates are lower. Curtailments are recognized when events such as plant closures, the sale of a business, or plan changes result in a significant 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 | | | | | | |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Service cost | $ | 487 | | | $ | 518 | | | $ | 434 | | | $ | 64 | | | $ | 104 | | | $ | 86 | | | $ | 37 | | | $ | 33 | | | $ | 25 | |
Other pension and retiree medical benefits (income)/expense: | | | | | | | | | | | | | | | | |
Interest cost | $ | 434 | | | $ | 324 | | | $ | 435 | | | $ | 90 | | | $ | 74 | | | $ | 85 | | | $ | 19 | | | $ | 15 | | | $ | 25 | |
Expected return on plan assets | (912) | | | (970) | | | (929) | | | (218) | | | (231) | | | (202) | | | (16) | | | (15) | | | (16) | |
Amortization of prior service (credit)/cost | (28) | | | (31) | | | 12 | | | (1) | | | (2) | | | — | | | (8) | | | (11) | | | (12) | |
Amortization of net losses/(gains) | 149 | | | 224 | | | 196 | | | 29 | | | 77 | | | 61 | | | (14) | | | (14) | | | (23) | |
Settlement/curtailment losses/(gains) (a) | 322 | | | 40 | | | 213 | | | 1 | | | (11) | | | 19 | | | (16) | | | — | | | — | |
Special termination benefits | 37 | | | 9 | | | 19 | | | — | | | — | | | — | | | — | | | — | | | — | |
Total other pension and retiree medical benefits (income)/expense | $ | 2 | | | $ | (404) | | | $ | (54) | | | $ | (99) | | | $ | (93) | | | $ | (37) | | | $ | (35) | | | $ | (25) | | | $ | (26) | |
Total | $ | 489 | | | $ | 114 | | | $ | 380 | | | $ | (35) | | | $ | 11 | | | $ | 49 | | | $ | 2 | | | $ | 8 | | | $ | (1) | |
(a)In 2022 and 2020, U.S. includes a settlement charge of $318 million ($246 million after-tax or $0.18 per share) and $205 million ($158 million after-tax or $0.11 per share), respectively, related to lump sum distributions exceeding the total of annual service and interest cost.
The following table provides the weighted-average assumptions used to determine net periodic benefit cost and projected benefit obligation for our pension and retiree medical plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Retiree Medical |
| U.S. | | International | | | | | | |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Net Periodic Benefit Cost | | | | | | | | | | | | | | | | | |
Service cost discount rate (a) | 3.1 | % | | 2.6 | % | | 3.4 | % | | 4.2 | % | | 2.7 | % | | 3.2 | % | | 2.8 | % | | 2.3 | % | | 3.2 | % |
Interest cost discount rate (a) | 3.1 | % | | 2.0 | % | | 2.9 | % | | 2.3 | % | | 1.7 | % | | 2.4 | % | | 2.1 | % | | 1.6 | % | | 2.6 | % |
Expected return on plan assets (a) | 6.7 | % | | 6.4 | % | | 6.8 | % | | 5.3 | % | | 5.3 | % | | 5.6 | % | | 5.7 | % | | 5.4 | % | | 5.8 | % |
Rate of salary increases | 3.0 | % | | 3.0 | % | | 3.1 | % | | 3.3 | % | | 3.3 | % | | 3.3 | % | | | | | | |
| | | | | | | | | | | | | | | | | |
Projected Benefit Obligation | | | | | | | | | | | | | | | | | |
Discount rate | 5.4 | % | | 2.9 | % | | 2.5 | % | | 5.3 | % | | 2.4 | % | | 2.0 | % | | 5.4 | % | | 2.7 | % | | 2.3 | % |
Rate of salary increases | 3.2 | % | | 3.0 | % | | 3.0 | % | | 4.2 | % | | 3.3 | % | | 3.3 | % | | | | | | |
(a)2022 U.S. rates reflect remeasurement of a U.S. qualified defined benefit pension plan in the second quarter of 2022.
The following table provides selected information about plans with accumulated benefit obligation and total projected benefit obligation in excess of plan assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Retiree Medical |
| U.S. | | International | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Selected information for plans with accumulated benefit obligation in excess of plan assets | | | | |
Obligation for service to date | $ | (584) | | | $ | (1,499) | | | $ | (158) | | | $ | (127) | | | | | |
Fair value of plan assets | $ | — | | | $ | 705 | | | $ | 129 | | | $ | 102 | | | | | |
Selected information for plans with projected benefit obligation in excess of plan assets | | | | | | |
Benefit obligation | $ | (620) | | | $ | (1,709) | | | $ | (273) | | | $ | (286) | | | $ | (714) | | | $ | (954) | |
Fair value of plan assets | $ | — | | | $ | 705 | | | $ | 157 | | | $ | 171 | | | $ | 196 | | | $ | 299 | |
Of the total projected pension benefit obligation as of December 31, 2022, approximately $625 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 - 2032 |
Pension | $ | 945 | | | $ | 1,070 | | | $ | 910 | | | $ | 955 | | | $ | 975 | | | $ | 5,100 | |
Retiree medical (a) | $ | 90 | | | $ | 85 | | | $ | 80 | | | $ | 80 | | | $ | 75 | | | $ | 330 | |
(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 $1 million for each of the years from 2023 through 2027 and approximately $3 million in total for 2028 through 2032.
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 |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Discretionary (a) | $ | 160 | | | $ | 525 | | | $ | 339 | | | $ | — | | | $ | — | | | $ | — | |
Non-discretionary | 176 | | | 213 | | | 168 | | | 48 | | | 47 | | | 55 | |
Total | $ | 336 | | | $ | 738 | | | $ | 507 | | | $ | 48 | | | $ | 47 | | | $ | 55 | |
(a)Includes $150 million contribution in 2022, $500 million contribution in 2021 and $325 million contribution in 2020 to fund our U.S. qualified defined benefit plans.
We made a discretionary contribution of $125 million to a U.S. qualified defined benefit plan in January 2023 and expect to make an additional contribution of $125 million in the third quarter of 2023. In addition, in 2023, we expect to make non-discretionary contributions of approximately $90 million to our U.S. and international pension benefit plans and contributions of approximately $55 million for retiree medical benefits.
We also 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 obligations, 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 obligations. 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 2023 and 2022, our expected long-term rate of return on U.S. plan assets is 7.4% and 6.7%, respectively. Our target investment allocations for U.S. plan assets for both 2023 and 2022 are as follows:
| | | | | | | |
Fixed income | 56 | % | | |
U.S. equity | 22 | % | | |
International equity | 18 | % | | |
Real estate | 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 2022 and 2021 are categorized consistently by Level 1 (quoted prices in active markets for identical assets), Level 2 (significant other observable inputs) and Level 3 (significant unobservable inputs) in both years and are as follows:
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | 2022 | | 2021 |
U.S. plan assets (a) | | | | | |
Equity securities, including preferred stock (b) | 1 | | $ | 4,387 | | | $ | 6,387 | |
Government securities (c) | 2 | | 1,751 | | | 2,523 | |
Corporate bonds (c) | 2 | | 4,245 | | | 6,210 | |
Mortgage-backed securities (c) | 2 | | 142 | | | 199 | |
Contracts with insurance companies (d) | 3 | | 9 | | | 9 | |
Cash and cash equivalents (e) | 1, 2 | | 157 | | | 352 | |
Sub-total U.S. plan assets | | | 10,691 | | | 15,680 | |
Real estate commingled funds measured at net asset value (f) | | | 533 | | | 478 | |
Dividends and interest receivable, net of payables | | | 120 | | | 45 | |
Total U.S. plan assets | | | $ | 11,344 | | | $ | 16,203 | |
International plan assets | | | | | |
Equity securities (b) | 1 | | $ | 1,291 | | | $ | 2,232 | |
Government securities (c) | 2 | | 736 | | | 1,053 | |
Corporate bonds (c) | 2 | | 254 | | | 400 | |
Fixed income commingled funds (g) | 1 | | 628 | | | 632 | |
Contracts with insurance companies (d) | 3 | | 27 | | | 43 | |
Cash and cash equivalents | 1 | | 75 | | | 34 | |
Sub-total international plan assets | | | 3,011 | | | 4,394 | |
Real estate commingled funds measured at net asset value (f) | | | 173 | | | 221 | |
Dividends and interest receivable | | | 11 | | | 9 | |
Total international plan assets | | | $ | 3,195 | | | $ | 4,624 | |
(a)Includes $196 million and $299 million in 2022 and 2021, respectively, of retiree medical plan assets that are restricted for purposes of providing health benefits for U.S. retirees and their beneficiaries.
(b)Invested in U.S. and international common stock and commingled funds, and the preferred stock portfolio was invested in domestic and international corporate preferred stock investments. The common and preferred stock investments are based on quoted prices in active markets. The commingled funds are based on the published price of the fund and include one large-cap fund that represents 10% and 11% of total U.S. plan assets for 2022 and 2021, respectively.
(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 represents 32% of total U.S. plan assets for 2022 and 2021.
(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 31, 2022 and December 25, 2021.
(e)Includes Level 1 assets of $216 million for 2021 and Level 2 assets of $157 million and $136 million for 2022 and 2021, respectively.
(f)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.
(g)Based on the published price of the fund.
Retiree Medical Cost Trend Rates
The assumed health care cost trend rates are as follows:
| | | | | | | | | | | |
| 2023 | | 2022 |
Average increase assumed | 6 | % | | 6 | % |
Ultimate projected increase | 4 | % | | 4 | % |
Year of ultimate projected increase | 2046 | | 2046 |
These assumed health care cost trend rates have an impact on the retiree medical plan expense and obligation, 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 employee contributions 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 based on age and years of service regardless of employee contribution.
In 2022, 2021 and 2020, our total Company contributions were $283 million, $246 million and $225 million, respectively.
Note 8 — Debt Obligations
The following table summarizes our debt obligations:
| | | | | | | | | | | |
| 2022(a) | | 2021(a) |
Short-term debt obligations (b) | | | |
Current maturities of long-term debt | $ | 3,096 | | | $ | 3,872 | |
| | | |
Commercial paper (0.1% and 0.1%) | — | | | 400 | |
Other borrowings (15.0% and 2.2%) | 318 | | | 36 | |
| $ | 3,414 | | | $ | 4,308 | |
Long-term debt obligations (b) | | | |
| | | |
Notes due 2022 (2.4%) | $ | — | | | $ | 3,868 | |
Notes due 2023 (1.7% and 1.5%) | 3,094 | | | 3,019 | |
Notes due 2024 (2.2% and 2.1%) | 2,867 | | | 2,986 | |
Notes due 2025 (2.7% and 2.7%) | 3,193 | | | 3,230 | |
Notes due 2026 (3.1% and 3.2%) | 2,396 | | | 2,450 | |
Notes due 2027 (2.5% and 2.4% ) | 2,523 | | | 2,554 | |
Notes due 2028-2060 (2.8% and 2.6%) | 24,652 | | | 21,759 | |
Other, due 2022-2028 (1.3% and 1.3%) | 28 | | | 32 | |
| 38,753 | | | 39,898 | |
Less: current maturities of long-term debt obligations | 3,096 | | | 3,872 | |
Total | $ | 35,657 | | | $ | 36,026 | |
(a)Amounts are shown net of unamortized net discounts of $227 million and $233 million for 2022 and 2021, respectively.
(b)The interest rates presented reflect weighted-average effective interest rates at year-end. See Note 9 for further information regarding our interest rate derivative instruments.
As of December 31, 2022 and December 25, 2021, our international debt of $304 million and $38 million, respectively, 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 2022, we issued the following senior notes:
| | | | | | | | | | | | | | | | | |
Interest Rate | | Maturity Date | | Principal Amount(a) | |
3.200 | % | | July 2029 | | £ | 300 | | (b) |
3.550 | % | | July 2034 | | £ | 450 | | (b) |
3.600 | % | | February 2028 | | $ | 750 | | |
3.900 | % | | July 2032 | | $ | 1,250 | | |
4.200 | % | | July 2052 | | $ | 500 | | |
(a)Excludes debt issuance costs, discounts and premiums.
(b)These notes, issued in British pounds, 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 3.900% senior notes due 2032 that will be allocated to fund, in whole or in part, eligible green projects in the categories of investments in recycling and sustainable plastics and packaging, decarbonizing our operations and supply chain, water sustainability, and regenerative agriculture, which promote our selected Sustainable Development Goals, as defined by the United Nations.
In 2022, we entered into a new five-year unsecured revolving credit agreement (Five-Year Credit Agreement), which expires on May 27, 2027. The Five-Year Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.8 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. The Five-Year Credit Agreement replaced our $3.75 billion five-year credit agreement, dated as of May 28, 2021.
Also in 2022, we entered into a new 364-day unsecured revolving credit agreement (364-Day Credit Agreement), which expires on May 26, 2023. The 364-Day Credit Agreement enables us and our borrowing subsidiaries to borrow up to $3.8 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 term loan would mature no later than the anniversary of the then effective termination date. The 364-Day Credit Agreement replaced our $3.75 billion 364-day credit agreement, dated as of May 28, 2021.
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 31, 2022, there were no outstanding borrowings under the Five-Year Credit Agreement or the 364-Day Credit Agreement.
In 2022, we paid $750 million to redeem all $750 million outstanding principal amount of our 2.25% senior notes due May 2022, we paid $800 million to redeem all $800 million outstanding principal amount of our 3.10% senior notes due July 2022 and we paid $154 million to redeem all $133 million outstanding principal amount of our subsidiary, Pepsi-Cola Metropolitan Bottling Company, Inc.’s 7.00% senior notes due March 2029 and 5.50% notes due May 2035. Additionally, we deposited $102 million of U.S. government securities with the Bank of New York Mellon, as trustee, in legal defeasance of $94 million outstanding principal amount of certain notes originally issued by our subsidiary, The Quaker Oats Company (Quaker notes). PepsiCo will be deemed to have paid and discharged the Quaker notes on April 12, 2023.
In 2021, we completed cash tender offers to redeem $4.1 billion principal amount of certain notes, with maturity dates ranging from May 2035 to March 2060 and interest rates ranging from 3.375% to 5.500%, for $4.8 billion in cash. As a result of the cash tender offers, we recorded a pre-tax charge of $842 million ($677 million after-tax or $0.49 per share) to net interest expense and other, primarily representing the tender price paid over the carrying value of the tendered notes and loss on treasury rate locks used to mitigate the interest rate risk on the cash tender offers.
Also in 2021, we paid $750 million to redeem all $750 million outstanding principal amount of our 1.70% senior notes due 2021 and terminated the associated interest rate swap with a notional amount of $250 million.
In 2020, we paid $1.1 billion to redeem all $1.1 billion outstanding principal amount of our 2.15% senior notes due 2020 and terminated associated interest rate swaps with a notional amount of $0.8 billion.
Also in 2020, one of our international consolidated subsidiaries borrowed 21.7 billion South African rand, or approximately $1.3 billion, from our two unsecured bridge loan facilities (Bridge Loan Facilities) to fund our acquisition of Pioneer Foods. These borrowings were fully repaid in April 2020 and no further borrowings under these Bridge Loan Facilities are permitted.
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. We do not use derivative instruments for trading or speculative purposes. 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 within common shareholders’ equity 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 31, 2022 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.
Credit Risk
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 either of these levels. The fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of December 31, 2022 was $235 million. We have posted no collateral under these contracts and no credit-risk-related contingent features were triggered as of December 31, 2022.
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 agricultural products, energy 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 $1.8 billion as of December 31, 2022 and $1.6 billion as of December 25, 2021.
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 $3.0 billion as of December 31, 2022 and $2.8 billion as of December 25, 2021. The total notional amount of our debt instruments designated as net
investment hedges was $2.9 billion as of December 31, 2022 and $2.1 billion as of December 25, 2021. 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. 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 $1.3 billion as of December 31, 2022 and $2.1 billion as of December 25, 2021.
As of December 31, 2022, approximately 1% of total debt was subject to variable rates, compared to approximately 2%, after the impact of the related interest rate derivative instruments, as of December 25, 2021.
Debt Securities
Held-to-Maturity
Investments in debt securities that we have the positive intent and ability to hold until maturity are classified as held-to-maturity. Highly liquid debt securities with original maturities of three months or less are recorded as cash equivalents. As of December 31, 2022, we had no investments in held-to-maturity debt securities. As of December 25, 2021, we had $130 million of investments in commercial paper recorded in cash and cash equivalents. Held-to-maturity debt securities are recorded at amortized cost, which approximates fair value, and realized gains or losses are reported in earnings. As of December 25, 2021, gross unrecognized gains and losses and the allowance for expected credit losses were not material.
Available-for-Sale
Investments in available-for-sale debt securities are reported at fair value. Changes in the fair value of available-for-sale debt securities are generally recognized in accumulated other comprehensive loss within common shareholders’ equity. Changes in the fair value of available-for-sale debt securities impact earnings only when such securities are sold, or an allowance for expected credit losses or impairment is recognized. We regularly evaluate our investment portfolio for expected credit losses and impairment. In making this judgment, we evaluate, among other things, the extent to which the fair value of a debt security is less than its amortized cost; the financial condition of the issuer, including the credit quality, and any changes thereto; and our intent to sell, or whether we will more likely than not be required to sell, the debt security before recovery of its amortized cost basis. Our assessment of whether a debt security has a credit loss or is impaired could change in the future due to new developments or changes in assumptions related to any particular debt security.
In 2022, we entered into an agreement with Celsius to distribute Celsius energy drinks in the United States (see Note 4 for further information) and invested $550 million in Series A convertible preferred shares issued by Celsius, which included certain conversion and redemption features. The preferred shares automatically convert into Celsius common shares after six years if certain market-based conditions are met, or can be redeemed after seven years. Shares underlying the transaction were priced at $75 per share,
and the preferred shares are entitled to a 5% annual dividend, payable either in cash or in-kind. Given our redemption right, we classified our investment in the convertible preferred stock as an available-for-sale debt security. There were no unrealized gains and losses on our investment as of December 31, 2022. There were no impairment charges related to our investment in the year ended December 31, 2022.
Fair Value Measurements
The fair values of our financial assets and liabilities as of December 31, 2022 and December 25, 2021 are categorized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 |
| Fair Value Hierarchy Levels(a) | | Assets(a) | | Liabilities(a) | | Assets(a) | | Liabilities(a) |
Available-for-sale debt securities (b) | 2 | | $ | 660 | | | $ | — | | | $ | — | | | $ | — | |
Index funds (c) | 1 | | $ | 257 | | | $ | — | | | $ | 337 | | | $ | — | |
Prepaid forward contracts (d) | 2 | | $ | 14 | | | $ | — | | | $ | 21 | | | $ | — | |
Deferred compensation (e) | 2 | | $ | — | | | $ | 434 | | | $ | — | | | $ | 505 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Derivatives designated as cash flow hedging instruments: | | | | | | | | | |
Foreign exchange (f) | 2 | | $ | 24 | | | $ | 22 | | | $ | 29 | | | $ | 14 | |
Interest rate (f) | 2 | | — | | | 164 | | | 14 | | | 264 | |
| | | | | | | | | |
Commodity (g) | 2 | | 2 | | | 60 | | | 70 | | | 5 | |
| | | $ | 26 | | | $ | 246 | | | $ | 113 | | | $ | 283 | |
Derivatives not designated as hedging instruments: | | | | | | | | | |
Foreign exchange (f) | 2 | | $ | 21 | | | $ | 21 | | | $ | 19 | | | $ | 7 | |
| | | | | | | | | |
Commodity (g) | 2 | | 11 | | | 51 | | | 35 | | | 22 | |
| | | $ | 32 | | | $ | 72 | | | $ | 54 | | | $ | 29 | |
Total derivatives at fair value (h) | | | $ | 58 | | | $ | 318 | | | $ | 167 | | | $ | 312 | |
Total | | | $ | 989 | | | $ | 752 | | | $ | 525 | | | $ | 817 | |
(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)Primarily related to our investment in Celsius convertible preferred stock. The fair value of our investment approximates the transaction price and any accrued dividends, as well as the amortized cost. As of December 31, 2022, $3 million, $104 million and $553 million were classified as cash equivalents, short-term investments and other assets, respectively.
(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 recently reported market transactions of spot and forward rates.
(g)Primarily based on recently reported market transactions of swap arrangements.
(h)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 our balance sheet as of December 31, 2022 and December 25, 2021 were not material. Collateral received or posted against our asset or liability positions was not material. Exchange-traded commodity futures are cash-settled on a daily basis and, therefore, not included in the table.
The carrying amounts of our cash and cash equivalents and short-term investments recorded at amortized cost approximate fair value (classified as Level 2 in the fair value hierarchy) due to their short-term maturity. The fair value of our debt obligations as of December 31, 2022 and December 25, 2021 was $35 billion and $43 billion, respectively, based upon prices of identical or 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) |
2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Foreign exchange | $ | (58) | | | $ | (4) | | | $ | (3) | | | $ | (7) | | | $ | (21) | | | $ | 82 | |
Interest | — | | | 56 | | | 138 | | | 44 | | | 159 | | | 64 | |
Commodity | (179) | | | (218) | | | (57) | | | (285) | | | (267) | | | (194) | |
Net investment | — | | | — | | | (120) | | | (192) | | | — | | | — | |
Total | $ | (237) | | | $ | (166) | | | $ | (42) | | | $ | (440) | | | $ | (129) | | | $ | (48) | |
(a)Foreign exchange derivative losses/gains are included in selling, general and administrative expenses. Commodity derivative gains included in cost of sales totaled $8 million in 2022 and $109 million in 2021 and commodity derivative gains included in selling, general and administrative expenses totaled $171 million in 2022 and $109 million in 2021.
(b)Foreign exchange derivative losses/gains are included in net revenue and cost of sales. Interest rate derivative losses/gains on cross-currency interest rate swaps are included in selling, general and administrative expenses. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. See Note 11 for further information.
Based on current market conditions, we expect to reclassify net losses of $51 million related to our cash flow hedges from accumulated other comprehensive loss within common shareholders’ equity 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Income | | Shares(a) | | Income | | Shares(a) | | Income | | Shares(a) |
Basic net income attributable to PepsiCo per common share | $ | 6.45 | | | | | $ | 5.51 | | | | | $ | 5.14 | | | |
Net income available for PepsiCo common shareholders | $ | 8,910 | | | 1,380 | | | $ | 7,618 | | | 1,382 | | | $ | 7,120 | | | 1,385 | |
Dilutive securities: | | | | | | | | | | | |
Stock options, RSUs, PSUs and other (b) | — | | | 7 | | | — | | | 7 | | | — | | | 7 | |
| | | | | | | | | | | |
Diluted | $ | 8,910 | | | 1,387 | | | $ | 7,618 | | | 1,389 | | | $ | 7,120 | | | 1,392 | |
Diluted net income attributable to PepsiCo per common share | $ | 6.42 | | | | | $ | 5.49 | | | | | $ | 5.12 | | | |
(a)Weighted-average common shares outstanding (in millions).
(b)The dilutive effect of these securities is calculated using the treasury stock method.
The weighted-average amount of antidilutive securities excluded from the calculation of diluted earnings per common share was immaterial for the years ended December 31, 2022, December 25, 2021 and December 26, 2020.
Note 11 — 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 | | Other(a) | | Accumulated Other Comprehensive Loss Attributable to PepsiCo |
Balance as of December 28, 2019 (b) | $ | (11,290) | | | $ | (3) | | | $ | (2,988) | | | $ | (19) | | | $ | (14,300) | |
Other comprehensive income/(loss) before reclassifications (c) | (710) | | | 126 | | | (1,141) | | | (1) | | | (1,726) | |
Amounts reclassified from accumulated other comprehensive loss | — | | | (116) | | | 465 | | | — | | | 349 | |
Net other comprehensive income/(loss) | (710) | | | 10 | | | (676) | | | (1) | | | (1,377) | |
Tax amounts | 60 | | | (3) | | | 144 | | | — | | | 201 | |
Balance as of December 26, 2020 (b) | (11,940) | | | 4 | | | (3,520) | | | (20) | | | (15,476) | |
Other comprehensive (loss)/income before reclassifications (d) | (340) | | | 248 | | | 702 | | | 22 | | | 632 | |
Amounts reclassified from accumulated other comprehensive loss | 18 | | | (48) | | | 299 | | | — | | | 269 | |
Net other comprehensive (loss)/income | (322) | | | 200 | | | 1,001 | | | 22 | | | 901 | |
Tax amounts | (47) | | | (45) | | | (231) | | | — | | | (323) | |
Balance as of December 25, 2021 (b) | (12,309) | | | 159 | | | (2,750) | | | 2 | | | (14,898) | |
Other comprehensive (loss)/income before reclassifications (e) | (603) | | | (78) | | | 48 | | | 8 | | | (625) | |
Amounts reclassified from accumulated other comprehensive loss | — | | | (129) | | | 440 | | | — | | | 311 | |
Net other comprehensive (loss)/income | (603) | | Ye | (207) | | | 488 | | | 8 | | | (314) | |
Tax amounts | (36) | | | 49 | | | (99) | | | (4) | | | (90) | |
Balance as of December 31, 2022 (b) | $ | (12,948) | | | $ | 1 | | | $ | (2,361) | | | $ | 6 | | | $ | (15,302) | |
(a)The change in 2021 primarily comprises fair value increases in available-for-sale securities.
(b)Pension and retiree medical amounts are net of taxes of $1,370 million as of December 28, 2019, $1,514 million as of December 26, 2020, $1,283 million as of December 25, 2021 and $1,184 million as of December 31, 2022.
(c)Currency translation adjustment primarily reflects depreciation of the Russian ruble and Mexican peso.
(d)Currency translation adjustment primarily reflects depreciation of the Turkish lira, Swiss franc and Mexican peso.
(e)Currency translation adjustment primarily reflects depreciation of the Egyptian pound and British 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 |
| 2022 | | 2021 | | 2020 | | |
Currency translation: | | | | | | | |
Divestitures | $ | — | | | $ | 18 | | | $ | — | | | Selling, general and administrative expenses |
| | | | | | | |
Cash flow hedges: | | | | | | | |
Foreign exchange contracts | $ | (11) | | | $ | 6 | | | $ | — | | | Net revenue |
Foreign exchange contracts | (10) | | | 76 | | | (43) | | | Cost of sales |
Interest rate derivatives | 159 | | | 64 | | | (129) | | | Selling, general and administrative expenses |
Commodity contracts | (252) | | | (190) | | | 50 | | | Cost of sales |
Commodity contracts | (15) | | | (4) | | | 6 | | | Selling, general and administrative expenses |
Net gains before tax | (129) | | | (48) | | | (116) | | | |
Tax amounts | 23 | | | 11 | | | 29 | | | |
Net (gains) after tax | $ | (106) | | | $ | (37) | | | $ | (87) | | | |
| | | | | | | |
Pension and retiree medical items: | | | | | | | |
Amortization of net prior service credit | $ | (37) | | | $ | (44) | | | $ | — | | | Other pension and retiree medical benefits income |
Amortization of net losses | 164 | | | 289 | | | 238 | | | Other pension and retiree medical benefits income |
Settlement/curtailment losses | 313 | | | 54 | | | 227 | | | Other pension and retiree medical benefits income |
Net losses before tax | 440 | | | 299 | | | 465 | | | |
Tax amounts | (80) | | | (65) | | | (101) | | | |
Net losses after tax | $ | 360 | | | $ | 234 | | | $ | 364 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total net losses reclassified for the year, net of tax | $ | 254 | | | $ | 215 | | | $ | 277 | | | |
Note 12 — 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:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Operating lease cost (a) | $ | 585 | | | $ | 563 | | | $ | 539 | |
Variable lease cost (b) | $ | 115 | | | $ | 112 | | | $ | 111 | |
Short-term lease cost (c) | $ | 510 | | | $ | 469 | | | $ | 436 | |
(a)Includes right-of-use asset amortization of $517 million, $505 million, and $478 million in 2022, 2021, and 2020, respectively.
(b)Primarily related to adjustments for inflation, common-area maintenance and property tax.
(c)Not recorded on our balance sheet.
In 2022, 2021 and 2020, we recognized gains of $175 million, $42 million and $7 million, respectively, on sale-leaseback transactions with terms under five years.
Supplemental cash flow information and non-cash activity related to our operating leases are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Operating cash flow information: | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | $ | 573 | | | $ | 567 | | | $ | 555 | |
Non-cash activity: | | | | | |
Right-of-use assets obtained in exchange for lease obligations | $ | 871 | | | $ | 934 | | | $ | 621 | |
Supplemental balance sheet information related to our operating leases is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Balance Sheet Classification | | 2022 | | 2021 |
Right-of-use assets | | Other assets | | $ | 2,373 | | | $ | 2,020 | |
Current lease liabilities | | Accounts payable and other current liabilities | | $ | 483 | | | $ | 446 | |
Non-current lease liabilities | | Other liabilities | | $ | 1,933 | | | $ | 1,598 | |
Weighted-average remaining lease term and discount rate for our operating leases are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Weighted-average remaining lease term | 7 years | | 7 years | | 6 years |
Weighted-average discount rate | 3 | % | | 3 | % | | 4 | % |
Maturities of lease liabilities by year for our operating leases are as follows:
| | | | | |
2023 | $ | 541 | |
2024 | 465 | |
2025 | 386 | |
2026 | 326 | |
2027 | 266 | |
2028 and beyond | 718 | |
Total lease payments | 2,702 | |
Less: Imputed interest | 286 | |
Present value of lease liabilities | $ | 2,416 | |
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 13 — Acquisitions and Divestitures
Juice Transaction
In the first quarter of 2022, we sold our Tropicana, Naked and other select juice brands to PAI Partners for approximately $3.5 billion in cash, subject to purchase price adjustments, and a 39% noncontrolling interest in TBG, operating across North America and Europe. The North America portion of the transaction was completed on January 24, 2022 and the Europe portion of the transaction was completed on February 1, 2022. In the United States, PepsiCo acts as the exclusive distributor for TBG’s portfolio of brands for small-format and foodservice customers with chilled DSD. We have significant influence over our investment in TBG and account for our investment under the equity method, recognizing our proportionate share of TBG’s earnings on our income statement (recorded in selling, general and administrative expenses).
As a result of this transaction, in the year ended December 31, 2022, we recorded a gain in our PBNA and Europe divisions (see detailed income statement activity below), including $520 million related to the remeasurement of our 39% ownership in TBG at fair value using a combination of the transaction price, discounted cash flows and an option pricing model related to our liquidation preference in TBG. In the fourth quarter of 2022, we reached an agreement on final purchase price adjustments for net working capital and net debt amounts as of the transaction close date compared to targeted amounts set forth in the purchase agreement.
A summary of income statement activity related to the Juice Transaction for the year ended December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| PBNA | | Europe | | Corporate | | Total PepsiCo | | Provision for income taxes(a) | | Net income attributable to PepsiCo | | Impact on net income attributable to PepsiCo per common share | |
Gain associated with the Juice Transaction | $ | (3,029) | | | $ | (292) | | | $ | — | | | $ | (3,321) | | | $ | 433 | | | $ | (2,888) | | | $ | 2.08 | | |
Acquisition and divestiture-related charges | 51 | | | 14 | | | 6 | | | 71 | | | (13) | | | 58 | | | (0.04) | | |
Operating profit | $ | (2,978) | | | $ | (278) | | | $ | 6 | | | (3,250) | | | 420 | | | (2,830) | | | 2.04 | | |
Other pension and retiree medical benefits income (b) | | | | | | | (10) | | | 3 | | | (7) | | | 0.01 | | |
Total Juice Transaction | | | | | | | $ | (3,260) | | | $ | 423 | | | $ | (2,837) | | | $ | 2.04 | | (c) |
(a) Includes $186 million of deferred tax expense related to the recognition of our investment in TBG.
(b) Includes $16 million curtailment gain, partially offset by $6 million special termination benefits.
(c) Does not sum due to rounding.
In connection with the sale, we entered into a transition services agreement with PAI Partners, under which we provide certain services to TBG to help facilitate an orderly transition of the business following the sale. In return for these services, TBG is required to pay certain agreed upon fees to reimburse us for our costs without markup.
As of December 25, 2021, $1.8 billion of assets, primarily accounts receivable, net, and inventories of $0.5 billion, goodwill and other intangible assets of $0.6 billion and property, plant and equipment of $0.5 billion, and liabilities of $0.8 billion, primarily accounts payable and other liabilities of $0.6 billion and deferred income taxes of $0.2 billion, related to the Juice Transaction were reclassified as held for sale in our consolidated balance sheet. The Juice Transaction did not meet the criteria to be classified as discontinued operations. As of December 31, 2022, there were no amounts classified as held for sale.
2020 Acquisitions
On March 23, 2020, we acquired 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. The total consideration transferred was approximately $1.2 billion and was funded by two unsecured bridge loan facilities entered into by one of our international consolidated subsidiaries, which were fully repaid in April 2020.
In connection with our acquisition of Pioneer Foods, we have made certain commitments to the South Africa Competition Commission, including a commitment to provide the equivalent of 8.8 billion South African rand, or approximately $0.5 billion as of the acquisition date, in value for the benefit of our employees, agricultural development, education, developing Pioneer Foods’ operations and enterprise development programs in South Africa. Included in this commitment is 2.3 billion South African rand, or approximately $0.1 billion, relating to the implementation of an employee ownership plan and an agricultural, entrepreneurship and educational development fund, which is an irrevocable condition of the acquisition. This commitment was recorded in selling, general and administrative expenses primarily in the year ended December 26, 2020 and was primarily settled in the fourth quarter of 2021. The remaining commitment of 6.5 billion South African rand, or approximately $0.4 billion as of the acquisition date, relates to capital expenditures and/or business-related costs which will be incurred and recorded over a five-year period from the acquisition date.
On April 24, 2020, we acquired Rockstar, an energy drink maker with whom we had a distribution agreement prior to the acquisition, for an upfront cash payment of approximately $3.85 billion and contingent consideration related to estimated future tax benefits associated with the acquisition of approximately $0.88 billion. In the fourth quarter of 2021, we exercised our option to accelerate all remaining payments due under the contingent consideration arrangement.
On June 1, 2020, we acquired all of the outstanding shares of Be & Cheery, one of the largest online convenient food companies in China, from Haoxiangni Health Food Co., Ltd. for cash. The total consideration transferred was approximately $0.7 billion.
We accounted for the 2020 transactions as business combinations. We recognized and measured the identifiable assets acquired and liabilities assumed at their estimated fair values on the respective dates of acquisition. The purchase price allocations for each of the 2020 acquisitions were finalized in the second quarter of 2021. The fair value of identifiable assets acquired and liabilities assumed in the acquisitions of Pioneer Foods, Rockstar and Be & Cheery and the resulting goodwill as of the respective acquisition dates is summarized as follows:
| | | | | | | | | | | | | | | | | |
| Pioneer Foods | | Rockstar | | Be & Cheery |
Acquisition date | March 23, 2020 | | April 24, 2020 | | June 1, 2020 |
Inventories | $ | 229 | | | $ | 52 | | | $ | 45 | |
Property, plant and equipment | 379 | | | 8 | | | 60 | |
Amortizable intangible assets | 52 | | | — | | | 98 | |
Nonamortizable intangible assets | 183 | | | 2,400 | | | 309 | |
Other assets and liabilities | (53) | | | (9) | | | (24) | |
Net deferred income taxes | (117) | | | — | | | (99) | |
Noncontrolling interest | (5) | | | — | | | — | |
Total identifiable net assets | 668 | | | 2,451 | | | 389 | |
Goodwill | 558 | | | 2,278 | | | 309 | |
Total purchase price | $ | 1,226 | | | $ | 4,729 | | | $ | 698 | |
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 Pioneer Foods primarily reflects synergies expected to arise from our combined brand portfolios and distribution networks, and is not deductible for tax purposes. All of the goodwill is recorded in the AMESA division.
The goodwill recorded as part of the acquisition of Rockstar primarily represents the value of PepsiCo’s expected new innovation in the energy category and is deductible for tax purposes. All of the goodwill is recorded in the PBNA division.
The goodwill recorded as part of the acquisition of Be & Cheery primarily reflects growth opportunities for PepsiCo as we leverage Be & Cheery’s direct-to-consumer and supply chain capabilities and is not deductible for tax purposes. All of the goodwill is recorded in the APAC division.
Acquisition and Divestiture-Related Charges
Acquisition and divestiture-related charges primarily include fair value adjustments to the acquired inventory included in the acquisition-date balance sheets (recorded in cost of sales), merger and integration charges and costs associated with divestitures (recorded in selling, general and administrative expenses). Merger and integration charges include liabilities to support socioeconomic programs in South Africa, gains associated with contingent consideration, employee-related costs, contract termination costs, closing costs and other integration costs. Divestiture-related charges reflect transaction expenses, including consulting, advisory and other professional fees.
A summary of our acquisition and divestiture-related charges is as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Cost of sales | $ | — | | | $ | 1 | | | $ | 32 | |
Selling, general and administrative expenses (a) | 74 | | | (5) | | | 223 | |
Other pension and retiree medical benefits expense | 6 | | | — | | | — | |
Total | $ | 80 | | | $ | (4) | | | $ | 255 | |
After-tax amount (b) | $ | 66 | | | $ | (27) | | | $ | 237 | |
Impact on net income attributable to PepsiCo per common share | $ | (0.05) | | | $ | 0.02 | | | $ | (0.17) | |
(a)The income amount primarily relates to the acceleration payment made in the fourth quarter of 2021 under the contingent consideration arrangement associated with our acquisition of Rockstar, which is partially offset by other acquisition and divestiture-related charges.
(b)In 2021, includes a tax benefit related to contributions to socioeconomic programs in South Africa.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 | | Transaction |
FLNA | $ | — | | | $ | 2 | | | $ | 29 | | | BFY Brands |
PBNA | 51 | | | 11 | | | 66 | | | Juice Transaction, Rockstar |
Europe | 14 | | | 8 | | | — | | | Juice Transaction |
AMESA | 3 | | | 10 | | | 173 | | | Pioneer Foods, Other |
APAC | — | | | 4 | | | 7 | | | Be & Cheery |
Corporate (a) | 6 | | | (39) | | | (20) | | | Juice Transaction, Rockstar |
Total | 74 | | | (4) | | | 255 | | | |
Other pension and retiree medical benefits expense | 6 | | | — | | | — | | | Juice Transaction |
Total acquisition and divestiture-related charges | $ | 80 | | | $ | (4) | | | $ | 255 | | | |
| | | | | | | |
| | | | | | | |
(a)In 2021, the income amount primarily relates to the acceleration payment made in the fourth quarter of 2021 under the contingent consideration arrangement associated with our acquisition of Rockstar, which is partially offset by divestiture-related charges associated with the Juice Transaction. In 2020, the income amount primarily relates to the change in the fair value of the Rockstar contingent consideration.
Note 14 — Supplemental Financial Information
Balance Sheet
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | 2020 |
Accounts and notes receivable (a) | | | | | | | |
Trade receivables | | | $ | 8,192 | | | $ | 7,172 | | | |
Other receivables | | | 2,121 | | | 1,655 | | | |
Total | | | 10,313 | | | 8,827 | | | |
Allowance, beginning of year | | | 147 | | | 201 | | | $ | 105 | |
Cumulative effect of accounting change | | | — | | | — | | | 44 | |
Net amounts charged to expense (b) | | | 21 | | | (19) | | | 79 | |
Deductions (c) | | | (12) | | | (25) | | | (32) | |
Other (d) | | | (6) | | | (10) | | | 5 | |
Allowance, end of year | | | 150 | | | 147 | | | $ | 201 | |
Net receivables | | | $ | 10,163 | | | $ | 8,680 | | | |
| | | | | | | |
Inventories (e) | | | | | | | |
Raw materials and packaging | | | $ | 2,366 | | | $ | 1,898 | | | |
Work-in-process | | | 114 | | | 151 | | | |
Finished goods | | | 2,742 | | | 2,298 | | | |
Total | | | $ | 5,222 | | | $ | 4,347 | | | |
| | | | | | | |
Property, plant and equipment, net (f) | Average Useful Life (Years) | | | | | | |
Land | | | $ | 1,142 | | | $ | 1,123 | | | |
Buildings and improvements | 15 - 44 | | 10,816 | | | 10,279 | | | |
Machinery and equipment, including fleet and software | 5 - 15 | | 33,335 | | | 31,486 | | | |
Construction in progress | | | 4,491 | | | 3,940 | | | |
| | | 49,784 | | | 46,828 | | | |
Accumulated depreciation | | | (25,493) | | | (24,421) | | | |
Total | | | $ | 24,291 | | | $ | 22,407 | | | |
Depreciation expense | | | $ | 2,523 | | | $ | 2,484 | | | $ | 2,335 | |
| | | | | | | |
Other assets | | | | | | | |
Noncurrent notes and accounts receivable | | | $ | 202 | | | $ | 111 | | | |
Deferred marketplace spending | | | 123 | | | 119 | | | |
Pension plans (g) | | | 948 | | | 1,260 | | | |
Right-of-use assets (h) | | | 2,373 | | | 2,020 | | | |
Other investments (i) | | | 813 | | | 277 | | | |
Other | | | 833 | | | 694 | | | |
Total | | | $ | 5,292 | | | $ | 4,481 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Accounts payable and other current liabilities | | | | | | | |
Accounts payable (j) | | | $ | 10,732 | | | $ | 9,834 | | | |
Accrued marketplace spending | | | 3,637 | | | 3,087 | | | |
Accrued compensation and benefits | | | 2,519 | | | 2,324 | | | |
Dividends payable | | | 1,610 | | | 1,508 | | | |
Current lease liabilities (h) | | | 483 | | | 446 | | | |
Other current liabilities | | | 4,390 | | | 3,960 | | | |
Total | | | $ | 23,371 | | | $ | 21,159 | | | |
(a)Increase primarily reflects strong revenue performance across much of our portfolio in 2022.
(b)2021 includes reductions in allowance for expected credit losses related to COVID-19 pandemic recorded in 2020.
(c)Includes accounts written off.
(d)Includes adjustments related primarily to currency translation and other adjustments.
(e)Increase reflects higher commodity costs in 2022. Approximately 9% and 7% of the inventory cost in 2022 and 2021, respectively, were computed using the LIFO method. The differences between LIFO and FIFO methods of valuing these inventories were not material. See Note 2 for further information.
(f)See Note 2 for further information.
(g)See Note 7 for further information.
(h)See Note 12 for further information.
(i)Increase in 2022 primarily reflects our investment in Celsius convertible preferred stock. See Note 9 for further information.
(j)Increase reflects higher commodity costs and capital expenditures in 2022.
Statement of Cash Flows
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Interest paid (a) | $ | 1,043 | | | $ | 1,184 | | | $ | 1,156 | |
Income taxes paid, net of refunds (b) | $ | 2,766 | | | $ | 1,933 | | | $ | 1,770 | |
(a)2022 excludes the premiums paid in accordance with the debt transactions. 2021 excludes the charge related to cash tender offers. See Note 8 for further information.
(b)In 2022, 2021 and 2020, includes tax payments of $309 million, $309 million and $78 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.
| | | | | | | | | | | |
| 2022 | | 2021 |
Cash and cash equivalents | $ | 4,954 | | | $ | 5,596 | |
| | | |
Restricted cash included in other assets (a) | 146 | | | 111 | |
Total cash and cash equivalents and restricted cash | $ | 5,100 | | | $ | 5,707 | |
(a)Primarily relates to collateral posted against certain of our derivative positions.