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Document and Entity Information	6 Months Ended
Jun. 12, 2010	Jul. 09, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-06-12
Document Fiscal Year Focus	2010
Document Fiscal Period Focus	Q2
Trading Symbol	PEP
Entity Registrant Name	PEPSICO INC
Entity Central Index Key	0000077476
Current Fiscal Year End Date	--12-25
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		1,590,933,558

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CONDENSED CONSOLIDATED STATEMENT OF INCOME (USD $) In Millions, except Per Share data	3 Months Ended	6 Months Ended
Jun. 12, 2010	Jun. 13, 2009	Jun. 12, 2010	Jun. 13, 2009
Net Revenue	$ 14,801	$ 10,592	$ 24,169	$ 18,855
Cost of sales	6,745	4,881	11,208	8,625
Selling, general and administrative expenses	5,563	3,507	9,612	6,428
Amortization of intangible assets	32	14	48	24
Operating Profit	2,461	2,190	3,301	3,778
Bottling equity income	9	119	718	144
Interest expense	(172)	(101)	(326)	(199)
Interest income	2	28	8	28
Income before income taxes	2,300	2,236	3,701	3,751
Provision for income taxes	687	568	654	942
Net income	1,613	1,668	3,047	2,809
Less: Net income attributable to noncontrolling interests	10	8	14	14
Net Income Attributable to PepsiCo	$ 1,603	$ 1,660	$ 3,033	$ 2,795
Net Income Attributable to PepsiCo per Common Share
Basic	$ 1	$ 1.06	$ 1.9	$ 1.79
Diluted	$ 0.98	$ 1.06	$ 1.87	$ 1.78
Cash Dividends Declared per Common Share	$ 0.48	$ 0.45	$ 0.93	$ 0.875

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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (USD $) In Millions	6 Months Ended
Jun. 12, 2010	Jun. 13, 2009
Operating Activities
Net income	$ 3,047	$ 2,809
Depreciation and amortization	969	685
Stock-based compensation expense	119	108
2009 restructuring and impairment charges		36
Cash payments for 2009 restructuring charges	(28)	(160)
PBG/PAS merger and integration costs	476
Cash payments for PBG/PAS merger and integration costs	(209)
Gain on previously held equity interests in PBG and PAS	(958)
Asset write-off	145
Non-cash foreign exchange loss related to Venezuela devaluation	120
Excess tax benefits from share-based payment arrangements	(47)	(8)
Pension and retiree medical plan contributions	(694)	(1,088)
Pension and retiree medical plan expenses	248	192
Bottling equity income, net of dividends	42	(101)
Deferred income taxes and other tax charges and credits	186	4
Change in accounts and notes receivable	(994)	(489)
Change in inventories	40	(384)
Change in prepaid expenses and other current assets	(139)	(124)
Change in accounts payable and other current liabilities	(55)	(505)
Change in income taxes payable	337	669
Other, net	(163)	(152)
Net Cash Provided by Operating Activities	2,442	1,492
Investing Activities
Capital spending	(968)	(735)
Sales of property, plant and equipment	37	26
Acquisitions of PBG and PAS, net of cash and cash equivalents acquired	(2,833)
Acquisition of manufacturing and distribution rights from Dr Pepper Snapple Group, Inc. (DPSG)	(900)
Other acquisitions and investments in noncontrolled affiliates	(34)	(120)
Divestitures		16
Short-term investments, by original maturity
More than three months - purchases	(6)	(23)
More than three months - maturities	15	34
Three months or less, net	(46)	6
Other investing, net	(10)
Net Cash Used for Investing Activities	(4,745)	(796)
Financing Activities
Proceeds from issuances of long-term debt	4,216	1,053
Payments of long-term debt	(26)	(151)
Short-term borrowings, by original maturity
More than three months - proceeds	31	33
More than three months - payments	(19)	(64)
Three months or less, net	3,329	(196)
Cash dividends paid	(1,451)	(1,331)
Share repurchases - common	(3,308)
Share repurchases - preferred	(2)	(3)
Proceeds from exercises of stock options	464	117
Excess tax benefits from share-based payment arrangements	47	8
Acquisition of noncontrolling interest in Lebedyansky from PBG	(159)
Other financing	(6)
Net Cash Provided by/(Used for) Financing Activities	3,116	(534)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	(227)	(12)
Net Increase in Cash and Cash Equivalents	586	150
Cash and Cash Equivalents - Beginning of year	3,943	2,064
Cash and Cash Equivalents - End of period	4,529	2,214
Non-cash activity:
Issuance of common stock and equity awards in connection with our acquisitions of PBG and PAS, as reflected in investing and financing activities	$ 4,451

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CONDENSED CONSOLIDATED BALANCE SHEET (USD $) In Millions	6 Months Ended	12 Months Ended
Jun. 12, 2010	Dec. 26, 2009
Current Assets
Cash and cash equivalents	$ 4,529	$ 3,943
Short-term investments	225	192
Accounts and notes receivable, less allowance: 6/10 - $151, 12/09 - $90	6,880	4,624
Inventories
Raw materials	1,725	1,274
Work-in-process	252	165
Finished goods	1,553	1,179
Inventory, Net, Total	3,530	2,618
Prepaid expenses and other current assets	1,579	1,194
Total Current Assets	16,743	12,571
Property, Plant and Equipment	31,116	24,912
Accumulated Depreciation	(12,720)	(12,241)
Property, Plant and Equipment, Net, Total	18,396	12,671
Amortizable Intangible Assets, net	2,080	841
Goodwill	13,605	6,534
Other Nonamortizable Intangible Assets	11,796	1,782
Nonamortizable Intangible Assets	25,401	8,316
Investments in Noncontrolled Affiliates	1,373	4,484
Other Assets	1,081	965
Total Assets	65,074	39,848
Current Liabilities
Short-term obligations	4,493	464
Accounts payable and other current liabilities	9,843	8,127
Income taxes payable	236	165
Total Current Liabilities	14,572	8,756
Long-term Debt Obligations	19,586	7,400
Other Liabilities	6,843	5,591
Deferred Income Taxes	4,159	659
Total Liabilities	45,160	22,406
Commitments and Contingencies
Preferred Stock, no par value	41	41
Repurchased Preferred Stock	(147)	(145)
PepsiCo Common Shareholders' Equity
Common stock, par value 1 2/3 cents per share: Authorized 3,600 shares, issued 6/10 - 1,865 shares, 12/09 - 1,782 shares	31	30
Capital in excess of par value	4,539	250
Retained earnings	35,328	33,805
Accumulated other comprehensive loss	(4,226)	(3,794)
Less: repurchased common stock, at cost: 6/10 - 272 shares, 12/09 - 217 shares	(15,940)	(13,383)
Total PepsiCo Common Shareholders' Equity	19,732	16,908
Noncontrolling interests	288	638
Total Equity	19,914	17,442
Total Liabilities and Equity	$ 65,074	$ 39,848

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CONDENSED CONSOLIDATED BALANCE SHEET (Parenthetical) (USD $) In Millions, except Per Share data	Jun. 12, 2010	Dec. 26, 2009
Accounts and notes receivable, allowance	$ 151	$ 90
Preferred Stock, par value	$ 0	$ 0
Common stock, par value	$ 0.016667	$ 0.016667
Common stock, Authorized	3,600	3,600
Common stock, issued	1,865	1,782
Repurchased common stock, shares	272	217

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CONDENSED CONSOLIDATED STATEMENT OF EQUITY (USD $) In Millions	Preferred Stock	Repurchased Preferred Stock	Common Stock	Repurchased Common Stock	Capital in Excess of Par Value	Retained Earnings	Accumulated Other Comprehensive Loss	Total Common Shareholders' Equity	Noncontrolling Interests	Total
Balance, beginning of year (in shares) at Dec. 27, 2008		(0.5)	1,782	(229)
Balance, beginning of year at Dec. 27, 2008	$ 41	$ (138)	$ 30	$ (14,122)	$ 351		$ 30,638	$ (4,694)		$ 476
Redemptions (in shares)
Stock option exercises (in shares)				3
Other (in shares)				1
Net income							2,795			14	2,809
Stock-based compensation expense					108
Redemptions		(3)
Cash dividends declared - common							(1,362)
Stock option exercises/RSUs converted					(158)	^[1]
Stock option exercises				187
Currency translation adjustment								281		(62)
Cash dividends declared - preferred							(1)
Withholding tax on RSUs converted					(32)
Cash flow hedges, net of tax:
Net derivative losses								(23)			(23)
Reclassification of derivative losses/(gains) to net income								(16)			(16)
Cash dividends declared - RSUs							(5)
Reclassification of pension and retiree medical losses to net income, net of tax								10			10
Unrealized gains on securities, net of tax								4			4
Other				86						4
Balance, end of period (in shares) at Jun. 13, 2009	0.8	(0.5)	1,782	(225)
Balance, end of period at Jun. 13, 2009	41	(141)	30	(13,849)	269		32,065	(4,438)	14,077	432	14,409
Balance, beginning of year (in shares) at Dec. 26, 2009		(0.6)	1,782	(217)
Balance, beginning of year at Dec. 26, 2009	41	(145)	30	(13,383)	250		33,805	(3,794)		638	17,442
Share repurchases (in shares)				(52)
Shares issued in connection with our acquisitions of PBG and PAS (in shares)			83
Redemptions (in shares)
Stock option exercises (in shares)				11
Other (in shares)				(14)
Net income							3,033			14	3,047
Stock-based compensation expense					119
Share repurchases				(3,370)
Redemptions		(2)
Cash dividends declared - common							(1,510)
Stock option exercises/RSUs converted					(321)	^[1]
Distributions to noncontrolling interests, net										(350)
Stock option exercises				696
Currency translation adjustment								(581)		(14)
Cash dividends declared - preferred							(1)
Withholding tax on RSUs converted					(55)
Cash flow hedges, net of tax:
Net derivative losses								(86)			(86)
Reclassification of derivative losses/(gains) to net income								23			23
Cash dividends declared - RSUs							(6)
Equity issued in connection with our acquisitions of PBG and PAS			1		4,451
Reclassification of pension and retiree medical losses to net income, net of tax								211			211
Unrealized gains on securities, net of tax								1			1
Other				117	95		7
Balance, end of period (in shares) at Jun. 12, 2010	0.8	(0.6)	1,865	(272)
Balance, end of period at Jun. 12, 2010	$ 41	$ (147)	$ 31	$ (15,940)	$ 4,539		$ 35,328	$ (4,226)	$ 19,732	$ 288	$ 19,914

[1]	Includes total tax benefit/(shortfall) of $30 million in 2010 and $(1) million in 2009.

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CONDENSED CONSOLIDATED STATEMENT OF EQUITY (Parenthetical) (USD $) In Millions	6 Months Ended
Jun. 12, 2010	Jun. 13, 2009
Stock option exercises/RSUs converted, tax benefit/(shortfall)	$ 30	$ (1)

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CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (USD $) In Millions	3 Months Ended	6 Months Ended
Jun. 12, 2010	Jun. 13, 2009	Jun. 12, 2010	Jun. 13, 2009
Net income	$ 1,613	$ 1,668	$ 3,047	$ 2,809
Other Comprehensive Income
Currency translation adjustment	(700)	1,324	(595)	219
Reclassification of pension and retiree medical losses/(gains) to net income, net of tax	75	(15)	211	10
Cash flow hedges, net of tax:
Net derivative losses	(38)	(14)	(86)	(23)
Reclassification of derivative losses/(gains) to net income	5	(19)	23	(16)
Unrealized gains on securities, net of tax	2	9	1	4
Other Comprehensive Income (Loss), Net of Tax, Total	(656)	1,285	(446)	194
Comprehensive Income	957	2,953	2,601	3,003
Comprehensive (income)/loss attributable to noncontrolling interests	(11)	(33)		48
Comprehensive Income Attributable to PepsiCo	$ 946	$ 2,920	$ 2,601	$ 3,051

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Basis of Presentation and Our Divisions

6 Months Ended

Jun. 12, 2010

Basis of Presentation and Our Divisions

Basis of Presentation and Our Divisions

Basis of Presentation

The Condensed Consolidated Balance Sheet as of June 12, 2010, the Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 24 weeks ended June 12, 2010 and June 13, 2009, and the Condensed Consolidated Statements of Cash Flows and Equity for the 24 weeks ended June 12, 2010 and June 13, 2009 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended December 26, 2009. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 and 24 weeks are not necessarily indicative of the results expected for the full year.

While the majority of our results are reported on a period basis, most of our international operations report on a monthly calendar basis for which the months of March, April and May are reflected in our second quarter results.

On February 26, 2010, we completed our acquisitions of The Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS). The results of the acquired companies in the U.S. and Canada are reflected in our condensed consolidated results as of the acquisition date, and the international results of the acquired companies have been reported as of the beginning of our second quarter 2010, consistent with our monthly international reporting calendar. The results of the acquired companies in the U.S., Canada and Mexico are reported within our PAB segment, and the results of the acquired companies in Europe, including Russia, are reported within our Europe segment. Prior to our acquisitions of PBG and PAS, we recorded our share of equity income or loss from the acquired companies in bottling equity income in our income statement. Subsequent to our acquisitions of PBG and PAS, we continue to record our share of equity income or loss from Pepsi Bottling Ventures LLC in bottling equity income and our share of income or loss from other noncontrolled affiliates as a component of selling, general and administrative expenses. Additionally, in connection with our acquisitions of PBG and PAS, we recorded a gain on our previously held equity interests of $958 million, comprising $735 million which is non-taxable and recorded in bottling equity income and $223 million related to the reversal of deferred tax liabilities associated with these previously held equity interests. See also Acquisitions of PBG and PAS and “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As of the beginning of our 2010 fiscal year, the results of our Venezuelan businesses are reported under hyperinflationary accounting. See “Our Business Risks” and “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our significant interim accounting policies include the recognition of a pro rata share of certain estimated annual sales incentives, and certain advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate. Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw material handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.

The following information is unaudited. Tabular dollars are presented 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. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 26, 2009.

Our Divisions

We are organized into four business units, as follows:

PepsiCo Americas Foods (PAF), which includes Frito-Lay North America (FLNA), Quaker Foods North America (QFNA) and all of our Latin American food and snack businesses (LAF), including our Sabritas and Gamesa businesses in Mexico;

PepsiCo Americas Beverages (PAB), which includes PepsiCo Beverages Americas and Pepsi Beverages Company;

PepsiCo Europe, which includes all beverage, food and snack businesses in Europe; and

PepsiCo Asia, Middle East and Africa (AMEA), which includes all beverage, food and snack businesses in AMEA.

Our four business units comprise six reportable segments (referred to as divisions), as follows:

•

FLNA,

•

QFNA,

•

LAF,

•

PAB,

•

Europe, and

•

AMEA.


	12 Weeks Ended			24 Weeks Ended
	6/12/10			6/13/09			6/12/10		6/13/09
Net Revenue
FLNA	$	3,195			$	3,138		$	6,262		$	6,138
QFNA		379				396			859			881
LAF		1,538				1,378			2,521			2,245
PAB^(a)		5,548				2,618			8,313			4,706
Europe^(a)		2,416				1,642			3,409			2,589
AMEA		1,725				1,420			2,805			2,296

	$	14,801			$	10,592		$	24,169		$	18,855


	12 Weeks Ended			24 Weeks Ended
	6/12/10			6/13/09			6/12/10		6/13/09

Operating Profit
FLNA	$	845			$	783		$	1,615		$	1,480
QFNA		114				132			267			307
LAF		233				240			378			404
PAB^(a)		952				618			1,025			1,043
Europe^(a)		266				257			379			355
AMEA		277				237			437			373

Total division		2,687				2,267			4,101			3,962
Corporate Unallocated
Net impact of mark-to-market on commodity hedges		(4	)			100			42			162
PBG/PAS merger and integration costs		(24	)			–			(112	)		–
Venezuela currency devaluation		–				–			(129	)		–
Asset write-off		–				–			(145	)		–
Foundation contribution		–				–			(100	)		–
Other		(198	)			(177	)		(356	)		(346	)

	$	2,461			$	2,190		$	3,301		$	3,778

^(a)	Changes in 2010 relate primarily to our acquisitions of PBG and PAS.


	Total Assets
	6/12/10		12/26/09
FLNA	$	6,391		$	6,337
QFNA		931			997
LAF		3,503			3,575
PAB^(a)		32,227			7,670
Europe^(a)		12,522			9,321
AMEA		5,294			4,937

Total division		60,868			32,837
Corporate		3,967			3,933
Investments in bottling affiliates^(a)		239			3,078

	$	65,074		$	39,848

^(a)	Changes in 2010 relate primarily to our acquisitions of PBG and PAS.

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Acquisitions of PBG and PAS

6 Months Ended

Jun. 12, 2010

Acquisitions of PBG and PAS

Acquisitions of PBG and PAS

On February 26, 2010, PepsiCo announced that pursuant to the terms of merger agreements entered into on August 3, 2009 (the “Merger Agreements”), PBG and PAS merged with and into Pepsi-Cola Metropolitan Bottling Company, Inc. (“Metro”), with Metro continuing as the surviving corporation and a wholly owned subsidiary of PepsiCo. We acquired PBG and PAS to create a more fully integrated supply chain and go-to-market business model, improving the effectiveness and efficiency of the distribution of our brands and enhancing our revenue growth. The total purchase price was approximately $12.6 billion, which included $8.3 billion of cash and equity and the fair value of our previously held equity interests in PBG and PAS of $4.3 billion.

Under the terms of the Merger Agreements: (i) each outstanding share of common stock of PBG not held by Metro, PepsiCo or a subsidiary of PepsiCo or held by PBG as treasury stock (each, a “PBG Share”) was canceled and converted into the right to receive, at the holder’s election, either 0.6432 shares of common stock of PepsiCo (the “PBG Per Share Stock Consideration”) or $36.50 in cash, without interest (the “PBG Cash Election Price”), subject to proration provisions which provide that an aggregate 50% of such outstanding PBG Shares were converted into the right to receive common stock of PepsiCo and an aggregate 50% of such outstanding PBG Shares were converted into the right to receive cash and each PBG Share and share of Class B common stock of PBG held by Metro, PepsiCo or a subsidiary of PepsiCo was canceled or converted to the right to receive 0.6432 shares of common stock of PepsiCo; and (ii) each outstanding share of common stock of PAS not held by Metro, PepsiCo or a subsidiary of PepsiCo or held by PAS as treasury stock (each, a “PAS Share”) was canceled and converted into the right to receive, at the holder’s election, either 0.5022 shares of common stock of PepsiCo (the “PAS Per Share Stock Consideration”) or $28.50 in cash, without interest (the “PAS Cash Election Price”), subject to proration provisions which provide that an aggregate 50% of such outstanding PAS Shares were converted into the right to receive common stock of PepsiCo and an aggregate 50% of such outstanding PAS Shares were converted into the right to receive cash and each PAS Share held by Metro, PepsiCo or a subsidiary of PepsiCo was canceled or converted into the right to receive 0.5022 shares of common stock of PepsiCo.

Each PBG or PAS stock option was converted into an adjusted PepsiCo stock option to acquire a number of shares of PepsiCo common stock, determined by multiplying the number of shares of PBG or PAS common stock subject to the PBG or PAS stock option by an exchange ratio (the “Closing Exchange Ratio”) equal to the closing price of a share of PBG or PAS common stock on the business day immediately before the acquisition date divided by the closing price of a share of PepsiCo common stock on the business day immediately before the acquisition date. The exercise price per share of PepsiCo common stock subject to the adjusted PepsiCo stock option is equal to the per share exercise price of PBG or PAS stock option divided by the Closing Exchange Ratio.

Each PBG restricted stock unit (RSU) was adjusted so that its holder is entitled to receive, upon settlement, a number of shares of PepsiCo common stock equal to the number of shares of PBG common stock subject to the PBG RSU multiplied by the PBG Per Share Stock Consideration. PBG performance-based RSUs were converted into PepsiCo RSUs based on 100% target achievement, and, following conversion, remain subject to continued service of the holder. Each PBG RSU held by a non-employee director was vested and canceled at the acquisition date, and, in exchange for cancellation of the PBG RSU, the holder received the PBG Per Share Stock Consideration for each share of PBG common stock subject to the PBG RSU.

Each cash-settled PAS RSU was canceled in exchange for a cash payment equal to the closing price of a share of PAS common stock on the business day immediately before the closing of the PAS merger for each share of PAS common stock subject to each PAS RSU. Each PAS restricted share was converted into either the PAS Per Share Stock Consideration or the PAS Cash Election Price, at the election of the holder, with the same proration procedures applicable to PAS stockholders described above.

Pursuant to the terms of PBG’s executive retention arrangements, PBG equity awards granted to certain executives prior to the PBG merger vest immediately upon a qualifying termination of the executive’s employment except for certain PBG executives whose equity awards vested immediately at the effective time of the PBG merger pursuant to the terms of PepsiCo’s executive retention agreements. Each PAS equity award granted prior to the PAS merger vested immediately at the effective time of the PAS merger pursuant to the original terms of the awards.

Prior to the mergers, we had equity investments in PBG and PAS. In addition to approximately 32% of PBG’s outstanding common stock that we owned at year-end 2009, we owned 100% of PBG’s class B common stock and approximately 7% of the equity of Bottling Group, LLC, PBG’s principal operating subsidiary. At year-end 2009, we owned approximately 43% of the outstanding common stock of PAS.

The guidance on accounting for business combinations requires that an acquirer remeasure its previously held equity interest in an acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings. Thus, in connection with our acquisitions of PBG and PAS, the carrying amounts of our previously held equity interests in PBG and PAS were revalued to fair value at the acquisition date, resulting in a gain in the first quarter of 2010 of $958 million, comprising $735 million which is non-taxable and recorded in bottling equity income and $223 million related to the reversal of deferred tax liabilities associated with these previously held equity interests.

As discussed in Debt Obligations and Commitments, in January 2010, we issued $4.25 billion of fixed and floating rate notes. A portion of the net proceeds from the issuance of these notes was used to finance our acquisitions of PBG and PAS.

Our actual stock price on February 25, 2010 (the last trading day prior to the closing of the mergers) was used to determine the value of stock, stock options and RSUs issued as consideration in connection with our acquisitions of PBG and PAS and thus to calculate the actual purchase price.

The table below represents the computation of the purchase price excluding assumed debt and the fair value of our previously held equity interests in PBG and PAS as of the acquisition date:


	Total Number of Shares/Awards Issued	Total Estimated Fair Value
Payment in cash, for the remaining (not owned by PepsiCo and its subsidiaries) outstanding shares of PBG and PAS common stock and equity awards vested at consummation of merger	–	$	3,813
Payment to PBG and PAS of shares of PepsiCo common stock for the remaining (not owned by PepsiCo and its subsidiaries) outstanding shares of PBG and PAS common stock and equity awards vested at consummation of merger	67		4,175
Issuance of PepsiCo equity awards (vested and unvested) to replace existing PBG and PAS equity awards	16		276

Total purchase price	83	$	8,264

The following table summarizes the preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed in the PBG and PAS acquisitions and the resulting goodwill as of the acquisition date. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values presented below, when appraisals are finalized. We expect to finalize these amounts as soon as possible but no later than by the end of 2010.


	Preliminary Estimates of Acquisition Date Fair Value
Inventory	$	1,007
Property, plant and equipment		6,230
Amortizable intangible assets		1,313
Nonamortizable intangible assets, primarily reacquired franchise rights		9,286
Other current assets and current liabilities^(a)		774
Other noncurrent assets		280
Debt obligations		(8,814	)
Pension and retiree medical benefits		(962	)
Other noncurrent liabilities		(610	)
Deferred income taxes		(3,494	)

Total identifiable net assets		5,010
Goodwill		7,229

Subtotal		12,239
Fair value of acquisition of noncontrolling interest		317

Total purchase price	$	12,556

^(a)	Includes cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and other current liabilities.

Goodwill is calculated as the excess of the purchase price paid over the net assets recognized. The goodwill recorded as part of the PBG and PAS acquisitions primarily reflects the value of adding PBG and PAS to PepsiCo to create a more fully integrated supply chain and go-to-market business model, as well as any intangible assets that do not qualify for separate recognition. Goodwill is not amortizable nor deductible for tax purposes. While the final calculation of goodwill and its allocation among reporting units is not complete, substantially all of the goodwill is recorded in our PAB segment.

In connection with our acquisitions of PBG and PAS, we reacquired certain franchise rights which had previously provided PBG and PAS with the exclusive and perpetual rights to manufacture and/or distribute beverages for sale in specified territories. Reacquired franchise rights totaling $8.2 billion were assigned a perpetual life and are, therefore, not amortizable. Amortizable acquired franchise rights of $1 billion have weighted-average estimated useful lives of 49 years. Other amortizable intangible assets, primarily customer relationships, have weighted-average estimated useful lives of 20 years.

Under the guidance on accounting for business combinations, merger and integration costs are not included as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. See Restructuring, Impairment and Integration Charges for details on the expenses incurred during the 12 and 24 weeks ended June 12, 2010.

The following table presents unaudited consolidated pro forma financial information as if the closing of our acquisitions of PBG and PAS had occurred on December 27, 2009 for purposes of the financial information presented for the 12 weeks ended June 12, 2010; and as if the closing of our acquisitions of PBG and PAS had occurred on December 28, 2008 for purposes of the financial information presented for the 12 and 24 weeks ended June 13, 2009.


	(unaudited)
	12 Weeks Ended		24 Weeks Ended
	6/13/09		6/12/10			6/13/09
Net Revenue	$	14,307		$	25,913		$	25,390
Net Income Attributable to PepsiCo	$	1,903		$	2,569	^(a)	$	3,103
Net Income Attributable to PepsiCo per Common Share – Diluted	$	1.16		$	1.56	^(a)	$	1.89

^(a)	Includes PBG/PAS merger and integration costs, inventory fair value adjustments and the gain on previously held equity interests.

The unaudited consolidated pro forma financial information was prepared in accordance with the acquisition method of accounting under existing standards, and the regulations of the U.S. Securities and Exchange Commission, and is not necessarily indicative of the results of operations that would have occurred if our acquisitions of PBG and PAS had been completed on the dates indicated, nor is it indicative of the future operating results of PepsiCo.

The historical unaudited consolidated financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the acquisitions, (2) factually supportable, and (3) expected to have a continuing impact on the combined results of PepsiCo, PBG and PAS.

The unaudited pro forma results have been adjusted with respect to certain aspects of our acquisitions of PBG and PAS to reflect:

•

the consummation of the acquisitions;

•

consolidation of PBG and PAS which are now owned 100% by PepsiCo and the corresponding gain resulting from the remeasurement of our previously held equity interests in PBG and PAS;

•

the elimination of related party transactions between PepsiCo and PBG, and PepsiCo and PAS;

•

changes in assets and liabilities to record their preliminary estimated acquisition date fair values and changes in certain expenses resulting therefrom;

•

additional indebtedness, including, but not limited to, debt issuance costs and interest expense, incurred in connection with the acquisitions; and

•

merger and integration charges associated with the acquisitions.

The unaudited pro forma results do not reflect future events that may occur after the acquisitions, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. They also do not give effect to certain one-time charges we expect to incur in connection with the acquisitions, including, but not limited to, charges that are expected to achieve ongoing cost savings and synergies.

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Intangible Assets

6 Months Ended

Jun. 12, 2010

Intangible Assets

Intangible Assets


	6/12/10			12/26/09
*Amortizable intangible assets, net*
Acquired franchise rights	$	966			$	–
Reacquired franchise rights		120				–
Brands		1,430				1,465
Other identifiable intangibles		720				505

		3,236				1,970
Accumulated amortization		(1,156	)			(1,129	)

	$	2,080			$	841

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


	Balance 12/26/09		Acquisitions		Translation and Other		Balance 6/12/10
*FLNA*
Goodwill	$	306		$	–	$	2		$	308
Brands		30			–		–			30

		336			–		2			338

*QFNA*
Goodwill		175			–		–			175


*LAF*
Goodwill		479			–		(2	)		477
Brands		136			–		3			139

		615			–		1			616

*PAB*^(a)
Goodwill		2,431			6,480		8			8,919
Reacquired franchise rights		–			7,507		21			7,528
Acquired franchise rights		–			585		902	^(b ⁾		1,487
Brands		112			36		(2	)		146

		2,543			14,608		929			18,080

*Europe*^(a)
Goodwill		2,624			749		(223	)		3,150
Reacquired franchise rights		–			691		(48	)		643
Acquired franchise rights		–			475		(38	)		437
Brands		1,378			–		(117	)		1,261

		4,002			1,915		(426	)		5,491

*AMEA*
Goodwill		519			84		(27	)		576
Brands		126			8		(9	)		125

		645			92		(36	)		701


Total goodwill		6,534			7,313		(242	)		13,605
Total reacquired franchise rights		–			8,198		(27	)		8,171
Acquired franchise rights		–			1,060		864			1,924
Total brands		1,782			44		(125	)		1,701

	$	8,316		$	16,615	$	470		$	25,401

^(a)	Net increases in 2010 relate primarily to our acquisitions of PBG and PAS.

^(b)	Includes $900 million related to our upfront payment to Dr Pepper Snapple Group (DPSG) to manufacture and distribute Dr Pepper and certain other DPSG products.

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Stock-Based Compensation

6 Months Ended

Jun. 12, 2010

Stock-Based Compensation

Stock-Based Compensation

In connection with our acquisition of PBG, we issued 13.4 million stock options and 2.7 million RSUs at weighted-average grant prices of $42.89 and $62.30, respectively, to replace previously held PBG equity awards. In connection with our acquisition of PAS, we issued 0.4 million stock options at a weighted-average grant price of $31.72 to replace previously held PAS equity awards. Our equity issuances included 8.3 million stock options and 0.6 million RSUs which were vested at the acquisition date and were included in the purchase price consideration. The remaining 5.5 million stock options and 2.1 million RSUs issued are unvested and are being amortized over their remaining vesting period, up to 3 years.

For the 12 weeks ended June 12, 2010, we recognized stock-based compensation expense of $85 million ( $72 million recorded as stock-based compensation expense and $13 million included in PBG/PAS merger and integration charges). Of the $85 million, $21 million was related to the unvested acquisition-related grants described above. For the 24 weeks ended June 12, 2010, we recognized stock-based compensation expense of $159 million ( $119 million recorded as stock-based compensation expense and $40 million included in PBG/PAS merger and integration charges). Of the $159 million, $53 million was related to the unvested acquisition-related grants described above. For the 12 and 24 ended June 13, 2009, we recognized stock-based compensation expense of $54 million and $108 million, respectively.

In connection with our acquisitions of PBG and PAS, The Compensation Committee of PepsiCo’s Board of Directors elected to delay the annual equity award grant from the first quarter of 2010 to the second quarter of 2010, in order to ensure that all eligible employees receive grants on the same date and at the same market price. For the 12 and 24 weeks ended June 12, 2010, we granted 12.0 million stock options and 4.6 million RSUs at weighted-average grant prices of $66.50 and $66.46, respectively, under the terms of our 2007 Long-Term Incentive Plan.

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


	24 Weeks Ended
	6/12/10		6/13/09
Expected life	5 yrs.		6 yrs.
Risk free interest rate	2.3	%	2.8	%
Expected volatility⁽ ^a⁾	17	%	17	%
Expected dividend yield	2.8	%	3.0	%

^(a)	Reflects movements in our stock price over the most recent historical period equivalent to the expected life.

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Pension and Retiree Medical Benefits

6 Months Ended

Jun. 12, 2010

Pension and Retiree Medical Benefits

Pension and Retiree Medical Benefits

In connection with our acquisitions of PBG and PAS, we assumed sponsorship of pension and retiree medical plans that provide defined benefits to U.S. and certain international employees. As of the acquisition date, we preliminarily estimated and recorded the following assets and liabilities for these plans and recorded the net funded status:


	Pension			Retiree Medical
	U.S.			International
Fair value of plan assets	$	1,633			$	52		$	–
Projected benefit liability		2,161				90			396

Funded status	$	(528	)		$	(38	)	$	(396	)

The components of net periodic benefit cost for pension and retiree medical plans (including, in 2010, the preliminary estimate of the impact of our acquisitions of PBG and PAS) are as follows:


	12 Weeks Ended
	Pension			Retiree Medical
	6/12/10			6/13/09			6/12/10		6/13/09		6/12/10			6/13/09
	U.S.			International
Service cost	$	69			$	55		$	19		$	11			$	14		$	10
Interest cost		120				86			26			19				23			19
Expected return on plan assets		(150	)			(106	)		(31	)		(24	)			–			–
Amortization of prior service cost/(benefit)		2				2			1			–				(4	)		(4	)
Amortization of experience loss		25				26			6			2				1			2

		66				63			21			8				34			27

Special termination benefits		15				–			–			–				1			–
Curtailment gain		(2	)			(2	)		–			–				–			–

Total expense	$	79			$	61		$	21		$	8			$	35		$	27


	24 Weeks Ended
	Pension			Retiree Medical
	6/12/10			6/13/09			6/12/10		6/13/09		6/12/10			6/13/09
	U.S.			International
Service cost	$	130			$	110		$	33		$	19			$	26		$	20
Interest cost		218				172			44			33				43			38
Expected return on plan assets		(275	)			(213	)		(53	)		(42	)			–			–
Amortization of prior service cost/(benefit)		5				5			1			1				(8	)		(8	)
Amortization of experience loss		50				51			10			3				2			5

		128				125			35			14				63			55

Special termination benefits		23				–			–			–				1			–
Curtailment gain		(2	)			(2	)		–			–				–			–

Total expense	$	149			$	123		$	35		$	14			$	64		$	55

In 2010, we expect to make total pension contributions of approximately $1.3 billion with up to approximately $1.2 billion expected to be discretionary. Our cash payments for retiree medical benefits are estimated to be approximately $100 million in 2010.

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Income Taxes

6 Months Ended

Jun. 12, 2010

Income Taxes

Income Taxes

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


	6/12/10			12/26/09
Balance, beginning of year	$	1,731			$	1,711
Additions for tax positions related to the current year		89				238
Additions for tax positions from prior years		417				79
Reductions for tax positions from prior years		(386	)			(236	)
Settlement payments		–				(64	)
Statute of limitations expiration		(1	)			(4	)
Translation and other		(6	)			7

Balance, end of period	$	1,844	^(a)		$	1,731

^(a)	Includes a preliminary estimate of amounts related to our acquisitions of PBG and PAS.

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Net Income Attributable to PepsiCo per Common Share

6 Months Ended

Jun. 12, 2010

Net Income Attributable to PepsiCo per Common Share

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:


	12 Weeks Ended
	6/12/10		6/13/09
	Income			Shares^(a)		Income			Shares^(a)
Net income attributable to PepsiCo	$	1,603					$	1,660
Preferred shares:
Dividends		(1	)					(1	)
Redemption premium		(1	)					(1	)

Net income available for PepsiCo common shareholders	$	1,601			1,608		$	1,658		1,557

Basic net income attributable to PepsiCo per common share	$	1.00					$	1.06

Net income available for PepsiCo common shareholders	$	1,601			1,608		$	1,658		1,557
Dilutive securities:
Stock options and RSUs^(b)		–			25			–		14
ESOP convertible preferred stock		2			1			2		1

Diluted	$	1,603			1,634		$	1,660		1,572

Diluted net income attributable to PepsiCo per common share	$	0.98					$	1.06


	24 Weeks Ended
	6/12/10		6/13/09
	Income			Shares^(a)		Income			Shares^(a)
Net income attributable to PepsiCo	$	3,033					$	2,795
Preferred shares:
Dividends		(1	)					(1	)
Redemption premium		(2	)					(2	)

Net income available for PepsiCo common shareholders	$	3,030			1,595		$	2,792		1,556

Basic net income attributable to PepsiCo per common share	$	1.90					$	1.79

Net income available for PepsiCo common shareholders	$	3,030			1,595		$	2,792		1,556
Dilutive securities:
Stock options and RSUs^(b)		–			24			–		14
ESOP convertible preferred stock		3			1			3		1

Diluted	$	3,033			1,620		$	2,795		1,571

Diluted net income attributable to PepsiCo per common share	$	1.87					$	1.78

^(a)	Weighted-average common shares outstanding.

^(b)

Options to purchase 22.9 million and 21.8 million shares, respectively, for the 12 and 24 weeks in 2010 were not included in the calculation of earnings per share because these options were out-of-the money. These out-of-the money options had average exercise prices of $67.60 and $67.33, respectively. Options to purchase 54.9 million and 55.1 million shares, respectively, for the 12 and 24 weeks in 2009 were not included in the calculation of earnings per share because these options were out-of-the-money. Out-of-the-money options for the 12 and 24 weeks in 2009 had average exercise prices of $59.41 and $59.42, respectively.

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Debt Obligations and Commitments

6 Months Ended

Jun. 12, 2010

Debt Obligations and Commitments

Debt Obligations and Commitments

In the first quarter of 2010, we issued $4.25 billion of fixed and floating rate notes. The issuance was comprised of $1.25 billion of floating rate senior unsecured notes maturing in 2011 (the “2011 Floating Rate Notes”), $1.0 billion of 3.10% senior unsecured notes maturing in 2015, $1.0 billion of 4.50% senior unsecured notes maturing in 2020 and $1.0 billion of 5.50% senior unsecured notes maturing in 2040. The 2011 Floating Rate Notes bear interest at a rate equal to the three-month London Inter-Bank Offered Rate (“LIBOR”) plus 3 basis points. A portion of the net proceeds from the issuance of these notes was used to finance our acquisitions of PBG and PAS. The remainder of the net proceeds from the issuance of these notes was designated for general corporate purposes.

On February 26, 2010, in connection with the transactions contemplated by the PBG Merger Agreement, Metro, PBG, Bottling Group, LLC and The Bank of New York Mellon (as successor to The Chase Manhattan Bank) (the PBG Trustee) entered into a First Supplemental Indenture (the PBG Supplemental Indenture) to the Indenture dated March 8, 1999 (the PBG Indenture) between PBG, Bottling Group, LLC and the PBG Trustee. Pursuant to the PBG Supplemental Indenture, Metro assumed the due and punctual payment of the principal of (and premium, if any) and interest on the 7.00% Senior Notes due March 1, 2029 (the 7.00% Notes) under the PBG Indenture. As of June 12, 2010, the outstanding principal amount of the 7.00% Notes was approximately $1 billion. The 7.00% Notes are guaranteed by Bottling Group, LLC.

On February 26, 2010, in connection with the transactions contemplated by the PAS Merger Agreement, Metro, PAS and The Bank New York Mellon Trust Company, N.A. (as ultimate successor in interest to The First National Bank of Chicago) (the PAS IL Trustee) entered into a Second Supplemental Indenture (the PAS IL Supplemental Indenture) to the Indenture dated January 15, 1993 (the PAS IL Indenture) between PAS and the PAS IL Trustee. Pursuant to the PAS IL Supplemental Indenture, Metro assumed the due and punctual payment of the principal of (and premium, if any) and interest on the 7.625% Notes due 2015 (the 7.625% Notes), the 7.29% Notes due 2026 (the 7.29% Notes), the 7.44% Notes due 2026 (the 7.44% Notes) and the 4.50% Notes due 2013 (the 4.50% Notes) under the PAS IL Indenture. As of June 12, 2010, the outstanding principal amount of the 7.625% Notes was approximately $9 million, the outstanding principal amount of the 7.29% Notes was approximately $100 million, the outstanding principal amount of the 7.44% Notes was approximately $25 million and the outstanding principal amount of the 4.50% Notes was approximately $150 million.

On February 26, 2010, also in connection with the transactions contemplated by the PAS Merger Agreement, Metro, PAS and Wells Fargo Bank, National Association (the PAS MN Trustee, formerly known as Wells Fargo Bank Minnesota, National Association) entered into a First Supplemental Indenture (the PAS MN Supplemental Indenture) to the Indenture dated August 15, 2003 (the PAS MN Indenture) between PAS and the PAS MN Trustee. Pursuant to the PAS MN Supplemental Indenture, Metro assumed the due and punctual payment of the principal of (and premium, if any) and interest on the 5.625% Notes due 2011 (the 5.625% Notes), the 5.75% Notes due 2012 (the 5.75% Notes), the 4.375% Notes due 2014 (the 4.375% Notes), the 4.875% Notes due 2015 (the 4.875% Notes), the 5.00% Notes due 2017 (the 5.00% Notes) and the 5.50% Notes due 2035 (the 5.50% Notes) under the PAS MN Indenture. As of June 12, 2010, the outstanding principal amount of the 5.625% Notes was approximately $250 million, the outstanding principal amount of the 5.75% Notes was approximately $300 million, the outstanding principal amount of the 4.375% Notes was approximately $350 million, the outstanding principal amount of the 4.875% Notes was approximately $300 million, the outstanding principal amount of the 5.00% Notes was approximately $250 million and the outstanding principal amount of the 5.50% Notes was approximately $250 million.

As a result of the transactions contemplated by the PBG Merger Agreement, Bottling Group, LLC, which was previously a subsidiary of PBG, became a wholly-owned subsidiary of Metro. Bottling Group, LLC currently has issued and outstanding approximately $1 billion of its 4.625% Senior Notes due 2012 (the 4.625% Notes), $250 million of its 4.125% Senior Notes due 2015, $400 million of its 5.00% Senior Notes due 2013, $800 million of 5.50% Senior Notes due 2016, $1.3 billion of its 6.95% Senior Notes due 2014 (the 6.95% Notes) and $750 million of its 5.125% Senior Notes due 2019. Bottling Group, LLC’s 4.625% Notes and 6.95% Notes are guaranteed by PepsiCo.

As of June 12, 2010, the long-term debt acquired from our anchor bottlers (including debt previously issued by PBG, Bottling Group, LLC and PAS) in connection with our acquisitions of PBG and PAS has a total face value of approximately $7.5 billion (fair value of $8.6 billion) with a weighted-average stated interest rate of 5.7%. This acquired debt has a remaining weighted-average maturity of 7.2 years. See also Acquisitions of PBG and PAS.

As previously disclosed, we entered into amendments to PBG’s revolving credit facility (the Amended PBG Credit Facility) and PAS’s revolving credit facility (the Amended PAS Credit Facility) and these amendments became effective on February 26, 2010. Under the Amended PBG Credit Facility, Metro is able to borrow up to $1,080 million from time to time. Borrowings under the Amended PBG Credit Facility, which expires in October 2012, are guaranteed by PepsiCo. The Amended PBG Credit Facility was unused as of June 12, 2010. Under the Amended PAS Credit Facility as of June 12, 2010, Metro is able to borrow up to $540 million from time to time. Borrowings under the Amended PAS Credit Facility, which is due to expire in June 2011, are guaranteed by PepsiCo. The Amended PAS Credit Facility was unused as of June 12, 2010 and subsequently terminated on June 16, 2010.

As of June 12, 2010, short-term obligations totaled $4.5 billion, of which $3.5 billion was comprised of commercial paper.

Subsequent to the end of the second quarter of 2010, on June 16, 2010, we entered into a new 364-day unsecured revolving credit agreement which enables us to borrow up to $2,575 million, subject to customary terms and conditions, and expires in June 2011. We may request renewal of this facility for an additional 364-day period or convert any amounts outstanding into a term loan for a period of up to one year, which would mature no later than June 2012. This agreement replaces a $1,975 million 364-day unsecured revolving credit agreement and the $540 million Amended PAS Credit Facility. Funds borrowed under this new agreement may be used for general corporate purposes, including but not limited to repayment of our outstanding commercial paper, working capital, capital investments and/or acquisitions. This agreement is in addition to our existing $3,080 million unsecured revolving credit agreement which expires in 2012. Our lines of credit remain unused as of June 12, 2010.

Long-Term Contractual Commitments^(a)


	Payments Due by Period
	Total		2010		2011 – 2012	2013 – 2014		2015 and beyond
Long-term debt obligations^(b)	$	19,586		$	–	$	3,748		$	4,525	$	11,313
Interest on debt obligations^(c)		7,178			439		1,540			1,209		3,990
Operating leases		1,452			226		507			291		428
Purchasing commitments		2,656			495		1,308			608		245
Marketing commitments		727			112		351			92		172

	$	31,599		$	1,272	$	7,454		$	6,725	$	16,148

(a)	Reflects non-cancelable commitments as of June 12, 2010 based on foreign exchange rates in effect at that time and excludes any reserves for uncertain tax positions as we are unable to reasonably predict the ultimate amount or timing of settlement.

(b)	Excludes current maturities of long-term debt obligations of $358 million. Includes $60 million of principal and accrued interest related to our zero coupon notes.

(c)	Interest payments on floating-rate debt are estimated using interest rates effective as of June 12, 2010.

As of June 12, 2010, our total long-term contractual commitments totaled $31.6 billion, an increase of $17.9 billion from December 26, 2009. This increase is substantially due to the assumption of PBG’s and PAS’s outstanding debt, the issuance of new debt to finance our acquisitions of PBG and PAS, and the associated interest on debt.

Most long-term contractual commitments, except for our long-term debt obligations, are not recorded on our balance sheet. Non-cancelable operating leases primarily represent building leases. Non-cancelable purchasing commitments are primarily for packaging materials, oranges and orange juice, and cooking oil. Non-cancelable marketing commitments are primarily for sports marketing. See Pension and Retiree Medical Benefits regarding our pension and retiree medical obligations.

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Restructuring, Impairment and Integration Charges

6 Months Ended

Jun. 12, 2010

Restructuring, Impairment and Integration Charges

Restructuring, Impairment and Integration Charges

In the 12 weeks ended June 12, 2010, we incurred merger and integration charges of $155 million related to our acquisitions of PBG and PAS, including $103 million recorded in the PAB segment, $28 million recorded in the Europe segment and $24 million recorded in corporate unallocated expenses. In the 24 weeks ended June 12, 2010, we incurred merger and integration charges of $467 million related to our acquisitions of PBG and PAS, including $296 million recorded in the PAB segment, $29 million recorded in the Europe segment, $112 million recorded in corporate unallocated expenses and $30 million recorded in interest expense. All of these charges, other than the interest expense portion, were recorded in selling, general and administrative expenses. These charges are being incurred to help create a more fully integrated supply chain and go-to-market business model, to improve the effectiveness and efficiency of the distribution of our brands and to enhance our revenue growth. These charges also include closing costs, one-time financing costs and advisory fees related to our acquisitions of PBG and PAS. In addition, in the first quarter of 2010, we recorded $9 million of charges, representing our share of the respective merger costs of PBG and PAS, in bottling equity income. Substantially all cash payments related to the above charges are expected to be paid by the end of 2011. In total, these charges had an after-tax impact of $119 million ( $0.07 per share) and $380 million ( $0.23 per share) for the 12 and 24 weeks ended June 12, 2010, respectively. In the second half of 2009, we incurred $50 million of charges related to the merger of PBG and PAS, of which substantially all was paid in 2009.

In the 12 and 24 weeks ended June 13, 2009, we incurred charges of $11 million ( $10 million after-tax or $0.01 per share) and $36 million ( $29 million after-tax or $0.02 per share), respectively, in conjunction with our Productivity for Growth program. Our Productivity for Growth program was completed in the first half of 2009. These charges were recorded in selling, general and administrative expenses. The program included actions in all divisions of the business, including the closure of six plants that we believe will increase cost competitiveness across the supply chain, upgrade and streamline our product portfolio, and simplify the organization for more effective and timely decision-making. Substantially all cash payments related to these charges are expected to be paid by the end of 2010.

A summary of our merger and integration activity in 2010 is as follows:


	Severance and Other Employee Costs^(a)			Asset Impairment			Other Costs		Total
2010 merger and integration charges	$	185			$	113		$	178		$	476
Cash payments		(32	)			–			(177	)		(209	)
Non-cash charges		(59	)			(113	)		13			(159	)

Liability as of June 12, 2010	$	94			$	–		$	14		$	108

^(a)	Primarily reflects termination costs for approximately 990 employees.

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Financial Instruments

6 Months Ended

Jun. 12, 2010

Financial Instruments

Financial Instruments

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

•

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

•

foreign exchange risks, and

•

interest rates.

In the normal course of business, we manage these risks through a variety of strategies, including the use of derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. Cash flows from derivatives used to manage commodity, foreign exchange or interest risks are classified as operating activities. See “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further unaudited information on our business risks.

For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive loss within common shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the value of the underlying hedged item. Ineffectiveness of our hedges has not been material. If the derivative instrument is terminated, we continue to defer the related gain or loss and then include it as a component of the cost of the underlying hedged item. Upon determination that the underlying hedged item will not be part of an actual transaction, we recognize the related gain or loss in net income immediately.

We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in our income statement. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including 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 and generally settle with these financial institutions on a net basis.

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 purchase orders, pricing agreements, geographic diversity and derivatives. We use derivatives, with terms of no more than three years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for natural gas, diesel fuel and aluminum. For those derivatives that qualify for hedge accounting, any ineffectiveness is recorded immediately in corporate unallocated expenses. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item. During the next 12 months, we expect to reclassify net losses of $38 million related to these hedges from accumulated other comprehensive loss into net income. Derivatives used to hedge commodity price risk that do not qualify for hedge accounting are marked to market each period and reflected in our income statement.

Our open commodity derivative contracts that qualify for hedge accounting had a face value of $587 million as of June 12, 2010 and $214 million as of June 13, 2009. These contracts resulted in net unrealized losses of $15 million as of June 12, 2010 and $61 million as of June 13, 2009.

Our open commodity derivative contracts that do not qualify for hedge accounting had a face value of $246 million as of June 12, 2010 and $429 million as of June 13, 2009. These contracts resulted in net losses of $14 million as of June 12, 2010 and $151 million as of June 13, 2009.

Foreign Exchange

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

On occasion, we may enter into derivatives, primarily forward contracts with terms of no more than two years, to manage our exposure to foreign currency transaction risk. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred.

Our foreign currency derivatives had a total face value of $1.3 billion as of June 12, 2010 and June 13, 2009. The contracts that qualify for hedge accounting resulted in net unrealized gains of $5 million as of June 12, 2010 and $12 million as of June 13, 2009. During the next 12 months, we expect to reclassify a net gain of $1 million related to these hedges from accumulated other comprehensive loss into net income. The contracts that do not qualify for hedge accounting resulted in net gains of $6 million as of June 12, 2010 and net losses of $29 million as of June 13, 2009. All losses and gains were offset by changes in the underlying hedged items, resulting in no net material impact on earnings.

Interest Rates

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

The notional amounts of the interest rate derivative instruments outstanding as of June 12, 2010 and June 13, 2009 were $8.6 billion and $3.75 billion, respectively. For those interest rate derivative instruments that qualify for cash flow hedge accounting, any ineffectiveness is recorded immediately. We classify both the earnings and cash flow impact from these interest rate derivative instruments consistent with the underlying hedged item. During the next 12 months, we expect to reclassify net losses of $6 million related to these hedges from accumulated other comprehensive loss into net income.

Subsequent to the end of the second quarter of 2010, we executed interest rate derivative instruments with an aggregate notional value of $500 million in various maturities to hedge forecasted treasury transactions.

At June 12, 2010, approximately 47% of total debt (including indebtedness acquired in our acquisitions of PBG and PAS), after the impact of the related interest rate derivative instruments, was exposed to variable rates, compared to 57% as of December 26, 2009. In addition to variable rate long-term debt, all debt with maturities of less than one year is categorized as variable for purposes of this measure.

Fair Value Measurements

The fair values of our financial assets and liabilities are categorized as follows:


	June 12, 2010
	Total		Level 1		Level 2	Level 3
*Assets^(a)*
Available-for-sale securities^(b)	$	79		$	79	$	–	$	–
Short-term investments – index funds^(c)	$	144		$	144	$	–	$	–

Derivatives designated as hedging instruments:
Forward exchange contracts^(d)	$	24		$	–	$	24	$	–
Interest rate derivatives^(e)		268			–		268		–
Prepaid forward contracts^(f)		61			–		61		–
Commodity contracts – other^(g)		37			–		37		–

	$	390		$	–	$	390	$	–

Derivatives not designated as hedging instruments:
Forward exchange contracts^(d)	$	12		$	–	$	12	$	–
Interest rate derivatives^(e)		7			–		7		–
Commodity contracts – other^(g)		5			–		5		–

	$	24		$	–	$	24	$	–


Total asset derivatives at fair value	$	414		$	–	$	414	$	–


Total assets at fair value	$	637		$	223	$	414	$	–


*Liabilities^(a)*
Deferred compensation^(h)	$	554		$	144	$	410	$	–

Derivatives designated as hedging instruments:
Forward exchange contracts^(d)	$	19		$	–	$	19	$	–
Interest rate derivatives^(e)		27			–		27		–
Commodity contracts – other^(g)		27			–		27		–
Commodity contracts – futures⁽ⁱ⁾		26			26		–		–

	$	99		$	26	$	73	$	–

Derivatives not designated as hedging instruments:
Forward exchange contracts^(d)	$	6		$	–	$	6	$	–
Interest rate derivatives^(e)		48			–		48		–
Commodity contracts – other^(g)		19			–		19		–
Commodity contracts – futures⁽ⁱ⁾		1			1		–		–

	$	74		$	1	$	73	$	–

Total liability derivatives at fair value	$	173		$	27	$	146	$	–

Total liabilities at fair value	$	727		$	171	$	556	$	–

(a)	Financial assets are classified on our balance sheet within other assets, with the exception of short-term investments. Financial liabilities are classified on our balance sheet within other current liabilities and other liabilities.

(b)	Based on the price of common stock.

(c)	Based on price changes in index funds used to manage a portion of market risk arising from our deferred compensation liability.

(d)	Based on observable market transactions of spot and forward rates.

(e)	Based on LIBOR and recently reported transactions in the marketplace.

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

(g)	Based on recently reported transactions in the marketplace, primarily swap arrangements.

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

(i)	Based on average prices on futures exchanges.

The fair value of our debt obligations as of June 12, 2010 was $25.8 billion, based upon prices of similar instruments in the marketplace.


	June 13, 2009
	Total		Level 1		Level 2	Level 3
*Assets*^(a)
Available-for-sale securities^(b)	$	48		$	48	$	–	$	–
Short-term investments – index funds^(c)	$	101		$	101	$	–	$	–

Derivatives designated as hedging instruments:
Forward exchange contracts^(d)	$	38		$	–	$	38	$	–
Interest rate swaps^(e)		127			–		127		–
Prepaid forward contracts^(f)		41			–		41		–
Commodity contracts – other^(g)		5			–		5		–

	$	211		$	–	$	211	$	–

Derivatives not designated as hedging instruments:
Forward exchange contracts^(d)	$	6		$	–	$	6	$	–
Commodity contracts – other^(g)		8			–		8		–

	$	14		$	–	$	14	$	–


Total asset derivatives at fair value	$	225		$	–	$	225	$	–


Total assets at fair value	$	374		$	149	$	225	$	–


*Liabilities*^(a)
Deferred compensation^(h)	$	442		$	103	$	339	$	–

Derivatives designated as hedging instruments:
Forward exchange contracts^(d)	$	26		$	–	$	26	$	–
Interest rate swaps^(e)		18			–		18		–
Commodity contracts – other^(g)		22			–		22		–
Commodity contracts – futures⁽ⁱ⁾		44			44		–		–

	$	110		$	44	$	66	$	–

Derivatives not designated as hedging instruments:
Forward exchange contracts^(d)	$	35		$	–	$	35	$	–
Commodity contracts – other^(g)		133			–		133		–
Commodity contracts – futures⁽ⁱ⁾		27			27		–		–

	$	195		$	27	$	168	$	–

Total liability derivatives at fair value	$	305		$	71	$	234	$	–

Total liabilities at fair value	$	747		$	174	$	573	$	–

(a)	Financial assets are classified on our balance sheet as other assets, with the exception of short-term investments. Financial liabilities are classified on our balance sheet as other liabilities.

(b)	Based on the price of common stock.

(c)	Based on price changes in index funds used to manage a portion of market risk arising from our deferred compensation liability.

(d)	Based on observable market transactions of spot and forward rates.

(e)	Based on LIBOR and recently reported transactions in the marketplace.

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

(g)	Based on recently reported transactions in the marketplace, primarily swap arrangements.

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

(i)	Based on average prices on futures exchanges.

The effective portion of the pre-tax (gains)/losses on our derivative instruments are categorized in the tables below.


	12 Weeks Ended June 12, 2010
	(Gains)/Losses Recognized in Income Statement			(Gains)/Losses Recognized in Accumulated Other Comprehensive Loss			Losses Reclassified from Accumulated Other Comprehensive Loss into Income Statement
Fair Value/Non-designated Hedges
Forward exchange contracts^(a ⁾	$	(11	)
Interest rate derivatives^(b ⁾		(70	)
Prepaid forward contracts^(a ⁾		3
Commodity contracts^(a)		3

Total	$	(75	)


Cash Flow Hedges
Forward exchange contracts^(c ⁾					$	(21	)	$	11
Commodity contracts^(c)						70			–
Interest rate derivatives^(b ⁾						23			–

Total					$	72		$	11


	24 Weeks Ended June 12, 2010
	(Gains)/Losses Recognized in Income Statement			(Gains)/Losses Recognized in Accumulated Other Comprehensive Loss			Losses Reclassified from Accumulated Other Comprehensive Loss into Income Statement
Fair Value/Non-designated Hedges
Forward exchange contracts^(a ⁾	$	(5	)
Interest rate derivatives^(b ⁾		(60	)
Prepaid forward contracts^(a ⁾		(15	)
Commodity contracts^(a)		(43	)

Total	$	(123	)


Cash Flow Hedges
Forward exchange contracts^(c ⁾					$	(8	)	$	22
Commodity contracts^(c)						58			16
Interest rate derivatives^(b ⁾						36			–

Total					$	86		$	38

(a)	Included in corporate unallocated expenses.

(b)	Included in interest expense in our income statement.

(c)	Included in cost of sales in our income statement.


	12 Weeks Ended June 13, 2009
	(Gains)/Losses Recognized in Income Statement			Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss			(Gains)/Losses Reclassified from Accumulated Other Comprehensive Loss into Income Statement
Fair Value/Non-designated Hedges
Forward exchange contracts^(a ⁾	$	(39	)
Commodity contracts^(a)		(100	)
Interest rate swaps^(b ⁾		198
Prepaid forward contracts^(a ⁾		(3	)

Total	$	56


Cash Flow Hedges
Forward exchange contracts^(c ⁾					$	51		$	(30	)
Commodity contracts^(c)						(27	)		7

Total					$	24		$	(23	)


	24 Weeks Ended June 13, 2009
	Losses/(Gains) Recognized in Income Statement			Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss			(Gains)/Losses Reclassified from Accumulated Other Comprehensive Loss into Income Statement
Fair Value/Non-designated Hedges
Forward exchange contracts^(a ⁾	$	1
Commodity contracts^(a)		(162	)
Interest rate swaps^(b ⁾		264

Total	$	103


Cash Flow Hedges
Forward exchange contracts^(c ⁾					$	51		$	(52	)
Commodity contracts^(c)						(6	)		33

Total					$	45		$	(19	)

(a)	Included in corporate unallocated expenses.

(b)	Included in interest expense in our income statement.

(c)	Included in cost of sales in our income statement.

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Recent Accounting Pronouncements

6 Months Ended

Jun. 12, 2010

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) amended its accounting guidance on the consolidation of variable interest entities (VIE). Among other things, the new guidance requires a qualitative rather than a quantitative assessment to determine the primary beneficiary of a VIE based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. In addition, the amended guidance requires an ongoing reconsideration of the primary beneficiary. The provisions of this new guidance were effective as of the beginning of our 2010 fiscal year, and the adoption did not have a material impact on our financial statements.

In the second quarter of 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into law. The PPACA changes the tax treatment related to an existing retiree drug subsidy (RDS) available to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the PPACA, RDS payments will effectively become taxable in tax years beginning in 2013, by requiring the amount of the subsidy received to be offset against our deduction for health care expenses. The provisions of the PPACA required us to record the effect of this tax law change beginning in our second quarter of 2010, and consequently we recorded a one-time related tax charge of $41 million in the second quarter of 2010. We are currently evaluating the longer-term impacts of this new legislation.

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