Question

Comparative Analysis Case The Coca-Cola Company and PepsiCo, Inc. The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies' complete annual reports, including the notes to the financial statements, are available online. Instructions Use the companies' financial information to answer the following questions. a. What kind of pension plans do Coca-Cola and PepsiCo provide their employees? b. What net periodic pension expense (cost) did Coca-Cola and PepsiCo report in 2017? c. What is the year-end 2017 funded status of Coca-Cola's and PepsiCo's plans (include international)? d. What relevant rates were used by Coca-Cola and PepsiCo in computing their pension amounts? e. Compare the expected benefit payments and contributions for Coca-Cola and PepsiCo.

Answer 1

(a)

Coca-Cola sponsors and/or contributes to pension plans covering substantially all U.S. employees and certain employees in international locations. Coca-Cola also sponsors nonqualified, unfunded defined benefit plans for certain officers and other employees. In addition, Coca-Cola and its subsidiaries have various pension plans and other forms of post-retirement arrangements outside the United States.

PepsiCo sponsors noncontributory defined benefit pension plans covering substantially all full-time U.S. employees and certain international employees.

(b)

Coca-Cola reported “net periodic benefit cost” of $368 million in 2017.

PepsiCo reported “pension expense” of $280 million in 2017 for U.S. and international plans.

(c)

2017 Funded Status ($millions) Pensions
Coca-Cola ($612)
PepsiCo U.S. and international plans ($2,225)

(d)

Relevant rates used to compute pension information:

Coca-Cola PepsiCo 4.0% 3.7% 3.75% 3.1% Discount rate (expense) Rate of increase in compensation levels (expense) Expected long-term rate of return on plan assets 8.0% 7.5%

(e)

Coca-Cola and PepsiCo provide the following disclosures on expected contributions and benefit payments (amounts in millions):

Coca-Cola
Cash Flows
Our estimated future benefit payments for funded and unfunded plans are as follows (in millions):

Year Ended December 31, 2018 Pension benefit $ 713 Other benefit 64 Total estimated $ 777 $ $ 2019 2020 461 $ 482 62 61 523 $ 543 2021 489 59 548 2022 $ 500 57 $ 557 2023- 2027 $ 2.642 258 $ 2,900 $ $

The Company anticipates making pension contributions in 2018 of $59 million, all of which will be allocated to our international plans. The majority of these contributions are required by funding regulations or law.
PepsiCo
Future Benefit Payments
Our estimated future benefit payments are as follows:

Pension Retiree medical (a) 2018 2019 2020 2021 2022 2023-27 $ 890 $ 985 $ 825 $ 875 $ 925 $ 5,210 $ 120 $ 120 $ 110 $ 110 $ 105 $ 455

(a) Expected future benefit payments for our retiree medical plans do not reflect any estimated subsidies expected to be received under the 2003 Medicare Act. Subsidies are expected to be approximately $2 million for each of the years from 2018 through 2022 and approximately $6 million in total for 2023 through 2027.

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 - Discretionary (a) Non-discretionary Total 2017 2016 $ 6 $ 459 158 200 $ 164 $ 659 2015 $ 162 S 162 2017 2016 $ $ 56 36 $ 56 $ 36 2015 $ 43 $ 43

(a) Includes $452 million in 2016 relating to the funding of the group annuity contract purchase from an unrelated insurance company.

In February 2018, we received approval from our Board of Directors to make discretionary contributions of $1.4 billion to Plan A in the United States that we intend to invest in fixed income securities. As of February 13, 2018, we contributed $750 million of the approved amount; we expect to contribute the remaining $650 million in the first quarter of 2018. These contributions are reflected in our 2018 long-term expected rate of return on plan assets and target investment allocations. In addition, in 2018, we expect to make non-discretionary contributions of approximately $175 million to our U.S. and international plans for pension benefits and approximately $75 million for retiree medical benefits.

PepsiCo appears to have a much higher cash claim related to its post-retirement benefit plans with expected benefit payments than Coca-Cola’s. Thus, these disclosures provide information related to the cash outflows of the company. With this information, financial statement users can better understand the potential cash outflows related to the pension plan. As a result, users can better assess the liquidity and solvency of the company, which helps in assessing the company’s overall financial flexibility.