Pepsi 2007 Annual Report Download - page 80

Long-Term Contractual Commitments(a)
Payments Due by Period Total 2008 2009-2010 2011-2012 2013 and beyond
Long-term debt obligations(b) $ 2,827 $ – $ 171 $1,340 $1,316
Interest on debt obligations(c) 938 184 300 285 169
Operating leases 1,105 260 340 191 314
Purchasing commitments 3,767 1,182 1,713 509 363
Marketing commitments 1,251 329 551 278 93
Other commitments 248 44 127 75 2
$10,136 $1,999 $3,202 $2,678 $2,257
(a) Reflects non-cancelable commitments as of December 29, 2007 based on year-end foreign exchange rates and excludes any reserves for income taxes under FIN 48
as we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves for income taxes.
(b) Excludes short-term borrowings reclassified as long-term debt of $1,376 million and includes $273 million of accrued interest related to our zero coupon notes.
(c) Interest payments on floating-rate debt are estimated using interest rates effective as of December 29, 2007.
Most long-term contractual commit-
ments, 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 oranges and orange
juice, packaging materials and cooking
oil. Non-cancelable marketing commit-
ments are primarily for sports marketing.
Bottler funding is not refl ected in our
long-term contractual commitments as it is
negotiated on an annual basis. See Note 7
regarding our pension and retiree medical
obligations and discussion below regarding
our commitments to noncontrolled bottling
affi liates and former restaurant operations.
Off-Balance-Sheet Arrangements
It is not our business practice to enter into
off-balance-sheet arrangements, other
than in the normal course of business.
However, certain guarantees were neces-
sary to facilitate the separation of our bot-
tling and restaurant operations from us.
In connection with these transactions, we
have guaranteed $2.3 billion of Bottling
Group, LLC’s long-term debt through
2012 and $18 million of YUM! Brands,
Inc.’s (YUM) outstanding obligations,
primarily property leases, through 2020.
The terms of our Bottling Group, LLC
debt guarantee are intended to preserve
the structure of PBG’s separation from
us and our payment obligation would be
triggered if Bottling Group, LLC failed to
perform under these debt obligations or
the structure signifi cantly changed. Our
guarantees of certain obligations ensured
YUM’s continued use of certain proper-
ties. These guarantees would require our
cash payment if YUM failed to perform
under these lease obligations. See Note 8
regarding contracts related to certain of
our bottlers.
See “Our Liquidity and Capital
Resources” in Management’s Discussion
and Analysis for further unaudited infor-
mation on our borrowings.
Note 10 — Risk Management
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 deriva-
tives. Certain derivatives are designated
as either cash fl ow or fair value hedges
and qualify for hedge accounting treat-
ment, while others do not qualify and are
marked to market through earnings. See
“Our Business Risks” in Management’s
Discussion and Analysis for further unau-
dited information on our business risks.
For cash fl ow hedges, changes in fair
value are deferred in accumulated other
comprehensive loss within sharehold-
ers’ 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.
If the derivative instrument is terminated,
we continue to defer the related gain or
loss and 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 transac-
tion, we recognize the related gain or loss
in net income in that period.
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
refl ected in our income statement. We do
not use derivative instruments for trading
or speculative purposes, and we limit our
exposure to individual counterparties to
manage credit risk.
Commodity Prices
We are subject to commodity price risk
because our ability to recover increased
costs through higher pricing may be
limited in the competitive environment
in which we operate. This risk is man-
aged through the use of fi xed-price
purchase orders, pricing agreements,
geographic diversity and derivatives. We
use derivatives, with terms of no more
than two years, to economically hedge
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