Pepsi 2011 Annual Report Download - page 33

security breach, the loss of sensitive data through security breach or
otherwise, litigation, or remediation costs and could have a negative
impact on employee morale.
Our information systems could also be penetrated by outside
parties intent on extracting condential information, corrupting
information or disrupting business processes. Such unauthorized
access could disrupt our business and could result in the loss of
assets, litigation, remediation costs, damage to our reputation and
loss of revenue resulting from unauthorized use of condential
information or failure to retain or attract customers following such
an event.
Fluctuations in exchange rates may have an adverse impact on our
business results or financial condition.
We hold assets and incur liabilities, earn revenues and pay expenses
in a variety of currencies other than the U.S. dollar. Because our
consolidated nancial statements are presented in U.S. dollars, the
nancial statements of our subsidiaries outside the United States
are translated into U.S. dollars. Our operations outside of the U.S.
generate a signicant portion of our net revenue. Fluctuations in
exchange rates may therefore adversely impact our business results
or nancial condition. See also “Market Risks” and Note 1 to our
consolidated nancial statements.
Our operating results may be adversely affected by increased costs,
disruption of supply or shortages of raw materials and other supplies.
We and our business partners use various raw materials and other
supplies in our business. The principal ingredients we use include
apple, orange and pineapple juice and other juice concentrates,
aspartame, corn, corn sweeteners, avorings, our, grapefruit and
other fruits, oats, oranges, potatoes, raw milk, rice, seasonings,
sucralose, sugar, vegetable and essential oils, and wheat. Our key
packaging materials include plastic resins, including polyethylene
terephthalate (PET) and polypropylene resin used for plastic bever-
age bottles and lm packaging used for snack foods, aluminum
used for cans, glass bottles, closures, cardboard and paperboard
cartons. Fuel and natural gas are also important commodities due
to their use in our plants and facilities and in the trucks delivering
our products. Some of these raw materials and supplies are sourced
internationally and some are available from a limited number of
suppliers. We are exposed to the market risks arising from adverse
changes in commodity prices, aecting the cost of our raw materi-
als and energy. The raw materials and energy which we use for the
production of our products are largely commodities that are subject
to price volatility and uctuations in availability caused by changes
in global supply and demand, weather conditions, agricultural
uncertainty or governmental controls. We purchase these materials
and energy mainly in the open market. If commodity price changes
result in unexpected increases in raw materials and energy costs,
we may not be able to increase our prices to oset these increased
costs without suering reduced volume, revenue and operating
results. In addition, we use derivatives to hedge price risk associated
with forecasted purchases of certain raw materials. Certain of these
derivatives that do not qualify for hedge accounting treatment can
result in increased volatility in our net earnings in any given period
due to changes in the spot prices of the underlying commodities.
See also “Unfavorable economic conditions may have an adverse
impact on our business results or nancial condition.”, “Changes in
the legal and regulatory environment could limit our business activi-
ties, increase our operating costs, reduce demand for our products
or result in litigation.”, “Market Risks” and Note 1 to our consolidated
nancial statements.
Disruption of our supply chain could have an adverse impact on our
business, financial condition and results of operations.
Our ability, and that of our suppliers, business partners, including
our independent bottlers, contract manufacturers, independent
distributors and retailers, to make, manufacture, distribute and sell
products is critical to our success. Damage or disruption to our or
their manufacturing or distribution capabilities due to any of the
following could impair our ability to make, manufacture, distribute
or sell our products: adverse weather conditions or natural disaster,
such as a hurricane, earthquake or ooding; government action; re;
terrorism; the outbreak or escalation of armed hostilities; pandemic;
industrial accidents or other occupational health and safety issues;
strikes and other labor disputes; or other reasons beyond our con-
trol or the control of our suppliers and business partners. Failure to
take adequate steps to mitigate the likelihood or potential impact
of such events, or to eectively manage such events if they occur,
could adversely aect our business, nancial condition and results
of operations, as well as require additional resources to restore our
supply chain.
Climate change, or legal, regulatory or market measures to address
climate change, may negatively affect our business and operations.
There is growing concern that carbon dioxide and other greenhouse
gases in the atmosphere may have an adverse impact on global
temperatures, weather patterns and the frequency and severity
of extreme weather and natural disasters. In the event that such
climate change has a negative eect on agricultural productivity,
we may be subject to decreased availability or less favorable
pricingfor certain commodities that are necessary for our products,
such as sugar cane, corn, wheat, rice, oats, potatoes and various
fruits. We may also be subjected to decreased availability or less
favorable pricing for water as a result of such change, which could
impact our manufacturing and distribution operations. In addition,
natural disasters and extreme weather conditions may disrupt the
productivity of our facilities or the operation of our supply chain.
The increasing concern over climate change also may result in
more regional, federal and/or global legal and regulatory require-
ments to reduce or mitigate the eects of greenhouse gases. In
the event that such regulation is enacted and is more aggressive
than the sustainability measures that we are currently undertaking
to monitor our emissions and improve our energy eciency, we
may experience signicant increases in our costs of operation and
delivery. In particular, increasing regulation of fuel emissions could
substantially increase the distribution and supply chain costs associ-
ated with our products. As a result, climate change could negatively
Management’s Discussion and Analysis
PepsiCo, Inc.  Annual Report
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