Pepsi 2011 Annual Report Download - page 35

future success and earnings growth depends in part on our ability
to reduce costs and improve eciencies. If we are unable to suc-
cessfully implement our productivity plan or fail to implement it as
timely as we anticipate, our business, nancial condition and results
of operations could be adversely impacted.
Our borrowing costs and access to capital and credit markets may be
adversely affected by a downgrade or potential downgrade of our
credit ratings.
Our objective is to maintain credit ratings that provide us with
ready access to global capital and credit markets. Any downgrade
of our current credit ratings by a credit rating agency, especially
any downgrade to below investment grade, could increase our
future borrowing costs and impair our ability to access capital and
credit markets on terms commercially acceptable to us or at all. In
addition, any downgrade of our current short- term credit ratings
could impair our ability to access the commercial paper market
with the same exibility that we have experienced historically,
and therefore require us to rely more heavily on more expensive
types of debt nancing. Our borrowing costs and access to the
commercial paper market could also be adversely aected if a
creditrating agency announces that our ratings are under review
fora potential downgrade.
Our intellectual property rights could be infringed or challenged and
reduce the value of our products and brands and have an adverse
impact on our business, financial condition and results of operations.
We possess intellectual property rights that are important to our
business. These intellectual property rights include ingredient
formulas, trademarks, copyrights, patents, business processes and
other trade secrets which are important to our business and relate
to some of our products, their packaging, the processes for their
production and the design and operation of various equipment
used in our businesses. We protect our intellectual property rights
globally through a combination of trademark, copyright, patent and
trade secret laws, third- party assignment and nondisclosure agree-
ments and monitoring of third- party misuses of our intellectual
property. If we fail to obtain or adequately protect our ingredient
formulas, trademarks, copyrights, patents, business processes
and other trade secrets, or if there is a change in law that limits or
removes the current legal protections of our intellectual property,
the value of our products and brands could be reduced and there
could be an adverse impact on our business, nancial condition and
results of operations. See also “Changes in the legal and regulatory
environment could limit our business activities, increase our operat-
ing costs, reduce demand for our products or result in litigation.”
Market Risks
We are exposed to market risks arising from adverse changes in:
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In the normal course of business, we manage these risks through
a variety of strategies, including productivity initiatives, global pur-
chasing programs and hedging strategies. Ongoing productivity
initiatives involve the identication and eective implementa-
tion of meaningful cost- saving opportunities or eciencies. Our
global purchasing programs include xed- price purchase orders
and pricing agreements. See Note 9 for further information on our
non- cancelable purchasing commitments. Our hedging strategies
include the use of derivatives. Certain derivatives are designated
as either cash ow or fair value hedges and qualify for hedge
accounting treatment, while others do not qualify and are marked
to market through earnings. Cash ows from derivatives used to
manage commodity, foreign exchange or interest risks are classi-
ed as operating activities. 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 coun-
terparty credit risk, we consider this risk to be low. In addition, we
enter into derivative contracts with a variety of nancial institutions
that we believe are creditworthy in order to reduce our concentra-
tion of credit risk. See “Unfavorable economic conditions may have
an adverse impact on our business results or nancial condition.”
The fair value of our derivatives uctuates based on market rates
and prices. The sensitivity of our derivatives to these market uctua-
tions is discussed below. See Note 10 for further discussion of these
derivatives and our hedging policies. See “Our Critical Accounting
Policies” for a discussion of the exposure of our pension plan
assets and pension and retiree medical liabilities to risks related to
market uctuations.
Inationary, deationary and recessionary conditions impact-
ing these market risks also impact the demand for and pricing of
our products.
Commodity Prices
We expect to be able to reduce the impact of volatility in our raw
material and energy costs through our hedging strategies and
ongoing sourcing initiatives. We use derivatives, with terms of no
more than three years, to economically hedge price uctuations
related to a portion of our anticipated commodity purchases,
primarily for metals, energy and agricultural products.
Our open commodity derivative contracts that qualify for hedge
accounting had a face value of $598million as of December31, 2011
and $590million as of December25, 2010. At the end of 2011, the
potential change in fair value of commodity derivative instruments,
assuming a 10% decrease in the underlying commodity price, would
have increased our net unrealized losses in 2011 by $52million.
Our open commodity derivative contracts that do not qualify
for hedge accounting had a face value of $630million as of
December31, 2011 and $266million as of December25, 2010. At
the end of 2011, the potential change in fair value of commodity
derivative instruments, assuming a 10% decrease in the underlying
commodity price, would have increased our net losses in 2011 by
$58million.
Management’s Discussion and Analysis
PepsiCo, Inc.  Annual Report
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