Pepsi 2006 Annual Report Download - page 36

from adverse changes in commodity
prices, affecting the cost of our raw
materials and energy. The raw materials
and energy which we use for the pro-
duction of our products are largely
commodities that are subject to price
volatility and fluctuations in availability
caused by changes in global supply and
demand, weather conditions, agricul-
tural 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 offset these
increased costs without suffering
reduced volume, revenue and operat-
ing income.
Our profitability may also be
adversely impacted due to water
scarcity and regulation. Water is a lim-
ited resource in many parts of the
world. As demand for water continues
to increase, we and our business part-
ners may face disruption of supply or
increased costs to obtain the water
needed to produce our products.
Our business could suffer if we are
unable to compete effectively.
Our businesses operate in highly com-
petitive markets. We compete against
global, regional and private label
manufacturers on the basis of price,
quality, product variety and effective
distribution. Increased competition
and anticipated actions by our competi-
tors could lead to downward pressure
on prices and/or a decline in our mar-
ket share, either of which could
adversely affect our results. See “Our
Competition” for more information
about our competitors.
Forward-Looking and Cautionary
Statements
We discuss expectations regarding
our future performance, such as our
business outlook, in our annual and
quarterly reports, press releases, and
other written and oral statements.
These “forward-looking statements”
are based on currently available
competitive, financial and economic
data and our operating plans. They
are inherently uncertain, and investors
must recognize that events could turn
out to be significantly different from
our expectations. We undertake no
obligation to update any forward-look-
ing statement. The above discussion of
risks is by no means all inclusive but is
designed to highlight what we believe
are important factors to consider when
evaluating our trends and future results.
In the normal course of business, we
manage these risks through a variety of
strategies, including productivity initia-
tives, global purchasing programs and
hedging strategies. Ongoing productiv-
ity initiatives involve the identification
and effective implementation of mean-
ingful cost saving opportunities or
efficiencies. Our global purchasing pro-
grams include fixed-price purchase
orders and pricing agreements. Our
hedging strategies include the use of
derivatives. Certain derivatives are des-
ignated as either cash flow or fair value
hedges and qualify for hedge account-
ing treatment, while others do not
qualify and are marked to market
through earnings. We do not use deriv-
ative instruments for trading or
speculative purposes, and we limit our
exposure to individual counterparties to
manage credit risk. The fair value of our
derivatives fluctuates based on market
rates and prices. The sensitivity of our
derivatives to these market fluctuations
is discussed below. See Note 10 for fur-
ther 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 liabili-
ties to risks related to stock prices and
discount rates.
Inflationary, deflationary and
recessionary conditions impacting these
market risks also impact the demand
for and pricing of our products.
Commodity Prices
Our open commodity derivative
contracts that qualify for hedge
accounting had a face value of
$55 million at December 30, 2006 and
$89 million at December 31, 2005. The
open derivative contracts that qualify
for hedge accounting resulted in net
unrealized gains of less than $1 million
at December 30, 2006 and $39 million
at December 31, 2005. We estimate that
a 10% decline in commodity prices
would have reduced our unrealized
gains on open contracts to $2 million of
unrealized losses in 2006 and $35 mil-
lion of unrealized gains in 2005.
34
Market Risks
We are exposed to the market risks arising from adverse changes in:
• commodity prices, affecting the cost of our raw materials
and energy,
• foreign exchange rates,
• interest rates,
• stock prices, and
• discount rates affecting the measurement of our pension
and retiree medical liabilities.
267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 34