Pepsi 2006 Annual Report Download - page 75

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 commit-
ments are primarily for oranges and
orange juice, cooking oil and packaging
materials. Non-cancelable marketing
commitments primarily are for sports
marketing. Bottler funding is not
reflected in our long-term contractual
commitments as it is negotiated on an
annual basis. See Note 7 regarding
our pension and retiree medical obliga-
tions and discussion below regarding
our commitments to noncontrolled
bottling affiliates 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, nor is it our policy to issue
guarantees to our bottlers, non-
controlled affiliates or third parties.
However, certain guarantees were nec-
essary to facilitate the separation of
our bottling 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
$23 million of YUM! Brands, Inc.’s
(YUM) outstanding obligations, primar-
ily 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 significantly
changed. Our guarantees of certain
obligations ensured YUM’s continued
use of certain properties. These guaran-
tees would require our cash payment if
YUM failed to perform under these
lease obligations.
See “Our Liquidity and Capital
Resources” in Management’s Discussion
and Analysis for further unaudited
information on our borrowings.
We are exposed to the risk of loss
arising from adverse changes in:
• commodity prices, affecting the cost
of our raw materials and energy,
• foreign exchange risks,
• interest rates,
• stock prices, and
• discount rates affecting the measure-
ment of our pension and retiree
medical liabilities.
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 flow 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 unaudited information on
our business risks.
For cash flow hedges, changes in fair
value are deferred in accumulated other
comprehensive loss within shareholders’
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 off-
set 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 instru-
ment 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 determi-
nation that the underlying hedged item
will not be part of an actual transaction,
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 mar-
ket value with the resulting gains and
losses reflected in our income statement.
We do not use derivative instruments for
trading or speculative purposes, and we
73
Note 10 — Risk Management
Long-Term Contractual Commitments
Payments Due by Period Total 2007 2008-2009 2010-2011 2012 and beyond
Long-term debt obligations(a) $1,050 $ – $ 583 $ 125 $ 342
Interest on debt obligations(b) 295 50 57 43 145
Operating leases 922 231 302 176 213
Purchasing commitments 5,205 1,357 2,216 871 761
Marketing commitments 1,199 287 453 332 127
Other commitments 279 229 43 5 2
$8,950 $2,154 $3,654 $1,552 $ 1,590
(a) Excludes current maturities of long-term debt of $605 million which are classified within current liabilities, as well as short-term borrowings reclassified
as long-term debt of $1,500 million.
(b) Interest payments on floating-rate debt are estimated using interest rates effective as of December 30, 2006.
The above table reflects non-cancelable commitments as of December 30, 2006 based on year-end foreign exchange rates.
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