Pepsi 2012 Annual Report Download - page 50

risk to be low. In addition, we enter into derivative contracts
with a variety of financial institutions that we believe are cred-
itworthy in order to reduce our concentration of credit risk.
See “Unfavorable economic conditions may have an adverse
impact on our business results or financial condition.”
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 to
consolidated financial statements for further discussion of
these derivatives and our hedging policies. See “Our Critical
Accounting Policies” for a discussion of the exposure of our
pension and retiree medical plan assets and liabilities to risks
related to market fluctuations.
Inflationary, deflationary and recessionary conditions
impacting 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 strate-
gies and ongoing sourcing initiatives. We use derivatives, with
terms of no more than three years, to economically hedge
price fluctuations related to a portion of our anticipated com-
modity purchases, primarily for agricultural products, metals
and energy.
Our open commodity derivative contracts that qualify
for hedge accounting had a face value of $507million as of
December29, 2012 and $598 million as of December31,
2011. At the end of 2012, 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 2012 by $49million.
Our open commodity derivative contracts that do not qual-
ify for hedge accounting had a face value of $853million as
of December29, 2012 and $630million as of December31,
2011. At the end of 2012, 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 2012 by $85million.
Foreign Exchange
Financial statements of foreign subsidiaries are translated into
U.S. dollars using period-end exchange rates for assets and
liabilities and weighted-average exchange rates for revenues
and expenses. Adjustments resulting from translating net
assets are reported as a separate component of accumulated
other comprehensive loss within PepsiCo common sharehold-
ers’ equity under the caption currency translation adjustment.
Our operations outside of the U.S. generate 49% of our net
revenue, with Russia, Mexico, Canada, the United Kingdom and
Brazil comprising approximately 25% of our net revenue. As a
result, we are exposed to foreign currency risks. During 2012,
unfavorable foreign exchange reduced net revenue growth
by 2.5 percentage points, primarily due to depreciation of
the Russian ruble, euro, Brazilian real and the Mexican peso.
Currency declines against the U.S. dollar which are not offset
could adversely impact our future results.
The results of our Venezuelan businesses have been
reported under hyperinflationary accounting since the begin-
ning of our 2010 fiscal year, at which time the functional
currency of our Venezuelan entities was changed from the boli-
var fuerte (bolivar) to the U.S. dollar. As a result of the change
to hyperinflationary accounting and the devaluation of the
bolivar, we recorded an after-tax net chargeof $120million in
2010. In 2012 and 2011, the majority of our transactions and
net monetary assets qualified to be remeasured at the official
exchange rate of obtaining U.S. dollars for dividends through
the government-operated Foreign Exchange Administration
Board (CADIVI) (4.3 bolivars per dollar for 2012 and 2011). In
2012 and 2011, our operations in Venezuela comprised 7%
and 8% of our cash and cash equivalents balance, respectively,
and generated 1% of our net revenue in 2012 and less than
1% of our net revenue in 2011. Effective February 2013, the
Venezuelan government devalued the bolivar by resetting the
official exchange rate to 6.3 bolivars per dollar. We expect
that the impact of the devaluation on PepsiCo’s 2013 net
revenue and operating profit will not be material. The above
impact excludes an after-tax net charge of approximately
$100 million associated with the remeasurement of bolivar
denominated net monetary assets. This after-tax net charge
will be reflected in items affecting comparability in our 2013
first quarter Form 10-Q. We continue to use available options
to obtain U.S. dollars to meet our operational needs.
We are also exposed to foreign currency risk from foreign
currency purchases and foreign currency assets and liabilities
created in the normal course of business. We manage this risk
through sourcing purchases from local suppliers, negotiat-
ing contracts in local currencies with foreign suppliers and
through the use of derivatives, primarily forward contracts
with terms of no more than two years. Exchange rate gains
or losses related to foreign currency transactions are recog-
nized as transaction gains or losses in our income statement
as incurred.
Our foreign currency derivatives had a total face valueof
$2.8 billion as of December29, 2012 and $2.3 billion as
of December31, 2011. At the end of 2012, we estimate
that an unfavorable 10% change in the exchange rates would
have increased our net unrealized losses by $134million. For
foreign currency derivatives that do not qualify for hedge
accounting treatment, all losses and gains were offset by
changes in the underlying hedged items, resulting in no net
material impact on earnings.
Management’s Discussion and Analysis
2012 PEPSICO ANNUAL REPORT48