Pepsi 2013 Annual Report Download - page 121

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103
supply of certain raw materials is mitigated through purchases from multiple geographies and suppliers. We
use derivatives, with terms of no more than three years, to economically hedge price fluctuations related to
a portion of our anticipated commodity purchases, primarily for agricultural products, energy and metals.
For those derivatives that qualify for hedge accounting, any ineffectiveness is recorded immediately in
corporate unallocated expenses. Ineffectiveness was not material for all periods presented. During the next
12 months, we expect to reclassify net losses of $26 million related to these hedges from accumulated other
comprehensive loss into net income. Derivatives used to hedge commodity price risk that do not qualify for
hedge accounting are marked to market each period with the resulting gains and losses recorded in corporate
unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on
the underlying commodity. These gains and losses are subsequently reflected in division results when the
divisions recognize the cost of the underlying commodity in net income.
Our open commodity derivative contracts that qualify for hedge accounting had a face value of $494 million
as of December 28, 2013 and $507 million as of December 29, 2012.
Our open commodity derivative contracts that do not qualify for hedge accounting had a face value of $881
million as of December 28, 2013 and $853 million as of December 29, 2012.
Foreign Exchange
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 in 2013. As a result, we are exposed
to foreign exchange risks.
Additionally, we are also exposed to foreign exchange 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, negotiating 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 recognized as transaction gains or losses in our income
statement as incurred.
Our foreign currency derivatives had a total face value of $2.5 billion as of December 28, 2013 and $2.8
billion as of December 29, 2012. During the next 12 months, we expect to reclassify net gains of $11 million
related to foreign currency derivative contracts that qualify for hedge accounting from accumulated other
comprehensive loss into net income. Ineffectiveness was not material for all periods presented. 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.
Interest Rates
We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax
consequences and overall financing strategies. We use various interest rate derivative instruments including,
but not limited to, interest rate swaps, cross-currency interest rate swaps, Treasury locks and swap locks to
manage our overall interest expense and foreign exchange risk. These instruments effectively change the
interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness has been swapped
to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-
currency interest rate swaps match the principal, interest payment and maturity date of the related debt. Our
Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating
to forecasted debt transactions.
The notional amounts of the interest rate derivative instruments outstanding as of December 28, 2013 and
December 29, 2012 were $7.9 billion and $8.1 billion, respectively. For those interest rate derivative