PEP Annual Report 2012

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Letter to Shareholders

Financial Highlights

The Breadth o thePepsiCo Port olio

Rein orcing Existing Value Drivers

Migrating Our Port olio TowardsHigh-Growth Spaces

Accelerating the Benefts o One PepsiCo

Aggressively Building NewCapabilities

Strengthening a Second-to-NoneTeam and Culture

Delivering on the Promise o

Per ormance with Purpose

PepsiCo Board o Directors

PepsiCo Leadership

Financials


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2012 PEPSICO ANNUAL REPORT 3

1 Organic results are non-GAAP nancial measures that exclude certain items. See page 60 fora reconciliation to the most directly comparable nancial measure in accordance with GAAP.

2 Core results are non-GAAP nancial measures that exclude certain items. See page 58 for areconciliation to the most directly comparable nancial measure in accordance with GAAP.

3 Core results are non-GAAP nancial measures that exclude certain items. See pages 106-107 forreconciliations to the most directly comparable nancial measures in accordance with GAAP.

4 Represents a non-GAAP nancial measure that excludes certain items. See page 67 for a reconciliationto the most directly comparable nancial measure in accordance with GAAP.

+$1 b ll n n av ng d l v d nth t y a u du t v ty

g am and ma n n t a k td l v $3 b ll n by 2015.

C a n ng ha (eps)w $4.10 2 n 2012.

O gan v nu wa u 5 nt 1 n 2012.

$6.5 b ll n wa tu n d t ha h ld th ugh ha

u ha and d v d nd .

A h v d a n t tu n

n nv t d a tal 3

(roic) 15 nt and tu n nqu ty 3 (roe) 28 nt.

Manag m nt at ng a hw 4 , x lud ng ta n tm ,

a h d $7.4 b ll n.

bu n wh l al h t ng ut l t att a t v g wtha . W hav bu lt ut th k ya ab l t w n d t m t nth utu . W hav a d ua a ty t d v nt nu udu t v ty. W hav t ngth n d

u tal nt l a th gan za-t n, and, by n m an l a t, whav mb dd d u v n P man w th Pu nt all u a t n and a t .

That what w hav a h v d a , and t n d abl . W aan x t ng m any w th a t ngundat n and t a k d. But

a I l k wa d nt 2013 andb y nd, t l a that w t ll havu th t g n u j u n y. Out an mat n mu t nt nu .

Ov th a t v al y a , anumb hav mb n dt ad ally ha th xt nalnv nm nt n wh h th d andb v ag ndu t y at . Thhang hav had a maj m a tn wh and h w m an mu tm t t u v v and th v . Gl bal

ma n m g wth ha l w dgn antly, and th utl k ma n

m x d, a t ula ly n d v l dma k t . Gl bal n m w b m ng m d t but d, w th

th Ea t b m ng a la g lay nth w ld. Th d m g a h qua-t n n th W t h t ng, w th ann a ng ha n um t n nth hand b m , w m n andmall h u h ld , and a d g wth

d v thn and mm g ant m-mun t a unt .

Int n y ng n um and g v n-m nt u n h alth and w lln hang ng th lat v g wth

t aj t y u at g anddu t . C n um a l a ly

hang ng th hab t , nand n um t n att n . F da ty and u ty a n w ntand nt n th m nd g v n-

m nt and n um , n a ngth n d bu t y t m w th nm an t n u ng d nt

and du t t a ab l ty. Su ta n dmm d ty n a and

v lat l ty hav hall ng d m anyt t u tu . M anwh l , th

a t ng and g w ng nv nm ntaln u n m g ng n t

a und th w ld a th u nwat u , wa t d al ( -ally la t ) and n gy u byndu t y v add t nal ut ny.

La tly, th gl bal ta l nv n-m nt t an m ng. In m g-ng and d v l ng ma k t , thg wth gan z d m d n t ad b g nn ng t l wly la t ad -

t nal m m and t , and nd v l d ma k t , n w d unthann l l k ha d d unt andd lla t a a dly g w ng.Add t nally, nl n ta l ng b g nn ng t mak n ad nt

u at g wh l al m d aam l t v m ag andum n th bl nk an y .

Th mb nat n th h t haut n d abl u n th


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6 2012 PEPSICO ANNUAL REPORT

24 nt u n t v nu ;n 2012, th y nt d 35

nt u n t v nu . Andv th l ng t m, w a l k-

ng t g w u bu n n thma k t at h gh ngl d g t t l wd ubl d g t .

3. We Accelerated the Beneftso One PepsiCoP C t ngth l n th a tthat u t l d v , but

lat d. Th nv n nt na k andb v ag bu n hav h ghl v l n d n u haand n um t n and v y h ghv l t at th h l . W b l vth t l m l m nta ty -v d a natu al h dg , all w ng u tmanag th ugh nd v dual at g y

u and t ll d l v g d tu n .Ou t l v d u th ad-d t nal maj b n t .

F t, cost leverage : W a anm tant u t m t k y v ndn th d and b v ag a .W hav d a tn tatuw th many th m, wh h all w u

t t at g ally mak u a hth u ly ha n and d v l -m nt t t m an ng ully duu n ut t wh l a ng thb t tal nt and advan d th nk ng.

Add t nally, n d P C , abu n , w ha n a t u tu

n lud ng at un t n , ma -t data and ba k f ng,u th l w ng u t .

S nd, capability sharing: Ovth a t w y a , w hav ha m -n z d many u , mak-ng t a t m v tal nt ath m anyb th bu n andg g a h . W a abl t att a tw ld- la tal nt and g v th ma t uly d v , but lat d t

x n , all w ng u t bu ld aw ld- la w k .

W l t and h t b t a t

a th valu ha n. F xam-l , th x t w hav d v l-d n n a ng y ld wh ln v ng wat h l u g t

m d n u ag ul-tu al at n th ugh ut thw ld, b t tat n u na k , u t and v g tabl

u ju bu n .

B au th h gh n d n n um t n u du t ,

w hav d v l d a mm n n-um d mand am w k und -nn d by a gl bal databa , g v ng

u ta y n ght nt dand b v ag a n . Th gu du nn vat n a t n at th gl baland l al l v l.

Th d, commercial benefts: Ath nd-la g t d and b v -ag bu n n th w ld and thla g t n th U.S., w a t afg n at and th v w d

a a t al g wth d v by ta l-. Ju t n th U.S., w hav n n th t 40 t ad ma k at ta l,

m than any th d and b v-ag m any.

R ta l b n t m u n- tm t n that l v ag w -

ul t u h a th Nat nalF tball L agu , Maj L aguBa ball and th Nat nal H k yL agu n th U.S.; tal nt d -

lay l k L n l M , wha a d n b th P and Laymm al a t v t gl bally; a

w ll a th ugh m n - lm l k thB ng Ha n H m Ch nN w Y a du t n that b ughtt g th Lay , T ana and Pt d l v an m t nal ubl -

v m ag t Ch n n um-G h m t y u am l

Ch n N w Y a . Th lm ga -n d m than 700 m ll n v w

n Ch na al n .

All th a t v t n a d -n d n u ha b tw nb v ag and na k and uh althy b ak a t bundl , and n2012, mad u th nd-la g tg wth nt but n all m a u d

U.S. ta l hann l mb n d.

F d v u t m a alb g nn ng t b n t m thw P C t l : Ta

B ll n th U.S. a a n nt. Fm than 45 y a , w hav b nth b v ag a tn h .M unta n D w Baja Bla t, a avd v l d x lu v ly Ta B ll,ha b n a b t- ll ng t af d vn t y t m n laun h. In 2012,bu ld ng n th b v ag lat n-h , w a tn d w th Ta B llt nt du D t L Ta ,a ta w th a h ll mad m alNa h Ch D t that ha b -

m th tau ant b gg t u - n t 50-y a h t y. In n n

m nth al n , Ta B ll ld mthan 325 m ll n D t LTa n th m t u uln w du t n th d vndu t y n 2012. In 2013, w x tt nt nu bu ld ng n th u -

, w th th laun h C l Ran hD t L Ta . M m -tantly, w a nn vat ng n w n thb v ag nt w th th laun h M unta n D w Baja Bla t F z .Th a ng th D t andM unta n D w b and a natu al:In th U.S. nv n n hann l,D t th numb n altyna k, wh l M unta n D w thnumb n ngl - v a b n-at d t d nk.


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An xam l a ma k t wh wt uly l v ag th t, a ab l ty andmm al b n t m u b adt l Ru a. Ou bu n

at d a an nt g at d wh l ,w th ha d f , n a t u tu ,tal nt, u ly ha n and g -t -ma -k t y t m . W a an xt m lyf nt and t v l ad n thd and b v ag bu n n thatunt yl w ng u t gn -antly and x and ng th a h

u du t v al ld.

W b l v u wh l w th mthan th um u a t . It uP w On .

4. We Are Aggressivel BuildingNew CapabilitiesP C ha h t ally b n man-ag d a a l d at n un-t and g n . Th gan zat nalt u tu t d an nt n u -al ultu n th m any, n t n -a ly a ultu gl bal f n y.

Sta t ng n 2010 and a l at ngn 2012, w b gan t m d y ugl bal at ng m d l , balan ng

nd nd n and al , t b ma gl bally n tw k d m any. Oun- unt y and g nal t am am w d t v th ma k t ,but th ugh gl bal g u and un -t n , w a ha m n z ng u ta th w ld a und b and bu ld-ng, nn vat n and th manag m nt

u u ly ha n.

Ou n w m d l al ady ha b gunt y ld ult . Ou gl bal at-g y g u a gu d ng g nt at nal z th b and t land u th bulk u nd ngb h nd 12 gl bal b and . W ant nu ng t n a th al b u gl bal ma k t ng tal nt and

m l m nt ng gl bal am a gnu n gl bal b and , b g nn ng

w th L v N w, th t- vgl bal t n ng am a gn b and P . In 2012, L v N w ngag d m ll n n um-

th ugh mu , t , alm d a and th n um t u h

nt . In D mb , w ann un da un qu at v llab at nw th 17-t m G ammy Awa d w n-n ng ng B y n t w k w thu n at ng nt nt t ngagP n um a und th

w ld. Ou b and qu ty at ad ly m v ng, and w a ju tg tt ng ta t d.

Ou nn vat n f t al hav m-v d ub tant ally. Ba k n 2007,

w nv t d t bu ld u R&D a-ab l ty n th m any. W b ughtn ut tand ng tal nt and at dn w l ng-t m a h a ab l t .W n a d u nv tm nt b -h nd natu al w t n , d u t v

, a kag ng and nut t nlat m . W a al t a h ngu l h w t l v ag R&D nnt ll g nt way t at lat m g wth ath than ju t n -

l n xt n n .

W al hav tak n th maja t n t d v nn vat n. In 2012,

th t t m n P C , wat d a d gn a ab l ty n thm any. Ou g al t u d gnn th a ly tag nn vat n -

t t at m m abl du tand x n u n um .W al hav ut n la a m-m n tag -gat t a l tatdata-d v n d n mak ng. W

at d th a ab l ty t l t and h td a a th va u untw th n P C . Exam l n ludth laun h Lay D U A FlavCam a gn n th U.S. a t t u -

n Eu , A a, S uth Am aand A a; u nt nu d x an n

n th k and b u t at g yn B az l, A g nt na, th M ddl Ea tand th Ph l n , bu ld ng n tht ngth u Gam a-Quak

bu n n M x ; and th u Quak Y gu t Ba n th U.S.

a t th d v l m nt n Canada.

Thank t all th n t at v , at thnd 2012, nn vat n m d-u t laun h d n th a t th y aa unt d a x mat ly ght

nt u n t v nu .

G ng wa d, w nt nd t n-t nu t l v ag R&D t h l ud v l m b akth ugh nn va-t n that d l v t u n m ntalg wth and u ta nabl . T d aw

m at v x t n v yn th w ld, n 2012 wn d n w R&D nt n Shang-

ha , Ch na; Hambu g, G many; andM nt y, M x .

Ou gl bal u ly ha n g u hab n w k ng n b t a t t an -

a u nt , b ng ng nb akth ugh th nk ng m xt nal

u t l w u t and -at m a a ty and x b l ty nu u ly ha n. W a g u lyanalyz ng, aud t ng and b n hma k ngth man u a l t andu ng what w l a n t t ngth nu manu a tu ng, d t but n andg -t -ma k t a ab l t a und th

gl b . Ou nv nm ntal u ta n-ab l ty ag nda, wh h n lud wat ,n gy and a kag ng du t n , hah l d u d a u t wh ln v ng natu al u .

All th a t n , lu th , hav nabl d u t d ublu h t du t v ty un atta t ng n 2012, l ad ng t a $3 b l-l n t tak - ut v th y a .W hav du d u a h nv -


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n y l by n n day n 2012 andal und way t du u n ta tal nd ng m 5.5 nt n t v nu n 2010 t 4 nt

n t v nu n 2012, wh h n t nt w th u l ng-t m a -

tal nd ng ta g t l than qual t 5 nt n t v nu .

G ng wa d, w a w ll n uway t ha m n z ng u gl bal -

, ma t data and IT y t m

t n a v b l ty a thm any, n u m l an w th

all u n t at v , a ly m a uu g and d u d nmak ng. W nt nd t b n thm t f nt d and b v agm an n th w ld.

5. We Are Building a Second toNone Team and CultureIn nt y a , w th u t an -mat n a t n , w t uly hav a k da l t all u a at . It tha n, l n and tal nt thathav mad u g bl .T nu tu and g w u a at ,nabl ng th m t l ad P C nt

th utu , w hav m l m nt dawa d-w nn ng tal nt and l ad -h d v l m nt n t at v . Wal hav b n u t ng x ut v

m ut d u ndu t y t n uh th nk ng and b ng n w a a-

b l t t u t am. Im allyud th w k w hav d n

a a m any t bu ld a t ngt am u nt and utu mall ad . A w nt nu t u nd v l ng w ld- la tal nt andt am , P C wa gn z d n2012 by th G at Pla t W kIn t tut , wh h ank d u a n th W ld B t Mult nat nal

W k la . In add t n, Ch Ex ut v magaz n ank d P Ca n th B t C m an L ad n 2012.

On a a that d v m nt n th g at u ag and human ty

d m n t at d by u a at .In 2012, wh th t wa n n

t Hu an Sandy n th U.S., thd ng n th Ph l n , l t al

un t and t an t n n Egy t th unt y- v nt , ut am hav d m n t at d anunwav ng mm tm nt t un um , u t m and m-

mun t wh l d l v ng u

man g al . Th auntl t , and I w h I uld

t ll th m all n t but , b au I amt uly ud u a at andhumbl d t b th l ad .

6. We Are Delivering on thePromise o Per ormance withPurposeTh a g at d al a t v tyn P C t day, all u d nd l v ng u ta n d valu . Whav n what ha n wh n

at x ut v ha h t-t m wa d t th x lu n th l ng t m. N m any an

t l a m ly an ng n

h t-t m g wth and n th ngm . A m any at unda l n m ty. It du ta gulat d by ubl auth t .Th w k m d n bu nn m a a tn h w thth ubl and n n- t t .

W w n th t nt m -a y m an t gn z th m-tant nt d nd n b tw n

at n and ty wh n wa t ulat d u P man w thPu d t n ba k n 2007.P man w th Pu ug al t d l v u ta n d nan al

man by v d ng a w dang d and b v ag mt at t h althy at ; nd ng nn -vat v way t m n m z u m a t

n th nv nm nt and l w ut th ugh n gy and watn vat n, a w ll a du d

u a kag ng mat al; v d-

ng a a and n lu v w k la u m l y gl bally; and by

t ng, u t ng and nv t ngn th l al mmun t n wh hw at .

Th g w hav mad vth la t x y a and n 2012 n

a t ula h a t n ng nd d.

W nt nu d t g w u G d- -Y u ng , d m n t at d l ad -h n wat n vat n that wa

gn z d w th th St kh lmIndu t y Wat Awa d and th U.S.Wat P z , and du d u L tT m Inju y Rat by 32 nt n2012. Th a but a w xam l th g w hav mad ,g that ha l d t u l -

t n a n th W ld M t Ad-m d C m an by F tun , n t m t t d by Ba n andn t m t th al by Eth h .

I am ud what w hava h v d n th la t v al y a .W ant at d many th nv -nm ntal hang a ly n and

un qu ly and n a ly t an -

m d u lv wh l t ll d l v -ng t ng ult . W hav a m-l h d a g at d al and a n thght t a k.

W hav l a and d v lan tnt nu t ha th bu n

wh l d l v ng ult . Ou k yn t at v hav n t hang d. W w llnt nu t d v tabl g wthn u d v l d ma k t wh lnt nu ng t m g at u t -


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P C ha 22 b and that a h g n atd $1 b ll n m n 2012n t mat d annual ta l al :

1 G Series, G2, Propel 2 Outside the U.S.3 PepsiCo/Unilever partnership4 PepsiCo/Starbucks partnership

1

2

3

3

4

l t wa d att a t v h gh-g wtha . W w ll w k t ully al z

th b n t u m l m n-ta y at g , a tal z n u

t ngth n d and n w a ab l t ,mak v y nny a n , u -th nv t t d v l th k ll u a at , and m t m tant-ly, a l at u w k n t ntw th P man w th Pu .

Ou u nt lan af m u

mm tm nt t a h v ng ut-tand ng ult wh l w nt nuu n a y and x an v t an -mat n j u n y. Th j u n y

w ll n t b a y, but m tantw k n v .

S , a w nav gat u a a undth t a k, I b l v w a v y w ll

t n d t un a g at a , nu t u ha h ld t dayand th n xt g n at n.

R ntly, P C wa dt a a m any w th g at ha a -t . I am u t b au w havndu d and th v d n hall ng ng

t m . I h t al b au whav d m n t at d th u agt l k b y nd th mm d at andu mm tm nt t manag ng thm any u ta nabl l ng-t m

man , t ng and a t ngn th nt d nd n a-t n and th t n wh h

w at .

Th th v y n P -man w th Pu . I b l v t m tant n w m than v .

Indra K. Nooyi P C Cha man andCh Ex ut v Of


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Mix o Net Revenue Net Revenues

10%

20%

33%

37%BeverageFood 49%

U.S. Outside U.S.

Division Operating Proft

7%13%

28%52%PepsiCo AMEA 7%PepsiCo Europe 13%PepsiCo Americas Beverages 28%PepsiCo Americas Foods 52%

PepsiCo AMEA 10%PepsiCo Europe 20%PepsiCo Americas Beverages 33%PepsiCo Americas Foods 37%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(MAR)

50

100

150

200

250

Cumulative Total Shareholder Return Return on PepsiCo stock investment (including dividends) and the S&P 500

12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 3/13 1

PepsiCo, Inc. $100 $99 $87 $98 $111 $128 $139 $172 $127 $146 $161 $169 $180 $201

S&P 500

$100 $88 $69 $88 $98 $103 $119 $126 $79 $100 $115 $118 $136 $146

10 2012 P EPSICO ANNUAL REPORT

*The return or PepsiCo and the S&P 500 indices are calculated through March 1, 2013.1 As o March 1, 2013.

PepsiCo, Inc.

S&P 500

49%


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S y o Ope t ons 2012 2011 Chg ( )

Core net revenue (b) $65,492 $65,881 -1%

Core division operating pro t (c) $10,844 $11,329 -4%

Core total operating pro t (d) $9,682 $10,368 -7%

Core net income attributable to PepsiCo (e) $6,454 $7,035 -8%

Core earnings per share attributable to PepsiCo (e) $4.10 $4.40 -7%

Othe D t

Management operating cash fow, excludingcertain items ( ) $7,387 $6,145 20%

Net cash provided by operating activities $8,479 $8,944 -5%

Capital spending $2,714 $3,339 -19%

Common share repurchases $3,219 $2,489 29%

Dividends paid $3,305 $3,157 5%

Long-term debt $23,544 $20,568 14%

PepsiCo, Inc. and Subsidiaries(In millions except per share data; all per share amounts assume dilution)

(a) Percentage changes are based on unrounded amounts.(b) In 2011, excludes the impact o an extra reporting week. See page 106 Reconciliation o GAAP and

Non-GAAP In ormation or a reconciliation to the most directly comparable nancial measure inaccordance with GAAP.(c) Excludes corporate unallocated expenses, merger and integration charges and restructuring and

impairment charges in both years. In 2012, also excludes restructuring and other charges relatedto the transaction with Tingyi. In 2011, also excludes certain inventory air value adjustments inconnection with our Wimm-Bill-Dann (WBD) and bottling acquisitions and the impact o anextra reporting week. See page 106 Reconciliation o GAAP and Non-GAAP In ormation or areconciliation to the most directly comparable nancial measure in accordance with GAAP.

(d) Excludes merger and integration charges, restructuring and impairment charges and the net mark-to-market impact o our commodity hedges in both years. In 2012, also excludes restructuring andother charges related to the transaction with Tingyi and a pension lump sum settlement charge. In2011, also excludes certain inventory air value adjustments in connection with our WBD and bottlingacquisitions and the impact o an extra reporting week. See page 106 Reconciliation o GAAP and

Non-GAAP In ormation or a reconciliation to the most directly comparable nancial measure inaccordance with GAAP.(e) Excludes merger and integration charges, restructuring and impairment charges and the net mark-

to-market impact o our commodity hedges in both years. In 2012, also excludes restructuring andother charges related to the transaction with Tingyi, a pension lump sum settlement charge and taxbene t related to tax court decision. In 2011, also excludes certain inventory air value adjustmentsin connection with our WBD and bottling acquisitions and the impact o an extra reporting week.See pages 58 and 106 Results o Operations Consolidated Review in Managements Discussionand Analysis and Reconciliation o GAAP and Non-GAAP In ormation or reconciliations to themost directly comparable nancial measures in accordance with GAAP.

( ) Includes the impact o net capital spending, and excludes discretionary pension and retiree medicalpayments, merger and integration payments, restructuring payments and capital expendituresrelated to the integration o our bottlers in both years. In 2012, also excludes capital expenditures

related to the Productivity Plan and payments or restructuring and other charges related to thetransaction with Tingyi. See also Our Liquidity and Capital Resources in Managements Discussionand Analysis. See page 107 Reconciliation o GAAP and Non-GAAP In ormation or a reconciliationto the most directly comparable nancial measure in accordance with GAAP.

The actions we took in2012 were all

designed totake us one stepfurther on thetransformation

journey of ourcompany.

Indra K. Nooyi PepsiCo Chairman andChie Executive O fcer



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Fun-f or-YouOur Fun- or-You port olio includes treats thatare beloved the world over as well as o eringsthat are regional avorites.

Better-for-You Among the oods and beverages in our Better- or-You port olio are snacks baked with lower at content, snacks with wholegrains, and beverages with ewer or zerocalories and less added sugar.

Good-for-YouOur growing Good- or-You port olio iscomprised o nutritious oods and beveragesthat include ruits, vegetables, whole grains,low- at dairy, nuts, seeds and key nutrientswith levels o sodium, sugar and saturated at in line with global dietary requirements.

Also included are o erings that provide aunctional bene t, such as addressing the

per ormance needs o athletes.


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Our Banner S un port olio includes Lays, the #1 snack ood brand in the world.

SunChips are tasty multigrain

snacks that provide 18 grams o whole grains in a one ounce bag.

With bold and unique favors,

Doritos is the worlds leadingcorn snack.

A cheesy crunch to lighten up the

day, Cheetos is the global leader in its category.


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Brand Pepsi enables consumers to make the most o the moment and embrace their individuality with choices that include Pepsi, Pepsi NEXT, Pepsi MAX and Diet Pepsi.

Sierra Mist, our delicious lemon-lime carbonated so t drink in the U.S., is among our 22 billion-dollar brands.

How We DEW: Mountain Dew is the #1 favored carbonated so t drink in measured channelsin the U.S.


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Cra ted with premium Starbucks co ee beans,the Starbucks ready-to-drink beverage port olio 1 delivered double-digit retail sales growth in 2012.

Lipton ready-to-drink tea 2 , the category leader in theU.S., is re reshing consumers and growing in marketsaround the world.

P C th l ad n L qu d R -

hm nt B v ag n m a u dhann l n N th Am a. OuN th Am an b v ag bu n la g and tabl . It n lud

h ng, g at-ta t ng ngthat h ld th #1 #2 t n nm t maj at g .

Ou t l al t m nd u lyd v . F m than tw d -ad , w hav b n n a ng thnumb h w n-um , add ng ady-t -d nk t aand d nk , t n andth n n a b nat d b v ag .

Im tantly, w l w- z - al and mall - t n dt n , u h a 8 un an

( tu d b l w), alm t v yd nk w mak . T u th h l un um manag al , w

a k nly u d n nn vat n.In 2012, w laun h d P NEXT, agam - hang n th la at g y.

It d l v al la ta t w th 60nt l uga than P -C la.

In l than 12 m nth , P NEXTa h v d m than $100 m ll n nta l al .

1 PepsiCo/Starbucks partnership.2 PepsiCo/Unilever partnership.


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W nt nu t bu ld u t ln u t and v g tabl , g a n ,da y and t nut t n, t at g -ally t n ng P C t m tg w ng n um d mand ta ty and nv n nt nut t n. Oul ad ng b and n lud T ana,

Quak , Gat ad and Nak d Ju .

Ou t t g w n th nut -t n a a gl bal, a llu t at dby th g u Quakbu n . La t y a , w n a dQuak ta l al n th U.K. w thth u Oat S S m l ,g w Quak v lum n Ch na andInd a w th b ak a t d u t m-z d l al ta t , and l v -ag d Quak x t n Ru aby laun h ng at und u l alChud b and.


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Quaker, the most trusted masterbrand inits break ast and snacking categories in theU.S., grew volume in markets around the globe.

Tropicana innov ation includes premium packaging, Tropicana Farmstand in the U.S.and the 2013 launch o Trop 50 in the U.K.

Gatorade, the clear leader in the sportsnutrition category, is poised to continueits global expansion in 2013.

Naked Juice is one o our strongest growth per ormers and in 2012, grew net revenue21 percent over 2011.


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Ov th a t v y a , w hav

d l b at ly nv t d g wth nm g ng and d v l ng ma k t .

W a n w th #1 d andb v ag bu n n Ru a, Ind aand th M ddl Ea t. W a th#2 d and b v ag bu n nM x , wh w hav a t ng

t n n ma na k and havn a d th al u M x anb v ag bu n und a n w

j nt v ntu . W a al am ngth t 5 d and b v ag bu -n n B az l, Tu k y and manyth ma k t .

In 2006, m g ng and d v l ngma k t a unt d 24 nt P C n t v nu ; n 2012,

th y nt d 35 nt.

35%

PErCENTaGE Of NET rEvENuEfrOm EmErGiNG & DEvElOPiNGmarkETS

24%

2012

2006

1 Organic results are non-GAAP nancial measures that exclude certain items. See page 60 for a reconcili-ation to the most directly comparable nancial measure in accordance with GAAP.


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In 2012, w nt nu d u u na l at ng th b n t OnP C , l v ag ng u t ng -

t n n b th d and b v agt b m a m f nt and

t v m any.

Hav ng a mm n u ly ha n andha ng n a t u tu ha nabl du t d a t . Th x tw hav d v l d n l t ng and

h t ng b t a t ha h l du t m v u mann h w w mak , m v and g tma k t w th u d and b v -ag . Ou b ad t l nt nut att a t w ld- la tal nt.

Ab v all, b ng an nt g at d dand b v ag m any nablu t b tt v u n umand ta l u t m . W v dun qu valu t th m th ugh -g am , m t n and m han-d z ng a u at g , t nw th a tn u h a th Nat nalF tball L agu and Maj L aguBa ball.


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In 2012, we partnered with Taco Bell to introduceDoritos Locos Tacos, the restaurants biggest suc-cess in its 50-year history. In nine months alone, TacoBell sold 325 mil lion Doritos Locos Tacos. We arebuilding on this success with Cool Ranch-favored Doritos Locos Tacos and the launch o Mountain

Dew Baja Blast Freez e. The pairing o the Doritosand Mountain Dew brands is a power ul demonstra-tion o One PepsiCo: In the U.S. convenience channel,Doritos is the number one salty snack, while Moun-tain Dew is the number one single-serve carbonated so t drink.


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In 2012, w gn antly t du u adv t ng and ma k t ngnv tm nt , w th a u n 12

m gab and : n b v ag , P ,M unta n D w, S a M t ( n thU.S.) and 7UP ( ut d th U.S.),L t n ady-t -d nk t a andM nda; n na k , Lay , D t ,Ch t and SunCh ; and nu nut t n bu n , Quak ,T ana and Gat ad .

W laun h d b ld n w b andt n ng w th u gl bal P

L v N w am a gn and hT ana m ag ng n N thAm a and Eu ; u d ugam n d g tal ma k t ng w th thL t n B k Sta Wa gam a

m b l h n ; and la d tn th Ad M t ank ng SuB wl XLVI w th D t an- at dmm al .


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In 2012, Pepsis rst global campaign, Live or Now, engaged millions o consumers through music, sports, social media and other consumer touch points. In December, we announced a unique creativecollaboration with 17-time Grammy Award winning singer Beyonc to work with us on engaging content

or Pepsi consumers. As w e launch Live or Now around the world, we are customizing it or our local markets, while staying true to the brand position o living in the moment. In the Middle East,the campaign is called Yalla Now and in India,Oh Yes Abhi.


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A l at ng nn vat n a k y -ty P C . W hav nv t d

n R a h & D v l m nt andbu lt n w a ab l t t h l u d -v l b akth ugh nn vat n thatd l v u ta nabl n m ntalg wth. Inn vat n m du t

laun h d n th a t th y aa unt d a x mat ly ght

nt u n t v nu n 2012.


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rese ch &De e op ent

In th la t v y a , w havt an m d th R&D gan zat nat P C t at a gl baln tw k, d v l t ng

a h a ab l t and bu ldd nt k ll . Ou R&Dt am n lud x t m a w dang nt d l n whh l k P C n th l ad ngdg u ndu t y. Th t am u d n d l v ng n -

ba k d nn vat n t m tn um n d and g w u

bu n .

GlOBal CENTErSP C n w d and b v ag

nn vat n nt n Shangha w llv a a hub n w du t,a kag ng and qu m nt nn -vat n P C bu nth ugh ut A a and, m b adly,w ll a tn w th P C R&Dnt gl bally.

Ou n w R&D nt n Hambu g,G many w ll lay a l ad ng l nu gl bal a h and nn vat nu d n u t and v g tabl .

In 2013, w w ll naugu at uGl bal Bak ng Inn vat n and Nut -t n C nt . L at d n M nt y,M x , t w ll u n bak d

na k nn vat n that an bada t d gl bally.

SHANGHAI

HAMBURG

MONTERREY


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A a m any d ng bu n nm than 200 unt and t -t , d v ty and n lu n havn v b n m v tal t u u -

. B ng a d v a u n-um nabl u t und tand,

thand, h w t m t th n d .A a and n lu v w k lathat valu d nt t vbu ld m l y ngag m nt,

t at v ty and u l nn va-t n. Th v gn tt b l w buta w xam l h w P Cb th u t and b n t md v ty and n lu n.

GROWING THE NUMBER OWOMEN LEADERSW a mm tt d t n a ngth numb w m n l adw th n P C th ugh u t ngand d v l m nt n t at va und th w ld. In u A a,

M ddl Ea t and A a t , xam l , th ntag n wlyh d m t d x ut v wh

a w m n x d 50 nt.

Ta l d g am nabl g :In Saud A ab a, w hav n t u t-d w k la that t l alu t m wh l nabl ng w m n tw k and advan . Ou Saud t amn lud 25 w m n h d n 2011and 2012 n b th manag m nt and

nt-l n l .

TAkING A STAND OR EqUALITyA a gl bal m any, P Cw k n unt w th a b ada ay law and gulat n .R ga dl wh w -at , P C tak g at a t

t th d v ty, tal nt andab l t all.

At P C , w d n d v tya all th un qu ha a t tthat mak u a h u : nal-ty, l tyl , th ught ,w k x n , thn ty, a ,l , l g n, g nd , g ndd nt ty, xual ntat n,

ma tal tatu , ag , nat nal g n,d ab l ty, v t an tatu , thd n .


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RECRUITING VETERANSTO OUR COMPANyOu t t u t U.S. m l ta yv t an t P C hav a n d ua la n th G.I. J b ank ng T 100 M l ta y F ndly Em l y .Only th t tw nt th u-and l g bl m an makth T 100 ank ng. On th 2013l t, P C th nly d andb v ag m any n th t 50.

CREATING OPPORTUNITIES ORDI ERENTLy-ABLED PEOPLEOu P C M x F d a w lla u M ddl Ea t bu n x m-

l y h w P C at tu-n t d ntly-abl d l .B th th bu n havd v l d t ng t a k d

h ng and d v l ng thtal nt l w th h a ngm a m nt . Th a m l hm nt th a at a a u

d u nt m any.

SUPPORTING OUR LOCALCOMMUNITIESW b l v w hav a n b l tyt th mmun t wh w -at . Ou U.K. t am, xam l ,a tn w th a ha ty all d MagB ak a t t h l all v at hung .Thank t th a tn h , wh h u t d by u Quak and

T ana bu n , ab ut 6,000h ld n n th U.K. b g n th dayw th a nut t u b ak a t.

Ev y day, P C a ath w th a n th bu -

n . Du ng hall ng ng t m ,u a at hav d m n t at dg at u ag . Wh n Hu anSandy b ught t bl d va tat nt th Ea t n U.S., t am P C a at w k d t -l ly t h l mmun t n N wY k and N w J y. In th Ph l -n , wh n h avy m n n a n

and a ty h n au d d ng nMan la, u a at t k a t n,

v d ng a d t th n n d.And th ugh l t al un t andt an t n, u a at n Egy ta ly k t u bu n n t a k.W th th unwav ng d d at n

t u n um , u t mand mmun t , u P Ca at a und th w ld a

nd t n n . W thank andalut th m.

A P C adv t m nt, u d a a t u u t ng f t , atuw m n a at n u A a, M ddl Ea t and A a t : (l t t ght)St han L w (nut t n manag ), Sha ma Al Awadh ( mm al man-ag m nt t a n ) and Khu hnuma Panthak ( mmun at n d nat ).


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P man w th Pu und -n u g al t d l v l ng-t m,u ta nabl nan al man .It gu d u t at gy and a-t n , w th a u n Human Su -ta nab l ty, Env nm ntal Su ta n-ab l ty and Tal nt Su ta nab l ty.

Human Su ta nab l ty m an -v d ng a w d ang d andb v ag , m t at t h althyat . Ou t t n ah u n um n luddu ng l v l at, d um

and add d uga n many ut at . At th am t m , w havx and d u t l t v dn um w th nv n nt d

and b v ag that u t thda ly nut t n qu m nt .

W hav mad gn ant g

n x and ng u t l : In thU.S., xam l , l w- z -al b v ag , a t v hyd at n

ng and ju ll t v ly

m d 49 nt u 2012b v ag v lum .

Env nm ntal Su ta nab l tym an nd ng nn vat v way t

ut t and m n m z u m a tn th nv nm nt th ugh n-gy and wat n vat n anddu t n a kag ng v lum .

La t y a , w ann un d that wa h v d u wat du t n g alt m v gl bal at nalwat -u f n y by 20 nt

un t du t n u y aah ad h dul . W al m tu g al t v d a t awat t th m ll n l n2012th y a ah ad lanth ugh th t th P CF undat n. In gn t n um h n v a a h t wat

t wa d h , n lud ng u tth ugh ut u bu n a-t n , u w k n th mmun t


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In 2012, w d a d u L t T mInju y Rat by 32 nt m a d

t 2011.

W hav du d th a kag ng w ght u du t by m than 350

m ll n und v th la t v y a .

W a h v d u g al u y aah ad h dul t m v gl bal

at nal wat -u n y by 20 nt un t du t n by 2015, m a d t a 2006 ba l n .

L w- z - al b v ag ,a t v hyd at n f ng

and ju ll t v ly m d 49 nt u 2012 U.S.

b v ag v lum .

wh w at , and u n-t nu d l ad h n th u ,P C wa h n d w th th

t g u 2012 St kh lm Indu -t y Wat Awa d.

T h l gu d u ag ultu alat n , w d v l d and

a l t ng a l ad ng am w k u ta nabl ag ultu that

ngag g w , h l m a un- a m g and l v agu al t ha b t a t m v m nt.

At th nd la t y a , F t -LayN th Am a had n a ly 200

l t t u k d l y d n thU.S.; th bu n ha th la g tmm al t all- l t

d l v y t u k n th unt y.

Th ugh 2012, w x d d bym than 20 nt u g alt du th a kag ng w ght u du t by 350 m ll nund v th la t v y a ,ma ly n u b v ag b ttl .

Tal nt Su ta nab l ty m an nv t-ng n u a at t h l th mu d; v d ng a a andn lu v w k la gl bally; and

t ng, u t ng and nv t-ng n th l al mmun t whw at .

In all u ma k t , w a d v l-ng th tal nt a at , -

a ng th m t l ad P C nt

th utu . Th ugh P C Un -v ty and nl n u dby u gl bal un t n , m than

8,000 u a at m l t dm than 11,500 u n 2012.Th nal d v l m nt w

u a at nabl th mt d v l th k ll , a ab l tand m nd t n d d t d v u -ta nabl nan al man andvalu at n.

W al hav b n gn z d x-t nally u l ad h n u ng

al m d a t , u h a L nk dInand Tw tt , t u t g at tal ntt u m any.

And n H alth and Sa ty, w d -a d u L t T m Inju y Rat

by 32 nt m a d t 2011.

Th St kh lm Int nat nal Wat In t tut awa d d P C th 2012St kh lm Indu t y Wat Awa d.


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Financials


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Managements Discussion and AnalysisOur BusinessExecutive Overview 36Our Operations 37Our Customers 39Our Distribution Network 39Our Competition 39Other Relationships 40Our Business Risks 40

Our Critical Accounting PoliciesRevenue Recognition 49Goodwill and Other Intangible Assets 50Income Tax Expense and Accruals 51Pension and Retiree Medical Plans 52

Our Financial ResultsItems Affecting Comparability 54Results of Operations Consolidated Review 56Results of Operations Division Review 59

Frito-Lay North America 60Quaker Foods North America 61Latin America Foods 62PepsiCo Americas Beverages 63Europe 64Asia, Middle East and Africa 65

Our Liquidity and Capital Resources 66

Consolidated Statement o Income 68

Consolidated Statement o Comprehensive Income 69

Consolidated Statement o Cash Flows 70

Consolidated Balance Sheet 72

Consolidated Statement o Equity 73

Notes to Consolidated Financial StatementsNote 1 Basis of Presentation and Our Divisions 74Note 2 Our Significant Accounting Policies 78Note 3 Restructuring, Impairment and

Integration Charges 80Note 4 Property, Plant and Equipment and

Intangible Assets 81Note 5 Income Taxes 84Note 6 Stock-Based Compensation 85Note 7 Pension, Retiree Medical and Savings Plans 87Note 8 Related Party Transactions 93Note 9 Debt Obligations and Commitments 93Note 10 Financial Instruments 95Note 11 Net Income Attributable to PepsiCo

per Common Share 97Note 12 Preferred Stock 98Note 13 Accumulated Other Comprehensive Loss

Attributable to PepsiCo 98Note 14 Supplemental Financial Information 98Note 15 Acquisitions and Divestitures 99

Managements Responsibility orFinancial Reporting 100

Managements Report on Internal ControlOver Financial Reporting 101

Report o Independent Registered PublicAccounting Firm 102

Selected Financial Data 103

Reconciliation o GAAP and Non-GAAPIn ormation 105

Glossary 108

PEPSICO ANNUAL REPORT

Managements Discussion and Analysis


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Our discussion and analysis is an integral part of our consoli-dated financial statements and is provided as an addition to,and should be read in connection with, our consolidated f inan-cial statements and the accompanying notes. Definitions of key terms can be found in the glossary beginning on page 108.Tabular dollars are presented in millions, except per shareamounts. All per share amounts reflect common per shareamounts, assume dilution unless otherwise noted, and arebased on unrounded amounts. Percentage changes are basedon unrounded amounts.

Our Business

Executive OverviewWe are a leading global food and beverage company withbrands that are respected household names throughout theworld. Through our operations, authorized bottlers, contractmanufacturers and other partners, we make, market, sell anddistribute a wide variety of convenient and enjoyable foodsand beverages, serving customers and consumers in morethan 200 countries and territories.

Our management monitors a variety of key indicators toevaluate our business results and financial condition. Theseindicators include market share, volume, net revenue, oper-ating profit, management operating cash flow, earnings pershare and return on invested capital.

During 2012 we undertook a number of significant initia-tives that we believe will position us for future success. Theseinitiatives included increasing investment in our iconic globalbrands; stepping up our innovation program and launchingnew products like Pepsi Next; and implementing a multi-yearproductivity program that resulted in over $1 billion in savingslast year alone. We successfully completed these initiativeswhile returning $6.5 billion to shareholders through repur-chases and dividends during 2012.

As we look to 2013 and beyond, we are focused on position-ing our Company for long-term advantage and growth whilecontinuing to deliver strong and consistent financial results.Our business strategies are designed to address key chal-lenges facing our industry, including increasing consumer andgovernment focus on health and wellness, demographic shiftsand retail trade consolidation, and macroeconomic uncer-tainty and commodity price volatility. We believe that manyof these challenges create new opportunities for growth forour Company. For example, we expect that the accelerationof the convenience trend will drive continued growth in thedemand for convenient foods and beverages worldwide. In

addition, the favorable outlook in emerging and developingmarkets creates opportunities for growth in all of our productsin those markets. We believe that there are also potential new

categories of expansion for us in the global food and beveragemarketplace, such as Good-for-You and premium priced prod-ucts, products for aging populations and value offerings. Inorder to address these challenges and capitalize on theseopportunities, we plan to do the following:

Rein orce our existing value drivers.We will continue to refocus our efforts on key global brandsand categories in our most important developed markets todrive profitable growth. We believe that concentrating ourinsights, marketing and innovation resources behind our mostsignificant brands in key markets will enable us to reinforceour existing competitive advantages resulting from our go-to-market systems and strong brands, particularly with respectto snacks, and continue to grow demand and market share.

Migrate our port olio towards attractive high growthcategories and markets.We plan to build on our existing efforts in the Good-for-Youspace to continue to grow our nutrition business by growingour most admired existing nutrition brands, including Quaker,Tropicana and Gatorade. Our efforts to capitalize on the grow-ing consumer demand for convenient nutrition are global.We are also working to unlock opportunities in new productcategories through our dairy business in Russia and our MllerQuaker Dairy joint venture in the United States, our Sabra dips

joint venture and our Stacys baked grain snack business.We believe emerging and developing markets represent

another very attractive high growth space for PepsiCo.Economic growth in these markets is lifting consumer incomelevels and driving urban lifestyles, which is in turn increas-ing demand for convenient foods and beverages. We expectto continue to invest aggressively for advantaged growth inemerging and developing markets, such as through tuck-inacquisitions like Mabel cookies in Brazil and through strate-gic partnerships to improve scale and performance such asour partnership with Tingyi (Cayman Islands) Holding Corp.(Tingyi) in China.

Accelerate the bene ts o Power o One. We are focused on continuing to drive cost savings and otherproductivity enhancements derived from our complemen-tary food and beverage portfolio, which benefit both our topand bottom line. For example, we realize significant benefitsfrom our cost scale across our portfolio. We also captureproductivity benefits by applying a common set of best-in-class processes, technologies and best practices across ourbusinesses around the globe. In addition, the complementary

nature of our categories allows us to drive commercial activi-ties across food and beverage to accelerate our growth withinparticular markets.



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ll d ff l l h d d l



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Latin America FoodsEither independently or in conjunction with third-party part-ners, LAF makes, markets, sells and distributes a number of snack food brands including Marias Gamesa, Cheetos, Doritos,Ruffles, Emperador, Saladitas, Elma Chips, Rosquinhas Mabel,Sabritas and Tostitos, as well as many Quaker-branded cerealsand snacks. These branded products are sold to independentdistributors and retailers.

PepsiCo Americas BeveragesEither independently or in conjunction with third-party part-ners, PAB makes, markets, sells and distributes beverageconcentrates, fountain syrups and finished goods under vari-ous beverage brands including Pepsi, Mountain Dew, Gatorade,Diet Pepsi, Aquafina, 7UP (outside the U.S.), Diet MountainDew, Tropicana Pure Premium, Sierra Mist and Mirinda. PABalso, either independently or in conjunction with third-partypartners, makes, markets and sells ready-to-drink tea andcoffee products through joint ventures with Unilever (underthe Lipton brand name) and Starbucks. Further, PAB manufac-tures and distributes certain brands licensed from Dr PepperSnapple Group, Inc. (DPSG), including Dr Pepper and Crush,and certain juice brands licensed from Dole Food Company,Inc. PAB operates its own bottling plants and distributionfacilities and sells branded finished goods directly to inde-pendent distributors and retailers. PAB also sells concentrateand finished goods for our brands to authorized independentbottlers, who in turn also sell our brands as finished goods toindependent distributors and retailers in certain markets.

PABs volume reflects sales to its independent distributorsand retailers, as well as the sales of beverages bearing ourtrademarks that bottlers have reported as sold to independentdistributors and retailers. Bottler case sales (BCS) and con-centrate shipments and equivalents (CSE) are not necessarilyequal during any given period due to seasonality, timing of product launches, product mix, bottler inventory pract ices andother factors. While our revenues are not entirely based onBCS volume, as there are independent bottlers in the supplychain, we believe that BCS is a valuable measure as it quanti-fies the sell-through of our products at the consumer level.

See Note 15 to our consolidated financial statements foradditional information about our acquisitions of The PepsiBottling Group (PBG) and PepsiAmericas, Inc. (PAS) in 2010.

EuropeEither independently or in conjunction with third-party part-ners, Europe makes, markets, sells and distributes a number of leading snack foods including Lays, Walkers, Doritos, Cheetosand Ruffles, as well as many Quaker-branded cereals andsnacks, through consolidated businesses as well as through

noncontrolled affiliates. Europe also, either independentlyor in conjunction with third-party partners, makes, markets,sells and distributes beverage concentrates, fountain syrupsand finished goods under various beverage brands includ-ing Pepsi, Pepsi Max, 7UP, Diet Pepsi and Tropicana. Thesebranded products are sold to authorized bottlers, independentdistributors and retailers . In certain markets , however, Europeoperates its own bottling plants and distribution facilities.Europe also, either independently or in conjunction with third-party partners, makes, markets and sells ready-to-drink teaproducts through an international joint venture with Unilever(under the Lipton brand name). In addition, Europe makes,markets, sells and distributes a number of leading dairy prod-ucts including Domik v Derevne, Chudo and Agusha.

Europe reports two measures of volume. Snacks volumeis reported on a system-wide basis, which includes our ownsales and the sales by our noncontrolled affiliates of snacksbearing Company-owned or licensed trademarks. Beveragevolume reflects Company-owned or authorized bottler salesof beverages bearing Company-owned or licensed trade-marks to independent distributors and retailers (see PepsiCoAmericas Beverages above). In 2011, we acquired Wimm-Bill-Dann Foods OJSC (WBD), Russias leading branded food andbeverage company. WBDs portfolio of products is includedwithin Europes snacks or beverage reporting, depending onproduct type.

See Note 15 to our consolidated financial statements foradditional information about our acquisitions of WBD in 2011and PBG and PAS in 2010.

Asia, Middle East and A ricaEither independently or in conjunction with third-party part-ners, AMEA makes, markets, sells and distributes a numberof leading snack food brands including Lays, Chipsy, Kurkure,Doritos, Cheetos and Smiths through consolidated businessesas well as through noncontrolled affiliates. Further, eitherindependently or in conjunction with third-party partners,AMEA makes, markets and sells many Quaker-branded cerealsand snacks. AMEA also makes, markets, sells and distributesbeverage concentrates, fountain syrups and finished goodsunder various beverage brands including Pepsi, Mirinda, 7UP,Mountain Dew, Aquafina and Tropicana. These branded prod-ucts are sold to authorized bottlers, independent distributorsand retailers. However, in certain markets, AMEA operatesits own bottling plants and distribution facilities. AMEA also,either independently or in conjunction with third-party part-ners, makes, markets and sells ready-to-drink tea productsthrough an international joint venture with Unilever (under theLipton brand name). Further, AMEA licenses co-branded juiceproducts to third-party partners through a strategic alliance


ith Ti g i d th H f T i b d AMEA O Di t ib ti N t k



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with Tingyi under the House of Tropicana brand name. AMEAreports two measures of volume (see Europe above).

See Note 15 to our consolidated financial statements foradditional information about our transaction with Tingyiin 2012.

Our CustomersOur primary customers include wholesale distributors, food-service distributors, grocery stores, convenience stores, massmerchandisers, membership stores and authorized indepen-dent bottlers. We normally grant our independent bottlersexclusive contracts to sell and manufacture certain beverageproducts bearing our trademarks within a specific geographicarea. These arrangements provide us with the right to chargeour independent bottlers for concentrate, finished goods andAquafina royalties and specify the manufacturing processrequired for product quality.

Since we do not sell directly to the consumer, we rely onand provide financial incentives to our customers to assist inthe distribution and promotion of our products. For our inde-pendent distributors and retailers, these incentives includevolume-based rebates, product placement fees, promotionsand displays. For our independent bottlers, these incentivesare referred to as bottler funding and are negotiated annuallywith each bottler to support a variety of trade and consumerprograms, such as consumer incentives, advertising support,new product support, and vending and cooler equipmentplacement. Consumer incentives include coupons, pricingdiscounts and promotions, and other promotional offers.Advertising support is directed at advertising programs andsupporting independent bottler media. New product supportincludes targeted consumer and retailer incentives and directmarketplace support, such as point-of-purchase materials,product placement fees, media and advertising. Vending andcooler equipment placement programs support the acquisitionand placement of vending machines and cooler equipment.The nature and type of programs vary annually.

Retail consolidation and the current economic environmentcontinue to increase the importance of major customers.In 2012, sales to Wal-Mart Stores, Inc. (Wal-Mart) includingSams Club (Sams), represented approximately 11% of ourtotal net revenue. Our top five retail customers representedapproximately 30% of our 2012 North American (UnitedStates and Canada) net revenue, with Wal-Mart (includingSams) representing approximately 17%. These percentagesinclude concentrate sales to our independent bottlers whichwere used in finished goods sold by them to these retailers.

Our Distribution NetworkOur products are brought to market through direct-store-delivery (DSD), customer warehouse and distributor networks.The distribution system used depends on customer needs,product characteristics and local trade practices.

Direct-Store-Delivery We, our independent bottlers and our distributors operateDSD systems that deliver snacks and beverages directly toretail stores where the products are merchandised by ouremployees or our bottlers. DSD enables us to merchandisewith maximum visibility and appeal. DSD is especially well-suited to products that are restocked often and respond toin-store promotion and merchandising.

Customer WarehouseSome of our products are delivered from our manufacturingplants and warehouses to customer warehouses and retailstores. These less costly systems generally work best for prod-ucts that are less fragile and perishable, have lower turnover,and are less likely to be impulse purchases.

Distributor NetworksWe distribute many of our products through third-party dis-tributors. Third-party distributors are particularly effectivewhen greater distribution reach can be achieved by includinga wide range of products on the delivery vehicles. For exam-ple, our foodservice and vending business distributes snacks,foods and beverages to restaurants, businesses, schools andstadiums through third-party foodservice and vending dis-tributors and operators.

Our CompetitionOur businesses operate in highly competitive markets. Ourbeverage, snack and food brands compete against global,regional, local and private label manufacturers and other valuecompetitors. In many countries in which we do business, TheCoca-Cola Company is our primary beverage competitor.Other food and beverage competitors include, but are not lim-ited to, Nestl S.A., Danone, DPSG, Kellogg Company, GeneralMills, Inc. and Mondelz International, Inc. In many markets,we compete against numerous regional and local companies.

Many of our snack and food brands hold significant lead-ership positions in the snack and food industry worldwide.However, The Coca-Cola Company has significant CSD shareadvantage in many markets outside the United States.

Our beverage, snack and food brands compete on the basisof price, quality, product variety and distribution. Success inthis competitive environment is dependent on effective pro-motion of existing products, the introduction of new products



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and the effectiveness of our product packaging, advertising laws; privacy laws; laws regulating the price we may charge for



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and the effectiveness of our product packaging, advertisingcampaigns and marketing programs, including our ability tosuccessfully adapt to a rapidly changing media environment,such as through use of social media and online advertisingcampaigns and marketing programs. Although we devotesignificant resources to the actions mentioned above, therecan be no assurance as to our continued ability to developand launch successful new products or variants of existingproducts or to effectively execute advertising campaigns andmarketing programs. In addition, both the launch and ongoingsuccess of new products and advertising campaigns are inher-ently uncertain, especially as to their appeal to consumers. Ourfailure to make the right strategic investments to drive innova-tion or successfully launch new products or variant s of existingproducts could decrease demand for our existing product s bynegatively affecting consumer perception of existing brands,as well as result in inventory write-offs and other costs.

Changes in the legal and regulatory environment couldlimit our business activities, increase our operating costs,reduce demand for our products or result in litigation.The conduct of our businesses, including the production, stor-age, distribution, sale, advertising, marketing, labeling, healthand safety practices, transportation and use of many of ourproducts, are subject to various laws and regulations adminis-tered by federal, state and local governmental agencies in theUnited States, as well as to laws and regulations administeredby government entities and agencies outside the United Statesin markets in which our products are made, manufactured orsold, including in emerging and developing markets wherelegal and regulatory systems may be less developed. Theselaws and regulations and interpretations thereof may change,sometimes dramatically, as a result of political, economic orsocial events. Such changes may include changes in: food anddrug laws; laws related to product labeling, advertising andmarketing practices; laws regarding the import of ingredientsused in our products; laws regarding the import or export of our products; laws and programs aimed at reducing ingre-dients present in certain of our products, including sodium,saturated fat and added sugar; regulatory actions targetingthe snack food or beverage industries such as restrictionson the sale of snack and beverage products in publicly regu-lated venues or restrictions on the use of the SupplementalNutrition Assistance Program to purchase certain snacks orbeverages; increased regulatory scrutiny of, and increasedlitigation involving, product claims and concerns regardingthe effects on health of ingredients in, or attributes of, cer-tain of our products, including without limitation those foundin energy drinks; state consumer protection laws; taxationrequirements, including taxes that would increase the cost of our products to consumers; competition laws; employment

laws; privacy laws; laws regulating the price we may charge forour products; laws regulating access to and use of water orutilities; and environmental laws, including laws relating to theregulation of water rights and treatment. New laws, regula-tions or governmental policy and their related interpretations,or changes in any of the foregoing, may alter the environmentin which we do business and, therefore, may impact our resultsor increase our costs or liabilities.

Governmental entities or agencies in jurisdictions where weoperate may also impose new labeling, product or productionrequirements, or other restrictions. Studies are underway bythird parties to assess the health implications of consump-tion of certain ingredients present in some of our products,including sugar, artificial sweeteners, as well as substancessuch as acrylamide that are naturally formed in a wide varietyof foods when they are cooked (whether commercially or athome), including french fries, potato chips, cereal, bread andcoffee. Certain of these studies of acrylamide found that it isprobable that acrylamide causes cancer in laboratory animalswhen consumed in extraordinary amounts. If consumer con-cerns about the health implications of consumption of certainingredients present in some of our products, including sugar,artificial sweeteners, or acrylamide increase as a result of these studies, other new scientific evidence, or for any otherreason, whether or not valid, demand for our products coulddecline and we could be subject to lawsuits or new regulationsthat could affect sales of our products, any of which couldhave an adverse effect on our business, financial condition orresults of operations.

We are also subject to Proposition 65 in California, a lawwhich requires that a specific warning appear on any productsold in California that contains a substance listed by that Stateas having been found to cause cancer or birth defects. If wewere required to add warning labels to any of our products orplace warnings in certain locations where our products aresold, sales of those products could suffer not only in thoselocations but elsewhere.

In many jurisdictions, compliance with competition laws isof special importance to us due to our competitive position inthose jurisdictions. Regulatory authorities under whose lawswe operate may also have enforcement powers that can sub-

ject us to actions such as product recall, seizure of productsor other sanctions, which could have an adverse effect on oursales or damage our reputation. Although we have policies andprocedures in place that are designed to promote legal andregulatory compliance, our employees or suppliers could takeactions that violate these policies and procedures or applicablelaws or regulations. Violations of these laws or regulationscould subject us to criminal or civil enforcement actions whichcould have a material adverse effect on our business.


In addition, we and our subsidiaries are party to a variety of India, Brazil and the Africa and Middle East regions, pres-



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p y ylegal and environmental remediation obligations arising in thenormal course of business, as well as environmental reme-diation, product liability, toxic tort and related indemnificationproceedings in connection with certain historical activities andcontractual obligations of businesses acquired by our subsid-iaries. Due to regulatory complexities, uncertainties inherent inlitigation and the risk of unidentified contaminants on currentand former properties of ours and our subsidiaries, the poten-tial exists for remediation, liability and indemnification costs todiffer materially from the costs we have estimated. We cannotguarantee that our costs in relation to these matters will notexceed our established liabilities or otherwise have an adverseeffect on our results of operations. See Our financial perfor-mance could be adversely affected if we are unable to growour business in emerging and developing markets or as a resultof unstable political conditions, civil unrest or other develop-ments and risks in the markets where our products are sold.

Our financial performance could suffer if we are unable tocompete effectively.The food, snack and beverage industries in which we operateare highly competitive. We compete with major internationalfood, snack and beverage companies that, like us, operate inmultiple geographic areas, as well as regional, local and privatelabel manufacturers and other value competitors. We com-pete with other large companies in each of the food, snack andbeverage categories, including Nestl S.A., Danone, MondelzInternational, Kellogg Company, General Mills and DPSG. Inmany countries where we do business, including the UnitedStates, our primary beverage competitor is The Coca-ColaCompany. We compete on the basis of brand recognition,taste, price, quality, product variety, distribution, marketingand promotional activity, convenience, service and the abilityto identify and satisfy consumer preferences. If we are unableto compete effectively, we may be unable to grow or maintainsales or gross margins in the global market or in various localmarkets. This may have a material adverse impact on ourrevenues and profit margins. See also Unfavorable economicconditions may have an adverse impact on our business resultsor financial condition.

Our financial performance could be adversely affectedif we are unable to grow our business in emerging anddeveloping markets or as a result of unstable politicalconditions, civil unrest or other developments and risksin the markets where our products are sold.Our operations outside of the United States, particularly inRussia, Mexico, Canada and the United Kingdom, contributesignificantly to our revenue and profitability, and we believethat our emerging and developing markets, particularly China,

g pent important future growth opportunities for us. However,there can be no assurance that our existing products, vari-ants of our existing products or new products that we make,manufacture, market or sell will be accepted or successful inany particular emerging or developing market, due to local orglobal competition, product price, cultural differences or oth-erwise. If we are unable to expand our businesses in emergingand developing markets, or achieve the return on capital weexpect as a result of our investments, particularly in Russia,as a result of economic and political conditions, increasedcompetition, reduced demand for our products, an inability toacquire or form strategic business alliances or to make neces-sary infrastructure investments or for any other reason, ourfinancial performance could be adversely affected. Unstableeconomic or political conditions, civil unrest or other develop-ments and risks in the markets where our products are sold,including in Europe, Venezuela, Mexico, the Middle East andEgypt, could also have an adverse impact on our businessresults or financial condition. Factors that could adverselyaffect our business results in these markets include: foreignownership restrictions; nationalization of our assets; regula-tions on the transfer of funds to and from foreign countries,which, from time to time, result in significant cash balances inforeign countries such as Venezuela, and on the repatriationof funds; currency hyperinflation, devaluation or fluctuation,such as the devaluation of the Venezuelan bolivar; the lackof well-established or reliable legal systems; and increasedcosts of business due to compliance with complex foreign andUnited States laws and regulations that apply to our interna-tional operations, including the Foreign Corrupt Practices Actand the U.K. Bribery Act, and adverse consequences, such asthe assessment of fines or penalties , for failing to comply withthese laws and regulations. In addition, disruption in thesemarkets due to political instability or civil unrest could resultin a decline in consumer purchasing power, thereby reducingdemand for our products. See Demand for our productsmay be adversely affected by changes in consumer prefer-ences and tastes or if we are unable to innovate or market ourproducts effectively., Changes in the legal and regulatoryenvironment could limit our business activities, increase ouroperating costs, reduce demand for our products or result inlitigation., Our financial performance could suffer if we areunable to compete effectively., Disruption of our supply chaincould have an adverse impact on our business, f inancial condi-tion and results of operations. and Failure to successfullycomplete or integrate acquisitions and joint ventures into ourexisting operations, or to complete or manage divestitures orrefranchising, could have an adverse impact on our business,financial condition and results of operations.


Unfavorable economic conditions may have an adverse raw milk, rice, seasonings, sucralose, sugar, vegetable and



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impact on our business results or financial condition.Many of the countries in which we operate, including the UnitedStates and several of the members of the European Union,have experienced and continue to experience unfavorableeconomic conditions. Our business or financial results may beadversely impacted by these unfavorable economic conditions,including: adverse changes in interest rates, tax laws or taxrates; volatile commodity markets and inflation; contract ion inthe availability of credit in the marketplace due to legislationor other economic conditions such as the European sovereigndebt crisis, which may potentially impair our ability to accessthe capital markets on terms commercially acceptable to usor at all; the effects of government initiatives to manage eco-nomic conditions; reduced demand for our products resultingfrom a slow-down in the general global economy or a shift inconsumer preferences for economic reasons or otherwiseto regional, local or private label products or other economyproducts, or to less profitable channels; impairment of assets;or a decrease in the fair value of pension or post-retirementassets that could increase future employee benefit costs and/ or funding requirements of our pension or post-retirementplans. In addition, we cannot predict how current or worsen-ing economic conditions will affect our critical customers,suppliers and distributors and any negative impact on ourcritical customers, suppliers or distributors may also have anadverse impact on our business results or financial condition.In addition, some of the major financial institutions with whichwe execute transactions, including U.S. and non-U.S. com-mercial banks, insurance companies, investment banks andother financial institutions, may be exposed to a rat ings down-grade, bankruptcy, liquidity, default or similar risks as a resultof unfavorable economic conditions. A ratings downgrade,bankruptcy, receivership, default or similar event involving amajor financial institution may limit the availability of credit orwillingness of financial institutions to extend credit on termscommercially acceptable to us or at all or, with respect to finan-cial institutions who are parties to our financing arrangements,leave us with reduced borrowing capacity or unhedged againstcertain currencies or price risk associated with forecasted pur-chases of raw materials which could have an adverse impact onour business results or financial condition.

Our operating results may be adversely affected byincreased costs, disruption of supply or shortages of rawmaterials and other supplies.We and our business partners use various raw materials andother supplies in our business. The principal ingredients weuse include apple, orange and pineapple juice and other juiceconcentrates, aspartame, corn, corn sweeteners, flavorings,flour, grapefruit and other fruits, oats, oranges, potatoes,

essential oils and wheat. Our key packaging materials includeplastic resins, including polyethylene terephthalate (PET) andpolypropylene resin used for plastic beverage bott les and filmpackaging used for snack foods, aluminum used for cans, glassbottles, closures, cardboard and paperboard cartons. Fuel andnatural gas are also important commodities for us due to theiruse in our facilities and in the trucks delivering our products.Some of these raw materials and supplies are sourced inter-nationally and some are available from a limited number of suppliers or are in shortest supply when seasonal demand isat its peak. We are exposed to the market risks arising fromadverse changes in commodity prices, affecting the cost of our raw materials and energy, including fuel. The raw materialsand energy which we use for the production of our productsare largely commodities that are subject to price volatility andfluctuations in availability caused by changes in global supplyand demand, weather conditions, agricultural uncertainty orgovernmental incentives and controls. We purchase thesematerials and energy mainly in the open market. If commodityprice changes result in unexpected increases in raw materialsand energy costs, we may not be able to increase our pricesto offset these increased costs without suffering reducedvolume, revenue and operating results. In addition, we usederivatives to hedge price risk associated with forecastedpurchases of certain raw materials and energy, including fuel.Certain of these derivatives that do not qualify for hedgeaccounting treatment can result in increased volatility in ournet earnings in any given period due to changes in the spotprices of the underlying commodities. See also Changes inthe legal and regulatory environment could limit our businessactivities, increase our operating costs, reduce demand forour products or result in litigation., Unfavorable economicconditions may have an adverse impact on our business resultsor financial condition., Climate change, or legal, regulatory ormarket measures to address climate change, may negativelyaffect our business and operations., Market Risks andNote 1 to our consolidated financial statements.

Failure to realize anticipated benefits from ourproductivity plan or global operating model could have anadverse impact on our business, financial condition andresults of operations.We are implementing a strategic plan that we believe willposition our business for future success and growth, to allowus to achieve a lower cost structure and operate efficiently inthe highly competitive food, snack and beverage industries.In order to capitalize on our cost reduction efforts, it will benecessary to make certain investments in our business, whichmay be limited due to capital constraints. In addition, it is criti-cal that we have the appropriate personnel in place to continue


to lead and execute our plan. Our future success and earnings issue could cause our products to be unavailable for a period of



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growth depends in part on our ability to reduce costs andimprove efficiencies. If we are unable to successfully imple-ment our productivity plan or fail to implement it as timelyas we anticipate, our business, financial condition and resultsof operations could be adversely impacted. In addition, wehave launched a global operating model to improve efficiency,decision making, innovation and brand management acrossthe global PepsiCo organization. If we are unable to implementthis model effectively, it may have a negative impact on ourability to deliver sustained or breakthrough innovation or tootherwise compete effectively.

Disruption of our supply chain could have an adverseimpact on our business, financial condition and resultsof operations.Our ability, and that of our suppliers, third-party businesspartners, including our independent bottlers, contract manu-facturers, joint venture partners, independent distributorsand retailers, to make, manufacture, distribute and sell prod-ucts is critical to our success. Damage or disruption to our ortheir manufacturing or transportation and distribution capa-bilities due to any of the following could impair our abilityto make, manufacture, transport, distribute or sell our prod-ucts: adverse weather conditions or natural disaster, such asa hurricane, earthquake or flooding; government action; fire;terrorism; the outbreak or escalation of armed host ilities; pan-demic; industrial accidents or other occupational health andsafety issues; strikes and other labor disputes; or other reasonsbeyond our control or the control of our suppliers and busi-ness partners. Failure to take adequate steps to mitigate thelikelihood or potential impact of such events, or to effectivelymanage such events if they occur, could adversely affect ourbusiness, financial condition and results of operations, as wellas require additional resources to restore our supply chain.

Any damage to our reputation could have a materialadverse effect on our business, financial condition andresults of operations.Maintaining a good reputation globally is critical to selling ourbranded products. Product contamination or tampering, thefailure to maintain high standards for product quality, safetyand integrity, including with respect to raw materials andingredients obtained from suppliers, or allegations of productquality issues, mislabeling or contamination, even if untrue,may reduce demand for our products or cause productionand delivery disruptions. If any of our products becomes unfitfor consumption, causes injury or is mislabeled, we may haveto engage in a product recall and/or be subject to liability. Awidespread product recall or a significant product liability

time, which could further reduce consumer demand and brandequity. In addition, we operate globally, which requires us tocomply with numerous local regulations, including, without lim-itation, anti-corruption laws and competition laws. In the eventthat our employees, bottlers or agents engage in improperactivities abroad, we may be subject to enforcement actions,litigation, loss of sales or other consequences which may causeus to suffer damage to our reputation in the United States andabroad. Our reputation could also be adversely impacted by anyof the following, or by adverse publicity (whether or not valid)relating thereto: the failure to maintain high ethical, social andenvironmental standards for all of our operations and activi-ties; the failure to achieve our goals with respect to sodium,saturated fat and added sugar reduction or the development of our global nutrition business; health concerns about our prod-ucts or particular ingredients in our products; our researchand development efforts; our environmental impact, includinguse of agricultural materials, packaging, energy use and wastemanagement; the practices of our bottlers with respect to anyof the foregoing; or our responses to any of the foregoing. Inaddition, water is a limited resource in many parts of the worldand demand for water continues to increase. Our reputationcould be damaged if we or others in our industry do not act, orare perceived not to act, responsibly with respect to water use.Failure to comply with local laws and regulations, to maintainan effective system of internal controls or to provide accurateand timely financial information could also hurt our reputa-tion. Furthermore, the rising popularity of social networkingand other consumer-oriented technologies has increased thespeed and accessibility of information dissemination, and, as aresult, negative or inaccurate posts or comments on such sitesmay also generate adverse publicity that could damage ourreputation. Damage to our reputation or loss of consumer con-fidence in our products for any of these or other reasons couldresult in decreased demand for our products and could have amaterial adverse effect on our business, f inancial condition andresults of operations, as well as require additional resourcesto rebuild our reputation. See also Changes in the legal andregulatory environment could limit our business activities,increase our operating costs, reduce demand for our productsor result in litigation.

Failure to successfully complete or integrate acquisitionsand joint ventures into our existing operations, or tocomplete or manage divestitures or refranchisings,could have an adverse impact on our business, financialcondition and results of operations.We regularly evaluate potential acquisitions, joint ventures,divestitures and refranchisings. Potential issues associated



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be adversely affected if a credit rating agency announces thatour ratings are under review for a potential downgrade

Our information systems could also be penetrated by out-side parties intent on extracting confidential information



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our ratings are under review for a potential downgrade.

If we are not able to build and sustain proper information

technology infrastructure, successfully implement ourongoing business transformation initiative or outsourcecertain functions effectively, our business could suffer.We depend on information technology as an enabler toimprove the effectiveness of our operations, to interfacewith our customers, to maintain financial accuracy and effi-ciency, to comply with regulatory financial reporting, legaland tax requirements, and for digital marketing activities andelectronic communication among our locations around theworld and between our personnel and the personnel of ourindependent bottlers, contract manufacturers, joint ventures,suppliers or other third-party partners. If we do not allocateand effectively manage the resources necessary to build andsustain the proper information technology infrastructure, wecould be subject to transaction errors, processing inefficien-cies, the loss of customers, business disruptions, the loss of or damage to intellectual property, or the loss of sensitive orconfidential data through security breach or otherwise.

We have embarked on multi-year business transformationinitiatives to migrate certain of our financial processing sys-tems to enterprise-wide systems solutions. There can be nocertainty that these initiatives will deliver the expected ben-efits. The failure to deliver our goals may impact our ability toprocess transactions accurately and efficiently and remain instep with the changing needs of the trade, which could resultin the loss of customers. In addition, the failure to either deliverthe applications on time, or anticipate the necessary readinessand training needs, could lead to business disruption and lossof customers and revenue.

In addition, we have outsourced certain information tech-nology support services and administrative functions, such aspayroll processing and benefit plan administration, to third-party service providers and may outsource other functionsin the future to achieve cost savings and efficiencies. If theservice providers that we outsource these functions to do notperform or do not perform effectively, we may not be able toachieve the expected cost savings and may have to incur addi-tional costs to correct errors made by such service providers.Depending on the function involved, such errors may also leadto business disruption, processing inefficiencies, the loss of ordamage to intellectual property through security breach, theloss of sensitive data through security breach or otherwise, liti-gation or remediation costs and could have a negative impacton employee morale.

side parties intent on extracting confidential information,corrupting information or disrupting business processes.Such unauthorized access could disrupt our business andcould result in the loss of assets, litigation, remediation costs,damage to our reputation and loss of revenue resulting fromunauthorized use of confidential information or failure toretain or attract customers following such an event.

Fluctuations in exchange rates may have an adverseimpact on our business results or financial condition.We hold assets and incur liabilities, earn revenues and payexpenses in a variety of currencies other than the U.S. dollar.Because our consolidated financial statements are presentedin U.S. dollars, the financial statements of our subsidiariesoutside the United States are translated into U.S. dollars. Ouroperations outside of the U.S. generate a significant portion of our net revenue. Fluctuations in exchange rates may thereforeadversely impact our business results or financial condition.See also Market Risks and Note 1 to our consolidated finan-cial statements.

Climate change, or legal, regulatory or market measuresto address climate change, may negatively affect ourbusiness and operations.There is concern that carbon dioxide and other greenhousegases in the atmosphere may have an adverse impact on globaltemperatures, weather patterns and the frequency and sever-ity of extreme weather and natural disasters. In the eventthat such climate change has a negative effect on agriculturalproductivity, we may be subject to decreased availability orless favorable pricing for certain commodities that are neces-sary for our products, such as sugar cane, corn, wheat, rice,oats, potatoes and various fruits. We may also be subjected todecreased availability or less favorable pricing for water as aresult of such change, which could impact our manufacturingand distribution operations. In addition, natural disasters andextreme weather conditions may disrupt the productivity of our facilities or the operation of our supply chain. The increas-ing concern over climate change also may result in moreregional, federal and/or global legal and regulatory require-ments to reduce or mitigate the effects of greenhouse gases.In the event that such regulation is more aggressive than thesustainability measures that we are currently undertaking tomonitor our emissions and improve our energy efficiency, wemay experience significant increases in our costs of opera-tion and delivery. In particular, increasing regulation of fuelemissions could substantially increase the cost of energy,including fuel, required to operate our facilities or transport


and distribute our products, thereby substantially increasingthe distribution and supply chain costs associated with our

Potential liabilities and costs from litigation or legalproceedings could have an adverse impact on our



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the distribution and supply chain costs associated with ourproducts. As a result, climate change could negatively affectour business and operations. See also Changes in the legal

and regulatory environment could limit our business activities ,increase our operating costs, reduce demand for our productsor result in litigation., Our operating results may be adverselyaffected by increased costs, disruption of supply or shortagesof raw materials and other supplies. and Disruption of oursupply chain could have an adverse impact on our business,financial condition and results of operations.

A portion of our workforce belongs to unions. Failure tosuccessfully renew collective bargaining agreements,or strikes or work stoppages could cause our businessto suffer.Many of our employees are covered by collective bargain-ing agreements. These agreements expire on various dates.Strikes or work stoppages and interruptions could occur if we are unable to renew these agreements on satisfactoryterms, which could adversely impact our operating results. Theterms and conditions of existing or renegotiated agreementscould also increase our costs or otherwise affect our abilityto fully implement future operational changes to enhanceour efficiency.

Our intellectual property rights could be infringed orchallenged and reduce the value of our products andbrands and have an adverse impact on our business,financial condition and results of operations.We possess intellectual property rights that are importantto our business. These intellectual property rights includeingredient formulas, trademarks, copyrights, patents, businessprocesses and other trade secrets which are important to ourbusiness and relate to some of our products, their packaging,the processes for their production and the design and opera-tion of various equipment used in our businesses. We protectour intellectual property rights globally through a combina-tion of trademark, copyright, patent and trade secret laws,third-party assignment and nondisclosure agreements andmonitoring of third-party misuses of our intellectual property.If we fail to obtain or adequately protect our ingredient formu-las, trademarks, copyrights, patents, business processes andother trade secrets, or if there is a change in law that limits orremoves the current legal protections of our intellectual prop-erty, the value of our products and brands could be reducedand there could be an adverse impact on our business,

PEP Annual Report 2012

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