Pepsi 2005 Annual Report Download - page 44

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settlement of a class action lawsuit related
to our purchases of high fructose corn
syrup from 1991 to 1995. In 2004, we
recorded a charge of $50 million for the
settlement of a contractual dispute with a
former business partner.
In 2004, corporate unallocated expenses
increased 38%. Higher employee-related
costs contributed 18 percentage points of
the increase, an accrual recognized in the
fourth quarter for the settlement of a
contractual dispute with a former
business partner represented 10 percent-
age points of the increase and higher costs
related to our BPT initiative contributed
4 percentage points of the increase.
Corporate departmental expenses increased
2% compared to prior year.
Bottling equity income includes our share
of the net income or loss of our noncon-
trolled bottling affiliates as described in
“Our Customers.” Our interest in these
bottling investments may change from time
to time. Any gains or losses from these
changes, as well as other transactions
related to our bottling investments, are
also included on a pre-tax basis. We con-
tinue to sell shares of PBG stock to trim
our ownership to the level at the time of
PBG’s initial public offering, since our
ownership has increased as a result of
PBG’s share repurchase program. During
2005, we sold 7.5 million shares of PBG
stock. The resulting lower ownership per-
centage reduces the equity income from
PBG that we recognize.
2005
Bottling equity income increased 46%
reflecting $126 million of pre-tax gains
on our sales of PBG stock, as well as
stronger bottler results. In the first quarter
of 2006, PBG and PAS adopted SFAS
123R which will negatively impact our
bottling equity income.
Net interest expense increased 4%
reflecting the impact of higher debt levels,
substantially offset by higher investment
rates and cash balances.
The tax rate increased 11.4 percentage
points reflecting the $460 million tax
charge related to our repatriation of undis-
tributed international earnings, as well as
the absence of income tax benefits of
$266 million recorded in the prior year
related to a reduction in foreign tax accru-
als following the resolution of certain open
tax items with foreign tax authorities and a
refund claim related to prior U.S. tax set-
tlements. This increase was partially offset
by increased international profit which is
taxed at a lower rate.
Net income from continuing operations
decreased 2% and the related net income
per common share from continuing
operations decreased 1%. These decreases
reflect the impact of the tax items discussed
above, partially offset by our operating
profit growth, increased bottling equity
income, which includes the gain on our
PBG stock sale, the impact of the 53rd
week, a favorable comparison to prior year
restructuring and impairment charges, and
for net income per share, the impact of our
share repurchases.
2004
Bottling equity income increased 18%,
primarily reflecting increased earnings
from our anchor bottlers and favorable
comparisons from international bottling
investments, primarily as a result of the
nationwide strike in Venezuela in early 2003.
Net interest expense declined 17% pri-
marily due to favorable interest rates and
higher average cash balances, partially
offset by higher average debt balances and
lower gains in the market value of invest-
ments used to economically hedge a por-
tion of our deferred compensation liability.
The offsetting increase in deferred com-
pensation costs is reported in corporate
unallocated expenses.
The annual tax rate decreased 3.8 per-
centage points compared to the prior year,
primarily as a result of tax benefits from
the resolution of open items with tax
authorities in both years, as discussed in
“Items Affecting Comparability.” The tax
benefits reduced our tax rate by 2.6 per-
centage points. Increased benefit from
concentrate operations and favorable
changes arising from agreements with the
IRS in the fourth quarter of 2003 also
contributed to the decline in rate.
Net income from continuing operations
increased 17% and the related net income
per common share from continuing opera-
tions increased 18%. These increases
primarily reflect the solid operating profit
growth and our lower annual tax rate. The
absence of merger-related costs in 2004
and increased bottling equity income also
contributed to the growth.
Change
2005 2004 2003 2005 2004
Bottling equity income $557 $380 $323 46% 18%
Interest expense, net $(97) $(93) $(112) 4% (17)%
Annual tax rate 36.1% 24.7% 28.5%
Net income — continuing operations $4,078 $4,174 $3,568 (2)% 17%
Net income per common share —
continuing operations — diluted $2.39 $2.41 $2.05 (1)% 18%
Other Consolidated Results