Pepsi 2007 Annual Report Download - page 50

of $19 million from certain mark-to-market
derivatives (compared to $18 million of
losses in the prior year) were fully offset
by the absence of certain other favorable
corporate items in the prior year.
In 2006, corporate unallocated
expenses decreased $42 million primarily
refl ecting the absence of a non-recurring
charge of $55 million in the prior year to
conform our method of accounting across
all divisions, primarily for warehouse and
freight costs. Higher costs associated with
our ongoing business transformation
initiative of $35 million, as well as the
unfavorable comparison to the prior year’s
$25 million gain in connection with the
settlement of a class action lawsuit, were
offset by the favorable impact of certain
other corporate items.
Other Consolidated Results
Bottling equity income includes our
share of the net income or loss of our
anchor bottlers as described in “Our
Customers.” Our interest in these bot-
tling 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. During
2007, we continued to sell shares of PBG
stock to reduce our economic 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 repur-
chase program. We sold 9.5 million and
10.0 million shares of PBG stock in 2007
and 2006, respectively. The resulting lower
ownership percentage reduces the equity
income from PBG that we recognize. In
November 2007, our Board of Directors
approved the sale of additional PBG stock
to an economic ownership level of 35%,
as well as the sale of PAS stock to the
ownership level at the time of the merger
with Whitman Corporation in 2000 of
about 37%.
2007
Bottling equity income increased 1%
refl ecting higher earnings from our
anchor bottlers, partially offset by the
impact of our reduced ownership level in
2007 and lower pre-tax gains on our sale
of PBG stock.
Net interest expense increased $33 mil-
lion primarily refl ecting the impact of lower
investment balances and higher average
rates on our debt, partially offset by higher
average interest rates on our investments
and lower average debt balances.
The tax rate increased 6.6 percentage
points compared to the prior year primar-
ily refl ecting an unfavorable comparison
to the prior year’s non-cash tax benefi ts.
Net income remained fl at and the
related net income per share increased
2%. Our solid operating profi t growth
was offset by unfavorable comparisons
to the non-cash tax benefi ts and restruc-
turing and impairment charges in the
prior year. Additionally, net income per
share was favorably impacted by our
share repurchases.
2006
Bottling equity income increased 12%
primarily refl ecting a $186 million pre-tax
gain on our sale of PBG stock, which com-
pared favorably to a $126 million pre-tax
gain in the prior year. The non-cash gain
of $21 million from our share of PBG’s
Tax Settlement was fully offset by lower
equity income from our anchor bottlers in
the current year, primarily resulting from
the impact of their respective adoptions of
SFAS 123R in 2006.
Net interest expense decreased
$31 million primarily refl ecting higher
average rates on our investments and
lower debt balances, partially offset
by lower investment balances and the
impact of higher average rates on our
borrowings.
The tax rate decreased 16.8 percentage
points compared to prior year primar-
ily refl ecting the non-cash tax benefi ts
recorded in 2006, the absence of the
2005 tax charge related to the American
Jobs Creation Act of 2004 (AJCA) and
the resolution of certain state income tax
audits in the current year.
Net income increased 38% and the
related net income per share increased
40%. These increases primarily refl ect the
non-cash tax benefi ts recorded in 2006,
the absence of the AJCA tax charge and
our solid operating profi t growth.
Change
2007 2006 2005 2007 2006
Bottling equity income $560 $553 $495 1% 12%
Interest expense, net $(99) $(66) $(97) $(33) $31
Annual tax rate 25.9% 19.3% 36.1%
Net income $5,658 $5,642 $4,078 – 38%
Net income per common share — diluted $3.41 $3.34 $2.39 2% 40%
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