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Management’s Discussion & Analysis

Our Financial Results

Items Affecting Comparability

The year-over-year comparisons of our financial results are affected by the following items:

                 
   
2008
   
2007
   
2006
 
Operating profit
                 
Mark-to-market net impact
$
(346
)
$
19
 
$
(18
)
Restructuring and impairment charges
$
(543
)
$
(102
)
$
(67
)
Net income
                 
Mark-to-market net impact
$
(223
)
$
12
 
$
(12
)
Restructuring and impairment charges
$
(408
)
$
(70
)
$
(43
)
Tax benefits
 
 
$
129
 
$
602
 
PepsiCo share of PBG restructuring and impairment charges
$
(114
)
 
   
 
PepsiCo share of PBG tax settlement
 
   
 
$
18
 
Net income per common share – diluted
                 
Mark-to-market net impact
$
(0.14
)
$
0.01
 
$
(0.01
)
Restructuring and impairment charges
$
(0.25
)
$
(0.04
)
$
(0.03
)
Tax benefits
 
 
$
0.08
 
$
0.36
 
PepsiCo share of PBG restructuring and impairment charges
$
(0.07
)
 
   
 
PepsiCo share of PBG tax settlement
 
   
 
$
0.01
 

Mark-to-Market Net Impact

We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, fruit and other raw materials. Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market with the resulting gains and losses recognized in corporate unallocated expenses. These gains and losses are subsequently reflected in division results when the divisions take delivery of the underlying commodity.

In 2008, we recognized $346 million ($223 million after-tax or $0.14 per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses.

In 2007, we recognized $19 million ($12 million after-tax or $0.01 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses.

In 2006, we recognized $18 million ($12 million after-tax or $0.01 per share) of mark-to-market net losses on commodity hedges in corporate unallocated expenses.

Restructuring and Impairment Charges

In 2008, we incurred a charge of $543 million ($408 million after-tax or $0.25 per share) in conjunction with our Productivity for Growth program. The program includes actions in all divisions of the business, including the closure of six plants that we believe will increase cost competitiveness across the supply chain, upgrade and streamline our product portfolio, and simplify the organization for more effective and timely decision-making. In connection with this program, we expect to incur an additional pre-tax charge of approximately $30 million to $60 million in 2009.

In 2007, we incurred a charge of $102 million ($70 million after-tax or $0.04 per share) in conjunction with restructuring actions primarily to close certain plants and rationalize other production lines.

In 2006, we incurred a charge of $67 million ($43 million after-tax or $0.03 per share) in conjunction with consolidating the manufacturing network at FLNA by closing two plants in the U.S., and rationalizing other assets, to increase manufacturing productivity and supply chain efficiencies.

Tax Benefits

In 2007, we recognized $129 million ($0.08 per share) of non-cash tax benefits related to the favorable resolution of certain foreign tax matters.

In 2006, we recognized non-cash tax benefits of $602 million ($0.36 per share), substantially all of which related to the Internal Revenue Service’s (IRS) examination of our consolidated tax returns for the years 1998 through 2002.

PepsiCo Share of PBG’s Restructuring and Impairment Charges

In 2008, PBG implemented a restructuring initiative across all of its geographic segments. In addition, PBG recognized an asset impairment charge related to its business in Mexico. Consequently, a non-cash charge of $138 million was included in bottling equity income ($114 million after-tax or $0.07 per share) as part of recording our share of PBG’s financial results.

PepsiCo Share of PBG Tax Settlement

In 2006, the IRS concluded its examination of PBG’s consolidated income tax returns for the years 1999 through 2000. Consequently, a non-cash benefit of $21 million was included in bottling equity income ($18 million after-tax or $0.01 per share) as part of recording our share of PBG’s financial results.