Management's discussion analysis
NET FINANCIAL EXPENSE
INCOME TAXES
impact was more than offset by lower impairments and
integration expenses in 2005 compared to 2004 and higher
gains on disposal of non-current assets in 2005 compared
to 2004. In addition, our operating income in 2005 was
positively impacted by improved operating income at U.S.
Foodservice, Schuitema and in the Stop Shop/Giant-
Landover Arena, partially offset by lower operating income in
the Giant-Carlisle/Tops Arena and the Albert Heijn Arena.
Operating income in 2005 compared to 2004 was also
negatively impacted by the fact that 2005 consisted of
52 weeks while 2004 consisted of 53 weeks.
The following table sets forth our net financial expense for
2005 and 2004:
2005
2004
Euros in millions,
except percentages
(52 weeks)
Change
(53 weeks)
Interest income
89
34.9
66
Interest expense
(678)
(11.9)
(770)
Net interest expense
(589)
(16.3)
(704)
Gain (loss) on
foreign exchange
(1)
43
Other financial
income (expense)
(56)
380
Net financial expense
(646)
129.9
(281)
Our net financial expense increased in 2005 compared to
2004, primarily as a result of the 2004 net gain of EUR
379 million relating to the ICA put option transaction.
In 2004 we acquired an additional 20% interest in ICA
(10% of which we transferred to our joint venture partner)
pursuant to the exercise of a put option by one of the ICA
partners. Our net financial expense in 2005 also increased
as a result of an additional one-time loss of EUR 53 million
relating to a bond buy back transaction in October 2005
and as a result of the EUR 39 million gain in 2004 relating
to a derivative hedge that no longer qualified for hedge
accounting.
Our net interest expense decreased in 2005 compared
to 2004. The decrease of net interest expense was mainly
impacted by lower average outstanding debt balances as a
result of debt repayments totaling EUR 2.3 billion during
2005 as well as the full year effect of debt repayments of
EUR 1.5 billion in 2004. The increase in interest income
was primarily a result of a higher return on average
outstanding cash balances invested.
For further information about our borrowings, see Note 26
to our consolidated financial statements included in this
annual report.
In 2005, our income tax benefit amounted to EUR 205
million, as compared to an income tax expense of EUR 147
million in 2004. Our effective tax rate, calculated as a
percentage of income (loss) before income taxes, increased
significantly in 2005 compared to 2004 and reached a level
of 84.4% (2004: 18.8%). This high effective tax rate
indicates that 84.4% of our loss before income taxes is
offset by an income tax gain.
The main factor contributing to this increase in effective tax
rate in 2005 compared to 2004 was the impact of the
charge recorded at the Group Support Office relating to the
settlement of the Securities Class Action, which significantly
reduced our income before income taxes in 2005.
The effective tax rate in 2005 was positively affected by the
application of IFRS. Under IFRS the share in income (loss)
of our joint ventures and associates is required to be
included in income before tax without a corresponding
income tax expense effect. Because of our loss before
income taxes in 2005, the application of IFRS contributed
to the increase in our effective tax rate in 2005 compared
to our 2004 income before income taxes, in which year the
application of IFRS led to a reduction of our effective tax
rate. Furthermore, a tax exempt capital gain of EUR 38
million with respect to the release of the D&S litigation
provision had a positive impact on the effective tax rate in
2005, whereas additional valuation allowances related to
loss carry-forwards in our Central Europe Arena had a
negative impact on the effective tax rate in 2005.
The effective tax rate for 2004 was positively affected by
a tax exempt gain on the ICA put option transaction of
EUR 379 million and negatively affected by an impairment
on loan receivables of EUR 47 million.
For a full discussion of our accounting treatment of income
taxes, see Notes 3 and 11 to our consolidated financial
statements included in this annual report.
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