23 July 2009

PEP: Income Statement Analysis for the June 2009 Quarter

PepsiCo, Inc., (NYSE: PEP) earned $1.06 per share in the 12 weeks that ended 13 June, up from $1.05 last year.  This post examines the Income Statement and compares the figures on it to our "look-ahead" estimates.

In a follow-up post, we will move beyond the Income Statement and report PepsiCo's scores as measured by the GCFR Financial Gauges.  We will provide the latest figures for the various financial metrics we use to analyze PepsiCo's Cash Management, Growth, Profitability and Value.

Our principal sources were the earnings announcement, the 10-Q for the quarter, and the Seeking Alpha conference call transcript.  Some background information about PepsiCo and the business environment in which it is currently operating can be found in the look-ahead.

These sources did not disclose any new information about PepsiCo's April 2009 offer to buy the shares it does not already own in Pepsi Bottling Group, Inc. (NYSE: PBG) and PepsiAmericas, Inc., (NYSE: PAS).  At the time the offer was made, PepsiCo owned about 33 percent of Pepsi Bottling Group and 43 percent of PepsiAmericas, which are its two largest bottlers.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue in the second quarter, on a GAAP basis, was 3.2 percent less than in the year-earlier period.  We had expected a decline of only 0.5 percent.  However, we can't be too disappointed because PepsiCo reported that Revenue increased 5.5 percent if currency exchange rate fluctuations are ignored.

Exchange rates can have a significant effect on PepsiCo's results because the company has extensive non-U.S. operations.

Frito-Lay North America is the PepsiCo division in which Revenue increased the most, 6.4 percent, in the June quarter.  The division focusing on Europe suffered the greatest Revenue decline, 10.6 percent.  Revenue fell by more than 9 percent at Latin America Foods and PepsiCo Americas Beverages.

The Cost of Goods Sold in the quarter equaled 46.1 percent of Revenue, which translates into a Gross Margin of 53.9 percent.  The Gross Margin was a little better than last year's 53.6 percent, but we thought it would reach a more profitable 54.3 percent.

Sales, General, and Administrative (SG&A) expenses were 33.1 percent of Revenue, nearly a full point less than our 34-percent estimate.  In the June 2008 quarter, these expenses were 33.4 percent.

The charge for amortization of intangible assets was consistent with our expectations.

The lower-than-anticipated SG&A charges compensated for the weaker Revenue and Gross Margin.  As a result, Operating Income was a mere $6 million below our target.  Operating Income was also essentially identical to its value in last year's second quarter.

FLNA contributed more than to Operating Income than any other division, but Operating Income increased the most on a percentage basis at the Asia, Mid East, and Africa division.  Operating Income was down more than 9 percent in both Europe and PAB.  The drop was probably exacerbated by currency swings.

We rarely do well at predicting the erratic "Bottler equity income," and this quarter was no exception.  Our target was income of $25 million, and the actual figure was a much more profitable $119 million. 

The Net Interest Expense was $37 million less than we expected.  However, interest expenses doubled from last year because the company now has more debt.

The Income Tax Rate was 25.4 percent, down from 26.6 percent in the year-earlier quarter.  We expected a tax rate of 26 percent.  

Net Income in the quarter was 2.3 percent below that in the year-earlier period.  However, better-than-expected equity income and the lower tax rate enabled Net Income to exceed our prediction by 6.3 percent.  Earnings per share were up slightly because fewer shares were outstanding.

Full disclosure: Long PEP at time of writing.

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