11 February 2010

PEP: Income Statement Analysis for the December 2009 Quarter

PepsiCo (NYSE: PEP) earned $0.90 per diluted share, on a GAAP basis, in the 16-week quarter that ended 26 December 2009.  Net Income of $1.4 billion in this fourth quarter of fiscal 2009 nearly doubled the equivalent amount in the previous year.

Earnings in the earlier period were lower than normal because of currency exchange rates and an array of special items.

This post examines PepsiCo's Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates.  Our EPS target of $0.90 was on target.

The principal sources for the income statement analysis were the earnings announcement and the post-release conference call presentation [pdf].

In a second article, we will report PepsiCo's scores as measured by the GCFR financial gauges.  The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

PepsiCo, Inc., is a leading global purveyor of beverages and snacks.  The company's $7.8 billion acquisitions of its two largest bottlers -- Pepsi Bottling Group, Inc. (NYSE: PBG) and PepsiAmericas, Inc., (NYSE: PAS) -- are expected to close this month.  Additional background information about PepsiCo and the business environment in which it is currently operating can be found in the beginning of the look-ahead.

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 of $13.3 billion in the December quarter, on a GAAP basis, was 4.5 percent more than last year.  Our Revenue estimate was accurate at $13.31 billion.

Pepsi achieved constant-currency Revenue growth, a non-GAAP measure, of 3 percent.

Of the company's various divisions, PepsiCo International's Revenue increased the most, 8 percent, in the December quarter.  Revenue at the PepsiCo Americas Beverages division fell 1 percent.

The Cost of Goods Sold in the quarter equaled 47.3 percent of Revenue, which translates into a Gross Margin of 52.7 percent.  The Gross Margin expanded from 51.5 percent in the December 2008 quarter.  Our target for the Gross Margin was 52.5 percent, 20 basis points less than the actual result.

PepsiCo spent 7 percent less on Sales, General, and Administrative expenses.  As a percentage of Revenue, SG&A decreased from 41.8 percent (including special items) in the December 2008 quarter to 37.2 percent in the latest period.  Our $5.1 billion estimate for these expenses ended up being 2 percent too high. 

In the December 2009 quarter, PepsiCo recognized an $83 million mark-to-market net gain on commodity hedges, compared to a $227 million net loss the previous year.

The $21 million operating charge for amortization of intangible assets was consistent with our expectations.

These various operating items combined to produce Operating Income of $2.034 billion, which was 68 percent more than in 2008's fourth quarter.  The increase can be attributed to Revenue growth, margin expansion, and cost control.  Operating Income surpassed our $1.9 billion estimate by 5.7 percent.

PepsiCo reported that Operating Profit increased 19 percent at PepsiCo Americas Foods (which includes FLNA and the fast growing Latin America Foods), 26 percent at PepsiCo International, and 191 percent at PepsiCo Americas Beverages.

Our target for "Bottler equity income" was $100 million, and the actual figure was $75 million.  Some merger costs are included in this item.

The Net Interest Expense was $89 million, down substantially from $136 million last year.  The expense was less than the $100 million we expected.

The Income Tax Rate was 28.9 percent, about the same as the 29.0 percent in the year-earlier quarter. We expected a tax rate of 25 percent.

Bottom-line Net Income rose by 99 percent to $1.4 billion ($0.90 per diluted share), compared to earnings in the year-earlier quarter of $719 million ($0.46 per share). Net Income matched our estimate. The company's operating results exceeded our expectations, but this was balanced by a higher-then-expected tax rate.

Full disclosure: Long PEP at time of writing.

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