Analysis of FinancialStatements

For PepsiCo

Prepared by: Abdulla RawanbakhshSubmitted to Mr. Abdulla Al-HadhramiSubmission Date May 2011

University College of BahrainUniversity College of Bahrain

Acknowledgment:Acknowledgment:

The compilation of this report could not have been done without the blessings of Allah. I (Abdulla Rawanbakhsh) have been working on this project since February (the beginning of spring semester). I would like to thank our Accounting teacher Mr. Abdulla Al-Hadhrami for his guidance throughout the course, and for assisting us since we started on working with our projects until the completion day. His excessive supports must have been a key for my success to accomplish this project. Special thanks also go to all the relatives and friends who were involved in preparing and arranging this report.

Contents:Contents:

Introduction……………………………………………………………………Company's Background…………………………………………………..Horizontal Analysis – Income Statement………………………….Horizontal Analysis – Balance Sheet………………………………..Ratio Analysis………………………………………………………………….Liquidity………………………………………………………………………….Long-term Debt-Paying Ability………………………………………..Profitability…………………………………………………………………….Investor Analysis…………………………………………………………….Cash Flow Analysis………………………………………………………….

Introduction:Introduction:The aim of this project was to familiarize with the financial statements for one of the finest and leading corporation in its segment (PepsiCo). In this project, I analyzed the financial information of PepsiCo as of 2009, by going through their annual reports from the year 2006 up to 2009. The first step of analysis was performed horizontally for both the balance sheet and the income statement (trend analysis), and after that, I analyzed and commented on the financial ratios in different summarized paragraphs.

The calculation of the ratios and percentage changes have been made using a financial template (Microsoft Excel), in which the inputs were inserted (the financial statements), and the ratios were calculated by the program itself .

We seek to hope for having this report to be free from material errors which could mislead us in interpreting the financial data of PepsiCo.

Company Background:Company Background:

PepsiCo, is an American global corporation headquartered in New York, with interests in the manufacturing, marketing and distribution of grain-based snack foods, beverages, and other products. As of 2009, 19 of PepsiCo's product lines generated retail sales of more than $1 billion each, and the company’s products were distributed across more than 200 countries, resulting in annual net revenues of $43.3 billion. Based on net revenue, PepsiCo is the second largest food & beverage business in the world. Within North America, PepsiCo is ranked (by net revenue) as the largest food and beverage business.

Top Product RankingsTop Product Rankings• Lay’s – #1 Potato Chip*• Lebedyansky – #1 Juice in Russia **• Doritos – #1 Flavored Tortilla Chip*• Tropicana Pure Premium – #1 Orange Juice*• Pepsi – #1 Carbonated Beverage in Canada**• Cheetos – #1 Cheese Puff*• Sabritas – #1 Potato Chip in Mexico**• Lipton – #1 Ready-to-Drink Tea*• Quaker Oatmeal – #1 Hot Cereal*• Gatorade – #1 Sports Drink*• Walkers – #1 Potato Chip in United Kingdom**• Tostitos – #1 Unflavored Tortilla Chip*• Smith’s – #1 Potato Chip in Australia**

*U.S. (Source: IRI GDMxC 52 weeks ending 12/27/09) Based on Dollar Sales**International (Source: Nielsen All Outlets 52 weeks ending 10/31/09)

Horizontal Analysis:Horizontal Analysis:

1)1) Income Statement:Income Statement:

The net income improved slightly during the recent four years, and the sales of PepsiCo were the main reason for that, which have been increased in 2009 by 23% compared to the base year. Although the cost of goods sold increased at a higher percentage which was 27.5%, the company was able to increase its gross profit by 19.4%; because the sales remained constant, while the cost of goods sold was decreasing for the last 2 years (2009 and 2008).

The company's operating expenses were rising throughout the

years, but yet, the company had enough sales to generate a

higher operating profit compared to the previous years.

PepsiCo's equity earnings suffered a sharp decline throughout

the years. Disposal of PepsiCo for some of its shares in the

associates might be a reason. The associates have faced a loss

in their business could be another reason.

2)2) Balance SheetBalance Sheet

The increase in the total assets reflects the improvement from both current & non-current assets. PepsiCo had cash & equivalents which were 138% more than the previous periods, it might have decided to reduce its investment in marketable securities. Another reason could be that the company is preparing for an upcoming investment. The company might also have planned to open new funds for different future-related projects.

Taking the long-term assets in consideration, the strategy of investment (purchase) of properties, plants and equipments was a key for PepsiCo to improve its fixed assets, as it helped the company to reach to a favorable level of earnings. Intangible assets have also faced a positive movement, which reflects the company's successful acquisitions during the four years.

The long-term liabilities moved up by 85.5% compared to the base year. The company's willingness to finance in long-term debts was the main reason for this movement. Long-term debts for PepsiCo have increased by 190% in comparison with the base year. The company planned to use those debts for further plant expansions, which results in improvement of the production line in the upcoming period (the value of properties, plants & equipments in the balance sheet witnessed a great positive movement).

PepsiCo's current liabilities rose in 2009 compared to the previous years and the increase in the accounts payable played a big role for that change. It indicates that the company was seeking for more purchases of current assets (inventories). The increase in accounts receivable and inventories in the balance sheet are relatively close to the increase in the current liabilities.

Ratio Analysis:Ratio Analysis:

1)1) Liquidity:Liquidity:

The overall liquidity of PepsiCo was improved; it was almost stable for the past three years. The number of days' sales in inventory shows a delay of the company in processing its inventory and selling it to the customers; it moved from 44 to 47 days. The main reason for this was that the increase in the inventories was higher than the increase that occurred to the cost of sales. However, the company might have purchased those inventories at the year end, therefore, the cost of sales were related to the previous inventories. Thus, The current ratio was improved, because of the fact that the increase in current assets (inventories) was more than the increase in the current liabilities, which means that the company's ability to meet its current debts became stronger.

The working capital turnover has declined significantly. This was caused by the increasing working capital over the years, which may indicate that the company is considering a hedging strategy for new projects (saving for future plans), this could indicate a less profitable use of working capital. Although the sales were increased accordingly, but the increase in working capital turnover was more than the increase that the sales have witnessed.

In short, the overall PepsiCo's liquidity is quite strong and moving positively.

2)2) Long-term Debt-Paying Ability:Long-term Debt-Paying Ability:

The numbers of the ratios related to long-term debt-paying ability were all moving down. The times interest earned declined from 28 x to almost 20 x. The company's decision of increasing its debts played a big role for causing this change to the ratio; the debt ratio moved from 49% to 58%, and the debt/equity moved from 95% to 137%, and those debts probably will add the effect of their interest to the ratio. However, the result of those debts can be observed in the balance sheet; the improvement in the company's fixed assets. Expansions & investments in the company's plants and properties were mainly done to improve the production line and its capacity. After all, PepsiCo was able to generate higher sales and higher profit at the same time.

3)3) Profitability:Profitability:

The ROA went down significantly across the four years. When we perform the DuPont analysis to this ratio, we will find that the total asset turnover ratio remained almost stable, which means the company had no issues in managing its assets, while the net profit margin suffered a decline from 14.4% to 13%. However, this was caused by their purchasing/selling operations; the operating profit margin was almost constant, while on the other hand the gross profit margin dropped down from 55% to 53%, therefore the GPM was a main issue to affect the number in the ROA. The reduction in the GPM can be explained by the recent inflations to the materials caused by the financial crisis.

The ROI decreased slightly, because of the PepsiCo's recent commitments to the long-term debts. Although both the income and the debts were increasing, the increase percentage in the long-term debts was extremely higher.

4)4) Investor Analysis:Investor Analysis:

PepsiCo's earnings per share was growing over the four years, because of the fact that the net income was improved positively. The company decided to reduce the percentage of earnings retained, perhaps to invest in a new project in the upcoming period. However, it turned out to be a reward for some investors. The dividend payout increased from 31% to 46%, and the dividend yield increased from 1.6% to 2.8%. The company has had a P/E ratio of 18.7 in 2006, while in 2009, it got dropped to 16. A logical explanation for this change could be that the percentage of earnings retained was declining, and the investors might have thought that the company is not preparing for further future plans or investments. Another reason could be that the company in 2006 had a potential to grow and different opportunities to get benefits from, and eventually it was able to increase its earnings later on in 2009, which helped the ratio to get lower.

5)5) Cash Flow Analysis:Cash Flow Analysis:There is a positive movement in the increase in cash & cash equivalents for PepsiCo throughout the years. The cash & cash equivalents balance at the end of the year were getting higher as well. The cash provided from operating activities was the main source of inflow. Depreciation & amortization played a big role in increasing the cash from operations by adding back their effect. However, the contributions for pension & retiree medical plan got higher significantly. Therefore, it was a main outflow for cash from operations.

The net cash used for investments was approximately 35% out of the total cash from operations, thus, the company had no problems in covering the efforts and costs of those investments by using the cash provided from their operations, and the capital spending was covering the biggest (major) part of the cash used in investing activities.

The net cash used for PepsiCo's financing activities was mainly resulted from the cash dividends that they paid to their shareholders. However, the company had generated enough cash from their operations to cover the amount of those dividends paid; the total cash dividends were reflecting 40% of total cash provided from the operations. The proceeds from the issuance of long-term debts were a main inflow for the financing activities of PepsiCo.

Cash flow-related ratios were all declining at the same time. Since the cash dividends were increasing year by year, and the cash provided from operations had slightly declined, the operating cash flow/cash dividends dropped from 3.3% to 2.5%.

The number in cash flow/total debt suffered a sharp decline; the increase in the company's long-term debts, which was reflected in their balance sheet, was a main factor to affect this ratio.

Conclusion:

As a summary, the financial ratios indicate that the overall performance of PepsiCo has been improving over the four comparative years (06-09), and the trend of the company is moving positively year by year. This explains the unique extent of their efficiency in running their business, and how they are well-motivated for success.

Thank You!