Keurig Dr Pepper Inc. — FY2022 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2022, not a standalone fourth-quarter report. KDP is a North American beverage company with four reportable segments: Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages. Its portfolio includes more than 125 owned, licensed and partner brands.
Financial results
Amounts are in U.S. dollars. Year-over-year comparisons are FY2022 versus FY2021 unless noted.
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $14.057 billion | $12.683 billion | +10.8% |
| Gross profit / margin | $7.323 billion / 52.1% | $6.977 billion / 55.0% | Margin down 290 bps |
| Income from operations / margin | $2.605 billion / 18.5% | $2.894 billion / 22.8% | Income down 10.0%; margin down 430 bps |
| Net income attributable to KDP | $1.436 billion | $2.146 billion | Down 33.1% |
| Diluted GAAP EPS | $1.01 | $1.50 | Down 32.7% |
| Operating cash flow | $2.837 billion | $2.874 billion | Down $37 million |
| Cash and cash equivalents at year-end | $535 million | $567 million | Down $32 million |
Net sales growth reflected 10.6% favorable net price realization and 0.5% volume/mix growth, partly offset by 0.3% unfavorable foreign exchange. Cost of sales rose 18.0%; SG&A rose 11.8%. Management cited broad-based inflation, logistics, labor and other operating costs as pressures on margins. A $477 million non-cash intangible impairment, chiefly involving Bai and Schweppes, weighed on reported operating results.
Non-GAAP measures: Adjusted diluted EPS was $1.68, up approximately 5.0%; adjusted net income was $2.398 billion, up 5.2%; and adjusted income from operations was $3.538 billion, up 3.4%. These are management-defined measures, not substitutes for GAAP results.
Segment sales and operating income
| Segment | FY2022 sales | Sales change | FY2022 operating income |
|---|---|---|---|
| Coffee Systems | $4.982 billion | +5.6% | $1.316 billion, down 9.0% |
| Packaged Beverages | $6.607 billion | +12.3% | $1.014 billion, down 0.9% |
| Beverage Concentrates | $1.725 billion | +16.1% | $1.061 billion, up 1.3% |
| Latin America Beverages | $743 million | +24.0% | $158 million, up 18.8% |
Coffee Systems pod volume increased 1.4%, while brewer volume declined 5.2%. Latin America volume increased 7.2%; Beverage Concentrates volume increased 1.6%. Segment operating income includes impairment and other items; reported segment margins also reflected inflation and cost-to-serve pressures.
Cash flow, debt and liquidity
- Operating cash flow was $2.837 billion. Purchases of property, plant and equipment were $353 million; operating cash flow less these purchases is approximately $2.484 billion, a simple derived figure and not a company-reported free-cash-flow measure.
- Investing activities used $1.135 billion, including $962 million of investments in unconsolidated affiliates. Financing activities used $1.728 billion, including $1.080 billion of dividends and $379 million of share repurchases.
- At year-end, notes had a carrying value of $11.568 billion and commercial paper outstanding was $399 million. The company also had a $4 billion revolving credit facility, with no amount drawn at year-end. KDP reported compliance with debt covenants.
- In April 2022, KDP issued approximately $3 billion of notes and refinanced or retired portions of existing debt. It reported $217 million of losses on early extinguishment of debt for the year. Management said the refinancing reduced interest payments and annual cash requirements.
- Current liabilities were $8.076 billion versus current assets of $3.804 billion. The filing describes liquidity as strong and says operating cash flows are expected to meet anticipated obligations for the next 12 months.
- Supplier payment obligations voluntarily sold by suppliers to financial institutions under KDP’s accounts payable program totaled $3.839 billion at year-end. KDP says its obligations and scheduled payment terms are unchanged by suppliers’ participation.
Material changes, outlook and risks
- GAAP net income fell substantially, reflecting the prior-year $524 million BodyArmor investment-sale gain, lower operating income, higher interest expense and 2022 debt-extinguishment losses. The lower 2022 effective tax rate, 16.5% versus 23.3%, partly offset the decline.
- KDP received a $350 million BodyArmor payment in January 2022, allocating approximately $299 million to settlement of litigation and approximately $50 million to satisfaction of a holdback. The litigation settlement was recorded as a gain; these are unusual, non-recurring items.
- Management expected supply-chain constraints, labor shortages and input-cost inflation to remain headwinds into 2023. KDP had raised prices across its portfolio and cautioned that pricing could reduce volume or net sales and, together with inflation, affect margins and operating results. The filing provides no clear quantified 2023 revenue or earnings guidance.
- Key risks include commodity and transportation costs, retailer and bottler concentration, intense competition, changing consumer preferences, labor availability, water and climate exposure, cybersecurity, and the company’s substantial goodwill and intangible assets. Walmart represented approximately 16% of consolidated net sales.
- Pending single-serve coffee antitrust litigation includes plaintiffs’ claims of more than $5 billion in damages. KDP disputes the claims; the company said it could not predict the outcome or estimate a potential loss and had not accrued a loss contingency. The filing also reports a Superfund site matter for which remediation costs were not yet estimable.
- KDP invested $871 million in Nutrabolt for an approximately 29.8% interest and invested in Tractor and Athletic Brewing during 2022. It announced distribution partnerships for Red Bull in Mexico and C4 Energy beverages in most company-owned DSD territories. These investments and partnerships carry execution and return risks.
The independent auditor issued an unqualified opinion on the financial statements and an unqualified opinion on internal control over financial reporting. The audit identified valuation of certain indefinite-lived brand assets as a critical audit matter.
Important facts for investors to verify
- Whether pricing can offset continuing input, labor and logistics inflation without materially weakening volume or margins.
- Performance and impairment headroom for Bai, Schweppes and other brands, given the $477 million 2022 impairment and substantial goodwill and intangible asset balances.
- Developments in the remaining Keurig antitrust cases, including any court decisions on summary judgment, class certification or damages.
- Debt maturities, refinancing costs, interest-rate exposure and the sustainability of dividends and share repurchases alongside planned investments.
- Returns and commercial progress from Nutrabolt, Tractor, Athletic Brewing and new distribution partnerships.
- Liquidity and working-capital trends, including inventory growth, supplier-payment practices and the scale of obligations in the accounts payable program.