Keurig Dr Pepper Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and first nine months ended September 30, 2020. Unaudited results; comparisons are with the same 2019 periods. Amounts are in millions of dollars, except per-share data.
Business context and financial performance
KDP operates four segments: Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages. Its portfolio spans single-serve coffee systems and hot and cold beverages. The company reported that COVID-19 shifted demand toward at-home consumption while weakening office coffee, hospitality and fountain foodservice.
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $3,020 | $2,870 | $8,497 | $8,186 |
| Gross profit | $1,704 | $1,625 | $4,718 | $4,649 |
| Income from operations | $753 | $580 | $1,780 | $1,665 |
| Net income attributable to KDP | $443 | $304 | $897 | $848 |
| Diluted EPS | $0.31 | $0.21 | $0.63 | $0.60 |
| Gross margin | 56.4% | 56.6% | 55.5% | 56.8% |
| Operating margin | 24.9% | 20.2% | 20.9% | 20.3% |
Q3 sales rose 5.2%, reflecting 6.6% higher volume/mix, partly offset by 0.8% lower net price realization and 0.6% unfavorable foreign exchange. Q3 adjusted net income was $557 million and adjusted diluted EPS was $0.39, up 23.5% and 21.9%, respectively. For the first nine months, adjusted net income was $1,434 million and adjusted diluted EPS was $1.01, up 16.0% and 16.1%. These are non-GAAP measures; the company excludes various items affecting comparability.
Segments and material changes
- Q3: Packaged Beverages sales increased 10.7% to $1,447 million and operating income rose 32.7% to $260 million. Coffee Systems sales rose 3.0% to $1,097 million; brewer volume grew 33.7%, while K-Cup pod volume rose 2.4%. Beverage Concentrates sales fell 2.2% to $352 million, reflecting weaker fountain and foodservice demand. Latin America Beverages sales fell 10.1% to $124 million, mainly due to unfavorable currency translation.
- First nine months: Packaged Beverages sales rose 8.6% to $4,056 million. Coffee Systems sales rose 3.0% to $3,113 million. Beverage Concentrates sales fell 6.5% to $967 million. Latin America Beverages sales fell 8.6% to $361 million, primarily due to FX.
- Q3 operating income benefited from volume/mix, productivity and merger synergies, lower marketing expense and a favorable comparison in other operating expenses. These benefits were partly offset by COVID-related costs, lower pricing and higher manufacturing, logistics and labor costs. Q3 gross margin declined 20 basis points, while operating margin increased 470 basis points.
Cash flow, debt and liquidity
- First-nine-month operating cash flow was $1,666 million, down from $1,803 million. Investing activities used $182 million; financing activities used $1,366 million. Capital expenditures were $356 million, compared with $208 million in 2019. Cash and cash equivalents were $191 million at September 30; including restricted cash, the cash flow statement total was $218 million.
- Balance-sheet short-term borrowings and current maturities were $2,182 million; long-term obligations were $11,707 million. The company issued $1.5 billion of 2030 and 2050 senior notes in April, using proceeds to repay revolver borrowings, and continued term-loan repayments. It reported compliance with debt covenants.
- Committed availability under the revolver and 2020 364-day facility was $3.9 billion as of October 29, 2020. Management said operating cash flows, cash on hand and available financing should cover anticipated obligations for the next 12 months. It also stated an intention to deleverage within three years of the DPS merger.
- Dividends paid in the first nine months totaled $635 million. Supplier payment obligations sold by suppliers to financial institutions under the company’s accounts-payable program were $2,442 million at quarter-end; KDP said its supplier obligations and scheduled payment terms were not changed by suppliers’ participation.
Outlook, risks and unusual items
- The filing provides no specific numeric earnings or sales guidance. Management cautioned that COVID-19 could drive heightened sales volatility and that the timing and extent of economic recovery made near-term effects difficult to predict. It cited potential demand, supply-chain, workforce and customer-credit impacts, while stating the pandemic had not materially affected liquidity as of the filing.
- COVID-19 supported at-home beverage demand but hurt away-from-home coffee and fountain channels. KDP recorded $49 million of COVID-related costs in Q3 and $139 million in the first nine months, including employee compensation, protection costs, expected credit losses and inventory write-downs. Incremental frontline incentive pay ended in mid-September.
- First-nine-month investment impairments totaled $102 million: $86 million related to the Bedford investment and note receivable, and approximately $16 million for LifeFuels. The Q3 impairment was $16 million. These were non-cash charges.
- The DPS integration program had cumulative pretax charges of approximately $530 million through September 30, 2020. KDP targets $600 million of synergies over three years, expects total cash expenditures of $750 million, and expects completion by 2021.
- In July, KDP agreed to settle indirect-purchaser single-serve coffee litigation for $31 million, subject to court approval; other antitrust claims remain. A California Proposition 65 coffee case was dismissed at trial-court level in August, though appeal remained possible. KDP also disclosed ongoing BodyArmor contract litigation and inability to predict its outcome.
- After JAB’s ownership declined to approximately 44%, KDP ceased to be a Nasdaq “controlled company” and has transition periods to meet independence requirements for its board and committees. Failure to meet deadlines could risk Nasdaq listing. The stock moved from the NYSE to Nasdaq in September.
Most important facts for investors to verify
- Whether at-home demand and Packaged Beverages growth persist as consumer mobility and away-from-home channels recover.
- How COVID-19-related costs, logistics and labor inflation, pricing and product mix affect margins after the temporary cost actions and demand shifts.
- Debt maturities, interest costs, committed facility availability and progress toward management’s deleveraging objective.
- The cash-flow contribution and sustainability of extended supplier payment terms and supplier-finance participation.
- Progress and remaining costs for the DPS integration and realization of the stated synergy target.
- Non-GAAP reconciliations and the material impairments, legal exposures, and governance-transition requirements disclosed in the filing.