Keurig Dr Pepper Inc. quarterly report, Q3 FY2019

Vollständiges Dokument

Keurig Dr Pepper Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2019. The financial statements are unaudited. KDP combines Keurig’s coffee systems business with Dr Pepper Snapple’s beverage businesses. Comparisons with 2018 require care: the merger closed July 9, 2018, so 2018 reported results include DPS for only part of the first nine months. Management also provides non-GAAP pro forma comparisons intended to improve comparability.

Financial performance and position

Third quarter

  • Net sales: $2.870 billion, up 5% from $2.732 billion reported in Q3 2018. The reported increase includes eight additional days of DPS operations; on management’s adjusted pro forma basis, sales were up 0.5% to $2.870 billion, with underlying growth of 3.1% offset by a 2.7% impact from changes in Allied Brands.
  • Profit and margins: Net income was $304 million versus $149 million; diluted EPS was $0.21 versus $0.11. Gross margin increased to 56.6% from 50.0%, and operating margin to 20.2% from 12.6%. These reported comparisons benefited from the prior-year merger inventory step-up and transaction costs. Adjusted net income rose 8.2% to $451 million; adjusted diluted EPS rose 6.7% to $0.32; adjusted operating margin improved 190 basis points to 26.3%.
  • Segment trends: On adjusted pro forma comparisons, Coffee Systems sales rose 1.1%, but adjusted operating income declined 3.4%; Packaged Beverages sales fell 2.2%, while adjusted operating income rose 22.6%; Beverage Concentrates sales and adjusted operating income rose 8.8% and 19.6%; Latin America Beverages sales rose 1.5%, while adjusted operating income fell 7.4%.

First nine months

  • Net sales: $8.186 billion versus $4.629 billion reported in 2018, largely reflecting the merger and the different period of DPS consolidation. Against 2018 adjusted pro forma sales of $8.211 billion, adjusted sales declined 0.3%; underlying growth of 2.8% was offset by a 2.8% Allied Brands portfolio impact.
  • Profit and margins: Net income attributable to KDP was $848 million versus $320 million; diluted EPS was $0.60 versus $0.32. Reported gross margin was 56.8% versus 50.5%, and operating margin was 20.3% versus 14.9%. On an adjusted basis versus pro forma 2018, net income increased 20.0% to $1.236 billion, diluted EPS increased 17.6% to $0.87, and operating margin rose 230 basis points to 25.4%.
  • Cash flow: Operating cash flow was $1.803 billion, compared with $1.063 billion. Investing activities used $216 million, including $208 million of capital expenditures. Financing activities used $1.626 billion. Cash, cash equivalents and restricted cash totaled $112 million at period end, of which $74 million was cash and cash equivalents. Operating cash flow less reported capital expenditures was approximately $1.595 billion.

Balance sheet, debt and liquidity

  • At September 30, 2019, total assets were $49.400 billion and stockholders’ equity was $22.914 billion. Current assets were $2.269 billion; current liabilities were $6.550 billion.
  • Long-term obligations were $13.147 billion; short-term borrowings and current maturities were $1.761 billion, for total reported borrowings of approximately $14.908 billion. Commercial paper outstanding was $1.415 billion. KDP repaid approximately $788 million on notes, term loans and commercial paper during the first nine months and reported compliance with debt covenants.
  • Available facilities included a $2.4 billion revolving credit facility and an unused $750 million 364-day credit agreement. Management said operating cash flows, cash on hand and available financing were expected to cover obligations for the next 12 months.
  • Cash dividends paid were $633 million; the quarterly dividend declared was $0.15 per share. Accounts payable obligations voluntarily sold by suppliers to financial institutions were $1.912 billion, up from $1.438 billion at year-end.

Material changes and management commentary

  • Management attributed adjusted operating profit improvement principally to productivity and merger synergies, partly offset by packaging and other input-cost inflation and logistics costs. The Coffee Systems segment faced lower pricing, unfavorable pod mix and higher brewer investment; Latin America faced input and logistics inflation and currency headwinds.
  • The merger integration program targets $600 million of synergies over three years, with completion expected by 2021. KDP expected total cash expenditures of $750 million, including capital expenditures and expenses; cumulative pretax charges were approximately $323 million through September 30, 2019.
  • Management stated its intention to generate cash and deleverage rapidly, targeting two to three years from the merger. It announced a long-term McCafé U.S. licensing and distribution agreement, with expanded sourcing, distribution and marketing responsibilities expected to begin in the second half of 2020.
  • KDP adopted the new lease accounting standard on January 1, 2019, increasing reported assets by approximately $314 million and liabilities by approximately $319 million at adoption. It disclosed about $680 million of future payments on leases not yet commenced.

Risks, contingencies and unusual items

  • Moody’s rated KDP Baa2 with a negative outlook; S&P rated it BBB with a stable outlook. The filing warns that a downgrade could increase borrowing costs and weaken supplier participation in the accounts payable program.
  • A California Proposition 65 coffee acrylamide case remains unresolved. A new warning regulation took effect October 1, 2019, but further litigation was anticipated; KDP said it could not reasonably estimate potential loss. A separate dispute with BA Sports Nutrition over a distribution contract also remained pending, with outcome and potential recovery uncertain.
  • Other notable comparison items include the prior-year DPS inventory step-up, merger transaction and integration costs, and prior-year gains related to BODYARMOR and Big Red. KDP excluded various costs from its non-GAAP measures, including restructuring, productivity, intangible amortization, settlements and an $8 million malware-incident impact in the first nine months of 2019.
  • Management identified macroeconomic and supplier risks, including higher input costs, supply interruptions, weaker customer collections and reduced operating cash flow. It also cited seasonal demand and exposure to foreign exchange, interest rates and commodities.
  • Management reported disclosure controls were effective, while noting that merger-related integration continued to affect internal controls and was reasonably likely to materially affect them during 2019.

Important facts for investors to verify

  • How reported and adjusted results reconcile, and whether the non-GAAP exclusions are appropriate and consistently applied.
  • Underlying sales, volume, pricing and Allied Brands portfolio trends, especially in Packaged Beverages and Coffee Systems.
  • Progress toward the $600 million synergy target, integration spending and the expected timing and cash cost of achieving it.
  • Debt reduction, commercial paper reliance, supplier-payment program exposure, refinancing needs and the negative Moody’s outlook.
  • Developments and potential financial effects of the Proposition 65 and BA Sports Nutrition litigation, as well as execution of the McCafé agreement.