Business context and reporting period
This is Dr Pepper Snapple Group, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2013—not a filing under the name Keurig Dr Pepper Inc. The company operated Beverage Concentrates, Packaged Beverages, and Latin America Beverages segments across the U.S., Canada, Mexico, and the Caribbean.
Financial performance
Amounts are in millions of dollars, except per-share data. Comparisons are with the three months ended March 31, 2012.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $1,380 | $1,362 |
| Gross profit / margin | $790 / 57.2% | $778 / 57.1% |
| Operating income / margin | $197 / 14.3% | $192 / 14.1% |
| Net income / margin | $106 / 7.7% | $102 / 7.5% |
| Diluted EPS | $0.51 | $0.48 |
| Operating cash flow | $60 | $(325) |
| Cash and equivalents at period-end | $208 | $192 |
Revenue increased 1%, net income 4%, and diluted EPS 6%. Gross margin edged up 0.1 percentage point. SG&A rose $10 million, partly reflecting labor and benefit costs and higher marketing investment; interest expense increased $2 million. Effective tax rate declined to 36.1% from 37.4%.
Cash flow improved by $385 million year over year, principally because Q1 2012 included $508 million of tax payments related to licensing agreements with PepsiCo and Coca-Cola. Working-capital changes still used $116 million of cash in Q1 2013. Investing activities used $44 million and financing activities used $175 million, including $101 million of share repurchases and $70 million of dividends paid.
At March 31, 2013, total current assets were $1,280 million and current liabilities $1,212 million. Total long-term obligations were $2,797 million, including the $250 million current portion; the company also reported $56 million of long-term capital leases. It had no revolver borrowings or commercial paper outstanding, and $498 million was available under its $500 million revolving facility. The company reported compliance with debt covenants.
Material changes and operating trends
- Volume (bottler case sales) declined 2% overall: down 2% in the U.S. and Canada and up 1% in Mexico and the Caribbean. CSD volume fell 2% and NCB volume fell 4%.
- Net sales benefited from price increases, favorable mix, and lower discounts, partly offset by lower volume. Beverage Concentrates sales rose to $263 million from $254 million; Packaged Beverages were essentially flat at $1,018 million; Latin America Beverages increased to $99 million from $91 million.
- Segment operating profit increased to $154 million from $140 million for Beverage Concentrates, $114 million from $111 million for Packaged Beverages, and $10 million from $8 million for Latin America Beverages. Unallocated corporate costs rose to $80 million from $65 million.
- The company acquired certain DP/7UP West assets for $23 million of consideration, funded through 313,105 shares and assumed liabilities. It also reacquired Snapple and other NCB distribution rights in parts of Asia-Pacific from Mondelēz; the filing does not state a clear purchase price for those rights.
- The company repurchased 2.3 million shares for approximately $101 million, compared with 2.2 million shares for $85 million in the prior-year quarter. The declared dividend rose to $0.38 per share from $0.34.
Outlook, risks, and unusual items
- Management expected operating cash flows, cash on hand, and available financing to be sufficient for anticipated obligations over the next 12 months. It expected 2013 capital expenditures, net of disposals, of approximately 3.5% of net sales.
- A $250 million, 6.12% senior note matured May 1, 2013. Management intended to refinance it with commercial paper during Q2 2013; the filing reports no commercial paper outstanding at quarter-end.
- Management cited beverage seasonality, economic and credit-market conditions, customer collections, input costs, and foreign exchange as potential pressures. A 10% foreign-exchange movement was estimated to affect annual operating income by approximately $20 million; a 10% move in unhedged commodity prices was estimated to affect quarterly operating income by approximately $19 million.
- Commodity derivatives generated a net loss of $7 million in Q1 2013, versus a net gain of $4 million in Q1 2012. The company uses derivatives to manage interest-rate, currency, and commodity exposures and states it does not use them for speculation.
- A proposed Canadian tax-law change could reduce deferred tax assets and increase the effective tax rate, with a partial reduction in the Mondelēz tax-indemnity liability; management expected the net effect to reduce net income.
- The company accrued approximately $18 million for a jury verdict in an age-discrimination case and had appealed. It also disclosed an EPA Superfund-site matter for which total remediation costs were not reasonably estimable; approximately $0.5 million had been paid through March 31, 2013.
- Management said there had been no material changes to the risk factors in its 2012 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and period: the supplied filing is Dr Pepper Snapple Group’s Q1 2013 10-Q, despite the request metadata naming Keurig Dr Pepper.
- Track whether the planned refinancing of the May 2013 notes occurred and on what terms.
- Assess whether volume declines, especially in NCBs and key brands, persisted and whether pricing and mix continued to offset them.
- Separate recurring operating cash generation from the prior-year comparison distorted by exceptional tax payments, and monitor working capital and shareholder returns.
- Monitor the Canadian tax proposal, the appealed litigation verdict, and the unresolved environmental-cost exposure.