Dr Pepper Snapple Group, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Although the request identifies Keurig Dr Pepper Inc., this filing is for Dr Pepper Snapple Group, Inc. (DPS), before the proposed Keurig transaction.
Business context
DPS owned, manufactured and distributed non-alcoholic beverages, primarily in the United States, Mexico and Canada. Its portfolio included Dr Pepper, Canada Dry, 7UP, Snapple, Mott’s, Clamato and Bai. The company reported three segments: Beverage Concentrates, Packaged Beverages and Latin America Beverages. Approximately 90% of 2017 net sales came from the U.S.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $6.690 billion | $6.440 billion |
| Gross profit / margin | $3.995 billion / 59.7% | $3.858 billion / 59.9% |
| Income from operations / margin | $1.388 billion / 20.7% | $1.433 billion / 22.3% |
| Net income | $1.076 billion | $847 million |
| Diluted EPS | $5.89 | $4.54 |
| Cash from operating activities | $1.038 billion | $961 million |
| Cash used in investing activities | $1.763 billion | $189 million |
| Cash used in financing activities | $907 million | Cash provided: $108 million |
- Fourth-quarter 2017 net sales were $1.643 billion versus $1.578 billion a year earlier; gross profit was $980 million versus $951 million. Net income was $508 million versus $165 million, and diluted EPS was $2.81 versus $0.90.
- The 2017 effective tax rate was 8.1%, versus 33.8% in 2016. Year-end cash, cash equivalents and restricted cash totaled $158 million, including $61 million of unrestricted cash and $97 million of restricted cash.
- Debt excluding capital leases was $4.479 billion at year-end; the balance sheet reported $4.400 billion of long-term obligations and $79 million of short-term borrowings and current obligations. The company had a $500 million revolving credit facility, with no revolver borrowings outstanding.
- Capital expenditures were $202 million. Operating cash flow less capital expenditures was approximately $836 million. Dividends paid were $414 million and share repurchases were $399 million.
Material changes versus prior periods
- Annual net sales rose 4%, with volume (BCS) up 1%. Growth reflected shipments, favorable product and package mix, and $64 million of acquired Bai shipments to third parties; the loss of Rockstar distribution rights partly offset sales growth.
- Gross margin declined 0.2 percentage points. Management cited mix, higher manufacturing and commodity costs, an unfavorable LIFO provision and foreign exchange, partly offset by Bai-related margin benefit, pricing and productivity.
- Operating income fell 3% as SG&A rose 10%, including acquired Bai operating costs, marketing, transaction and integration spending, and higher people costs. Packaged Beverages segment operating profit fell 10% to $691 million; Latin America Beverages profit fell 21% to $62 million, while Beverage Concentrates profit increased 4% to $865 million.
- Net income increased 27%, primarily reflecting the $297 million tax benefit from U.S. tax reform and a $19 million benefit from adopting stock-compensation accounting guidance. The tax benefit raised 2017 diluted EPS by $1.62; therefore, the earnings increase does not represent comparable underlying operating growth.
- Investing cash outflow increased sharply, primarily from the $1.556 billion cash outlay for the Bai Brands acquisition, completed January 31, 2017. Bai contributed $64 million of incremental consolidated net sales after intercompany eliminations and a $21 million net loss contribution.
Outlook, transaction, risks and unusual items
- On January 29, 2018, DPS announced a proposed combination with Keurig Green Mountain. Under the agreement, former Maple Parent holders would own approximately 87% of the combined company and DPS shareholders approximately 13%; DPS shareholders were to receive a special cash dividend of $103.75 per share. Completion remained subject to shareholder, regulatory and other conditions. The agreement included a $16.9 billion post-transaction debt limit and, in specified termination circumstances, a $700 million termination fee.
- Management estimated an effective tax rate of approximately 26%–27% beginning in 2018. The filing provides no clear operating earnings or revenue guidance for 2018 and cautions that historical performance may not predict results after the proposed transaction.
- Transaction-related uncertainties included approval and financing risks, integration and synergy execution, additional debt and interest costs, potential credit-rating downgrades, reduced DPS shareholder influence and the combined company’s intended reliance on controlled-company governance exemptions. Rating agencies placed DPS ratings under review for downgrade or on negative credit watch after the announcement.
- Other key business risks include changing consumer preferences and health concerns, beverage taxes and regulation, commodity and fuel costs, reliance on third-party bottlers and major retailers, foreign exchange, supply or facility disruptions, water availability, litigation and potential impairment of goodwill or brands. The Bai brand had limited impairment-test headroom; management noted it could be impaired if performance assumptions were not met.
- Unusual 2017 items also included $62 million of losses on early debt extinguishment and a $28 million gain from the Bai step-acquisition, plus a $21 million benefit from renegotiating an acquired manufacturing contract. The TCJA tax accounting remained subject to refinement under SEC guidance.
Important facts for investors to verify
- Whether the proposed transaction closed, its final financing and debt structure, and the actual special dividend paid.
- How much of reported 2017 EPS growth came from the one-time tax benefit, and how the 2018 effective tax rate compared with management’s estimate.
- Whether Bai achieved the revenue and profitability assumptions underpinning its goodwill and brand valuations, and whether integration costs or impairments followed.
- Whether the decline in Packaged Beverages and Latin America segment profit persisted, and how commodity costs, pricing and volume affected margins.
- Actual liquidity available after distinguishing unrestricted cash from restricted escrow balances, and any subsequent changes in credit ratings or borrowing costs.
Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal control over financial reporting; the company’s assessment excluded Bai Brands from internal-control coverage for its first year after acquisition.