Keurig Dr Pepper Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and first nine months ended September 30, 2023. KDP is a North American beverage company reporting three segments: U.S. Refreshment Beverages, U.S. Coffee and International.
Key financial results
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Net sales | $3.805 billion | $3.622 billion | $10.947 billion | $10.254 billion |
| Gross profit / margin | $2.111 billion / 55.5% | $1.901 billion / 52.5% | $5.896 billion / 53.9% | $5.327 billion / 52.0% |
| Income from operations / margin | $896 million / 23.5% | $394 million / 10.9% | $2.249 billion / 20.5% | $1.932 billion / 18.8% |
| Net income attributable to KDP | $518 million | $180 million | $1.488 billion | $983 million |
| Diluted EPS | $0.37 | $0.13 | $1.05 | $0.69 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1.032 billion | $2.098 billion |
Q3 sales rose 5.1%; price realization and foreign exchange gains more than offset lower volume/mix. For the first nine months, sales rose 6.8%, with higher pricing and favorable FX offsetting lower volume/mix. Adjusted, constant-currency diluted EPS, a non-GAAP measure, increased 4.3% in Q3 and approximately 4.2% year to date.
Segments and material changes
- U.S. Refreshment Beverages: Q3 sales increased 5.9% to $2.270 billion; operating income was $676 million. Year-to-date sales rose 10.0% to $6.607 billion. Growth was driven mainly by pricing; volume was soft, particularly in still beverages.
- U.S. Coffee: Q3 sales fell 3.2% to $1.012 billion, while operating income rose to $293 million. Year-to-date sales fell 3.4% and operating income fell 5.7%. K-Cup pod and brewer volumes were lower year to date.
- International: Q3 sales rose 20.8% to $523 million and operating income rose 43.3% to $139 million. Year-to-date sales rose 16.2%; pricing, volume/mix and FX contributed.
- Reported operating income and earnings grew sharply against Q3 2022, which included a $311 million noncash Bai brand impairment. Year-to-date comparisons also include prior-year gains from the BodyArmor settlement and sale of its equity interest, a $217 million debt-extinguishment loss, and favorable tax effects in 2022. These items make reported growth less representative of underlying trends.
Cash, debt and liquidity
- Cash was $260 million at September 30, 2023, down from $535 million at year-end 2022. Operating cash flow for the first nine months declined by $1.066 billion year over year; the company cited lower accounts payable and working-capital changes, as well as prior-year comparison effects.
- Cash used in investing was $623 million, including $308 million invested in unconsolidated affiliates and $271 million of property and equipment purchases. Cash used in financing was $697 million, including $842 million of dividends and $457 million of share repurchases, partly offset by $750 million of net commercial-paper issuance.
- Debt at carrying value included $11.589 billion of notes and $1.149 billion of commercial paper. The $4 billion revolving credit facility was undrawn; KDP also reported $68 million of letters of credit used under a separate facility. Debt maturities include $500 million of notes due December 2023 and $1.150 billion due March 2024.
- Management said operating cash flows, cash on hand and available borrowing capacity should cover anticipated obligations for the next 12 months. KDP reported compliance with debt covenants and stable Moody’s and S&P outlooks.
Outlook, commentary and risks
- The filing provides no new quantified full-year earnings or sales guidance. Management emphasized pricing, productivity and growth through innovation, partnerships and distribution, while noting broad-based inflation, higher marketing costs and other operating cost pressures.
- KDP announced a 7.5% increase in its annualized dividend rate to $0.86 per share. A new COO was scheduled to join November 6, 2023, with an expected CEO transition in Q2 2024. The associated realignment program was expected to cost approximately $45 million; $25 million was recorded in Q3.
- KDP invested $300 million for a 33.3% interest in La Colombe and entered into related distribution and licensing agreements. It also agreed to distribute Electrolit in most company-owned U.S. DSD territories beginning in early 2024, with transition spending estimated at up to $57 million.
- Volume and demand weakness in U.S. Coffee, inflation, interest rates, FX, supplier and customer financial conditions, and working-capital needs are risks. The company’s cash conversion cycle worsened by 48 days year over year, to negative 23 days, primarily reflecting higher inventory and lower days payable.
- Remaining Keurig single-serve coffee antitrust litigation is unresolved; plaintiffs have claimed more than $5 billion in damages. KDP disputes the claims, has not accrued a loss, and cannot estimate the outcome or any potential loss. The SEC is also investigating statements concerning K-Cup pod recyclability; KDP said it does not expect a material impact. The filing reports no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether U.S. Coffee pod and brewer volumes stabilize, and the extent to which pricing can offset volume weakness and inflation.
- Whether operating cash flow recovers from the year-over-year decline and how inventory, supplier payment terms and accounts payable affect cash conversion.
- How KDP will address near-term note maturities and commercial-paper borrowing costs, and whether liquidity and leverage remain within management’s targets.
- The eventual cost and outcome of the antitrust litigation and SEC recyclability investigation.
- Execution, costs and financial contribution from La Colombe and the Electrolit distribution partnership, along with the CEO transition and realignment program.
- How much reported earnings growth reflects ongoing operations versus prior-year impairment, settlement, debt and tax comparison items; review the company’s non-GAAP reconciliations alongside GAAP results.