Keurig Dr Pepper Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 28, 2019. The DPS–Keurig merger closed July 9, 2018. Because Maple (Keurig) was the accounting acquirer, reported 2018 results include Maple for the full year but DPS only from the merger date. Consequently, reported year-over-year comparisons are not like-for-like; pro forma figures provide a more comparable view.
Business context
KDP is a North American beverage company with more than 125 owned, licensed and partner brands, spanning carbonated soft drinks, non-carbonated beverages, specialty coffee and Keurig single-serve brewers. Its four reporting segments are Beverage Concentrates, Packaged Beverages, Latin America Beverages and Coffee Systems. The merger expanded the company’s scale and combined hot and cold beverage businesses.
Financial results and liquidity
| Metric | 2018 | Comparable / prior-period context |
|---|---|---|
| Reported net sales | $7.442 billion | Includes DPS for only 176 days; not comparable with calendar 2017 reported sales of $4.226 billion. |
| Reported gross profit / margin | $3.882 billion / 52.2% | Calendar 2017: $2.025 billion / 47.9%; merger mix and partial-year consolidation limit comparison. |
| Reported operating income / margin | $1.237 billion / 16.6% | Calendar 2017: $862 million / 20.4%. |
| Net income attributable to KDP | $586 million; diluted EPS $0.53 | Calendar 2017: $847 million; diluted EPS $1.07. The decline primarily reflects the prior-year tax-reform benefit, higher interest expense, and merger-related transaction, restructuring and integration costs. |
| Pro forma adjusted net sales | $11.024 billion | Up 2.3% from $10.775 billion in 2017. |
| Pro forma adjusted operating income / margin | $2.620 billion / 23.8% | Up 6.7%; margin increased 100 basis points from 22.8%. |
| Pro forma adjusted net income / diluted EPS | $1.451 billion / $1.04 | Up 22.8% and 22.4%, respectively, from 2017. These are non-GAAP adjusted pro forma measures, not reported GAAP results. |
| Operating cash flow | $1.613 billion | Capital expenditures were $180 million; operating cash flow less capital expenditures was approximately $1.433 billion. |
| Cash and restricted cash | $139 million | Includes $83 million cash and cash equivalents and $56 million restricted cash. |
| Debt and liquidity | $15.659 billion of short- and long-term borrowings; $2.4 billion revolver capacity, undrawn | Also had $305 million of capital lease and financing obligations. Commercial paper outstanding was $1.079 billion. |
At year-end, total assets were $48.918 billion and stockholders’ equity was $22.533 billion. Current liabilities of $5.702 billion exceeded current assets of $2.159 billion. Credit ratings were Moody’s Baa2 (negative outlook) and S&P BBB (stable outlook). Management said operating cash flows, cash on hand and available financing should cover anticipated obligations over the next 12 months.
Segments and key movements
- Reported 2018 segment sales and operating income: Coffee Systems $4.114 billion and $1.163 billion; Packaged Beverages $2.415 billion and $257 million; Beverage Concentrates $669 million and $430 million; Latin America Beverages $244 million and $29 million. Reported segment figures reflect different periods of consolidation.
- On an adjusted pro forma basis, Packaged Beverages sales rose 4.1%, but operating income fell 9.8% to $688 million, pressured by input and logistics inflation and unfavorable comparisons with prior-year Bai-related gains.
- Adjusted pro forma Coffee Systems sales declined 0.4%; pod volume grew 7.4%, while brewer volume declined 1.5%. Segment adjusted operating income increased 9.4% to $1.329 billion on productivity improvements.
- Adjusted pro forma Beverage Concentrates sales and operating income rose 3.8% and 5.1%, respectively. Latin America Beverages sales rose 3.9% and operating income rose 28.1%, with foreign exchange weighing on sales.
Outlook, management commentary and notable items
- For 2019, management guided to adjusted diluted EPS of $1.20–$1.22, growth of 15%–17%; net sales growth of approximately 2%; and adjusted effective tax rate of 25.0%–25.5%.
- Management expected $200 million of merger synergies in 2019 and targeted $200 million annually over 2019–2021. The integration program targets $600 million of synergies over three years and anticipates total cash expenditures of $750 million, including capital expenditures and expenses.
- 2019 adjusted interest expense guidance was $570–$590 million, reflecting deleveraging and the continued benefit of unwinding swaps. The company said it intended to drive cash generation and rapid deleveraging within two to three years of the merger.
- The merger was financed in part with a $9 billion JAB equity investment, $8 billion of new senior notes, term-loan and revolving-credit borrowings, and a special cash dividend of $103.75 per share to eligible holders. KDP paid down approximately $938 million of term-loan, commercial-paper and revolver borrowings in the second half of 2018.
- 2018 included $170 million of restructuring and integration charges, including $155 million related to the merger integration program, and $162 million of transaction expenses. The DPS acquisition purchase-price allocation remained preliminary; acquired inventory step-up charges were recognized as inventory was sold.
- Significant risks include merger integration and realizing projected synergies, substantial indebtedness and interest costs, commodity and logistics inflation, changing consumer preferences, dependence on major retailers and bottlers, and competition in single-serve coffee pods. The filing also identifies antitrust litigation involving Keurig pods and a California Proposition 65 coffee-warning case; outcomes and potential losses were not estimable. The company was also identified as a potentially responsible party at a New Jersey Superfund site, with costs not reasonably estimable.
- A malware attack disrupted Coffee Systems business networks in February 2019; KDP said it was addressing the incident and continuing to assess its impact. Internal-control assessments excluded Maple operations after the merger: management assessed controls covering approximately 3% of total assets and 45% of annual net sales, while the auditor likewise excluded legacy Maple, described as 97% of assets and 55% of sales. Management and the auditor concluded controls in the scope they assessed were effective; integration-related control changes were expected to affect controls in 2019.
Important facts for investors to verify
- Use the unaudited pro forma and adjusted figures for broad business comparisons, and distinguish them from the company’s reported GAAP results and the filing’s partial-year merger accounting.
- Track debt repayment, interest expense, credit ratings and progress toward the stated deleveraging and synergy targets.
- Monitor Packaged Beverages profitability, pricing and cost inflation, and Coffee Systems pod growth, pricing and brewer demand.
- Assess the final purchase-price allocations and integration costs, along with the financial and operational effects of the February 2019 cyber incident.
- Follow developments in antitrust and Proposition 65 litigation, the Superfund matter, and the integration of financial reporting controls across the combined company.