Keurig Dr Pepper Inc. quarterly report, Q3 FY2017

Business context and reporting period

This is Dr Pepper Snapple Group, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The filing predates the Keurig Dr Pepper name; the issuer identified in the filing is Dr Pepper Snapple Group, Inc.

The company sells beverage concentrates and packaged beverages across the U.S., Canada, Mexico and other markets. Results include Bai Brands from its January 31, 2017 acquisition.

Financial results and key metrics

Amounts are in millions of dollars except per-share data and percentages.

• Liquidity: At September 30, cash and cash equivalents were $66; restricted cash was $89 current and $10 non-current. Current assets were $1,266 and current liabilities $1,359. The company reported $165 of total cash, cash equivalents and restricted cash for cash-flow reconciliation.
• Debt: Short-term borrowings and current maturities were $82, including $70 of commercial paper. Long-term obligations were $4,399, including $4,239 of senior notes and capital leases. The $500 revolving facility had no borrowings; $430 was available after letters of credit. The company said it was in compliance with its financial covenants.
• Capital returns: Nine-month dividends paid were $309; the declared dividend was $1.74 per share. Share repurchases were $320 for the nine months.

Material changes versus comparable periods

• Q3 sales increased 4%, while net income fell 15% and diluted EPS declined from $1.29 to $1.11. Nine-month sales rose 4%, while net income fell 17% and diluted EPS declined from $3.64 to $3.09.
• Sales growth reflected volume and mix, pricing, favorable foreign exchange in Q3, and Bai shipments to third parties ($21 in Q3; $51 year to date). Q3 bottler case sales were flat; nine-month volume increased 1%.
• Operating income declined as SG&A rose with Bai operating costs, marketing and integration expenses, higher labor costs and other spending. Bai-related effects reduced diluted EPS by $0.07 in Q3 and $0.22 year to date, including financing costs, operations and transaction/integration expenses; a step-acquisition gain partly offset the nine-month impact.
• Q3 Packaged Beverages segment operating profit fell $19 to $189; nine-month profit fell $66 to $526. Latin America Beverages profit fell $9 in Q3 and $13 year to date. Beverage Concentrates profit increased $13 in Q3 and $19 year to date.
• Gross margin was nearly flat in Q3 and down 0.1 percentage point year to date. Bai’s brand-owner margin benefit and productivity were offset by product mix, packaging and other commodity costs, foreign exchange, and a resin supplier default in Mexico.
• Cash from operations increased to $732 from $705 year to date. Investing outflows rose to $1,643, primarily due to $1,553 paid for Bai. Financing outflows were $717, including debt repayments, dividends and repurchases. Cash and restricted cash declined from $1,787 at year-end 2016 to $165.

Outlook, commentary, risks and unusual items

• Management said operating cash flows should be sufficient for anticipated obligations over the next 12 months, with cash on hand and financing facilities available if needed. No specific earnings or revenue guidance was provided. Expected 2017 capital expenditures were approximately 3% of net sales.
• Management reported no material loss of distribution or production from third-quarter hurricanes and earthquakes, but said it continued to assess their effects. A $6 resin supplier default affected Mexico operations and gross margin.
• Debt refinancing and redemptions generated a $13 loss on extinguishment in Q3 and $62 year to date. A $28 gain from remeasuring the previously held Bai interest was recorded in Q1. The acquisition holdback included $88 in escrow; one working-capital matter was being taken to arbitration.
• Key operating risks include beverage demand and seasonality, commodity and foreign-exchange fluctuations, customer and supplier disruptions, Bai integration, and the cost or availability of financing. A 10% currency move was estimated to affect annual operating income by about $22. The filing said pending legal matters were not expected to have a material adverse effect.
• The company expected no material annual impact from adopting revenue-recognition guidance in 2018, but anticipated higher contract liabilities and possible interim net-sales timing effects. It expected the 2019 lease standard to have a significant balance-sheet impact due to lease commitments.
• Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the previously disclosed risk factors.

Important facts for investors to verify

1. Confirm the issuer and historical reporting context: this 2017 filing is for Dr Pepper Snapple Group, Inc., not a filing under the Keurig Dr Pepper name.
2. Assess whether Bai can deliver profitable growth: acquired sales contributed to revenue, while Bai’s operations and associated costs reduced reported earnings.
3. Review cash and debt after the acquisition, including restricted escrow balances, upcoming debt maturities, refinancing costs and covenant headroom.
4. Monitor Packaged Beverages and Latin America segment profitability, commodity and packaging costs, currency effects, and the resin supplier dispute.
5. Check subsequent developments in Bai purchase-price allocation and escrow arbitration, as well as the effects of hurricanes and earthquakes.