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, 2011—not a filing under the later Keurig Dr Pepper name. The company operated beverage-concentrate, packaged-beverage, and Latin America beverage businesses. Unless otherwise noted, amounts are U.S. dollars in millions.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,529 | $1,457 | $4,442 | $4,224 |
| Gross profit | $857 | $857 | $2,561 | $2,535 |
| Gross margin | 56.0% | 58.8% | 57.7% | 60.0% |
| Operating income | $261 | $260 | $753 | $757 |
| Net income | $154 | $144 | $440 | $416 |
| Diluted EPS | $0.71 | $0.60 | $1.97 | $1.68 |
For the quarter, sales rose 5% and net income 7%; diluted EPS increased 18%, helped by fewer weighted-average shares following repurchases. Nine-month sales rose 5% and net income 6%, while operating income declined about 1%. Cost inflation pressured margins: higher packaging, sweetener, apple-juice concentrate and other commodity costs, alongside commodity-hedge mark-to-market losses and LIFO charges, partly offset by pricing and supply-chain efficiencies.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $580, down from $1,539 in 2010; the prior-year period included a one-time $900 PepsiCo licensing payment. Capital expenditures were $148, making operating cash flow less capital expenditures approximately $432.
- Cash was $651 at September 30, 2011, versus $315 at year-end 2010. Current assets were $1,695 and current liabilities $1,726.
- Long-term obligations were $2,210, with $401 current; senior unsecured notes totaled $2,603. The company issued $500 of 2.90% notes due 2016 during the period. No revolver or commercial paper borrowings were outstanding; $492 of revolver capacity was available.
- Cash financing uses included $425 of share repurchases and $183 of dividends. The quarterly dividend declared was $0.32 per share.
- Management said operating cash flows, cash on hand and available facilities should cover anticipated obligations for the next 12 months. The filing cited expected licensing-related tax payments of about $12 in 2011 and $535 in 2012.
Material changes, outlook and risks
- Volume (bottler case sales) declined 1% in Q3 and was flat for the first nine months. Pricing, favorable package mix, foreign exchange, brand repatriation and licensing revenue supported sales growth.
- Packaged Beverages nine-month segment operating profit fell $22 to $391, with inflation, fuel and logistics, marketing, compensation and brand-repatriation costs weighing on results. Beverage Concentrates profit rose $32 to $567; Latin America Beverages profit rose $3 to $34.
- Licensing arrangements with PepsiCo and Coca-Cola generated deferred revenue recognized over an estimated 25-year customer relationship. Management noted the temporary tax benefits related to these arrangements would not recur beyond 2011.
- Risks include commodity-cost volatility and limited ability to pass through cost increases, foreign-exchange and interest-rate exposure, consumer purchasing power, and possible additional contributions if the company or another large employer withdraws from certain multiemployer pension plans. The company reported compliance with debt covenants and no material changes to previously disclosed risk factors.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management expected annual discretionary capital expenditures, net of disposals, of approximately 4% of net sales.
- Legal and environmental matters include a $4.25 settlement accrued in a California wage-and-hour class action, subject to settlement conditions, and Superfund-site investigation costs not yet determined; the company reported approximately $425,000 paid toward its allocated study costs through September 30.
Important facts for investors to verify
- Confirm the issuer and reporting period: this source is Dr Pepper Snapple Group’s 2011 Q3 10-Q, despite the Keurig Dr Pepper request metadata.
- Assess whether pricing and licensing-related sales growth can offset persistent cost inflation and soft or declining volumes in selected brands.
- Reconcile the sharp year-over-year operating-cash-flow decline, including the prior-year $900 PepsiCo payment, 2011 tax-payable movements and the forecast licensing-related tax payments.
- Review the upcoming $400 maturity of 2011 notes, refinancing plans and the larger stated 2012 tax obligation.
- Check the sensitivity of margins and earnings to commodities, fuel, foreign exchange, interest rates and derivative valuation changes.