Keurig Dr Pepper Inc. — Q2 2021 Form 10-Q
Business context and reporting period. KDP is an integrated North American beverage brand owner, manufacturer and distributor, with Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages segments. This unaudited report covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2021 | Change vs. Q2 2020 | First six months 2021 | Change vs. first six months 2020 |
|---|---|---|---|---|
| Net sales | $3.140 billion | +9.6% | $6.042 billion | +10.3% |
| Gross profit / margin | $1.770 billion / 56.4% | +$208 million / +190 bps | $3.370 billion / 55.8% | +$356 million / +80 bps |
| Income from operations / margin | $734 million / 23.4% | +30.8% / +380 bps | $1.374 billion / 22.7% | +33.8% / +390 bps |
| Net income attributable to KDP | $448 million | +50.3% | $773 million | +70.3% |
| Diluted EPS | $0.31 | Up from $0.21 | $0.54 | Up from $0.32 |
| Adjusted diluted EPS (non-GAAP) | $0.38 | +15.2% | $0.71 | +14.5% |
| Operating cash flow | Not separately provided for the quarter | $1.139 billion | Up from $1.062 billion |
Q2 adjusted operating income was $839 million, up 8.3%, while adjusted operating margin declined 40 bps to 26.7%. For the first six months, adjusted operating income was $1.580 billion, up 8.3%, and adjusted margin declined 40 bps to 26.2%. These are management-defined non-GAAP measures and exclude specified items affecting comparability.
At June 30, cash and cash equivalents were $167 million. Debt carrying amounts were $11.721 billion of long-term obligations and $1.323 billion of commercial paper and other short-term borrowings. KDP reported $2.4 billion available under its revolver and a $1.5 billion 364-day facility; neither had been drawn. The company reported compliance with debt covenants. Total current liabilities were $6.917 billion.
Six-month investing cash outflow was $200 million, including $204 million of property, plant and equipment purchases; capital expenditures recorded in accounts payable and accrued expenses were a further $213 million. Financing cash outflow was $1.028 billion, including $424 million of dividends paid. The cash, cash equivalents and restricted cash total declined to $170 million from $255 million at year-end 2020.
Material changes versus the prior comparable period
- Q2 sales growth reflected volume/mix of 6.1%, net price realization of 2.0% and favorable foreign-exchange translation of 1.5%. For the first six months, the respective drivers were 8.1%, 1.3% and 0.9%.
- Q2 GAAP gross and operating margins expanded, but adjusted operating margin edged down. Management cited volume/mix, pricing, productivity and merger synergies as benefits, partly offset by input-cost, manufacturing and logistics inflation and higher marketing costs.
- Q2 Coffee Systems pod volume was nearly flat (+0.2%), while brewer volume rose 29.0%; packaged beverage non-carbonated beverage volume fell 5.5%. For the first six months, K-Cup pod and brewer volumes increased 6.8% and 41.3%, respectively, while non-carbonated beverage volume declined 7.7%.
- Interest expense decreased 20.4% in Q2 and 14.5% over six months, reflecting refinancing, deleveraging and derivative mark-to-market effects. Six-month results also included a $105 million debt-extinguishment loss, compared with $4 million in the prior-year period.
- Six-month 2020 results included an $86 million impairment of the Bedford investment and note receivable; there was no comparable 2021 charge. The 2020 period also included a $42 million network-optimization gain from facility sale-leasebacks.
Outlook, management commentary, risks and unusual items
- Management said operating cash flows, together with available cash and financing capacity if needed, should meet anticipated obligations for the next 12 months. It described liquidity and financial condition as strong, while acknowledging continuing COVID-19 uncertainty. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- KDP expected annualized capital expenditures to be approximately 3% of net sales as it moved beyond the three-year post-merger period. The DPS integration program was expected to finish in 2021; its stated target was $600 million of synergies over three years, with expected total cash expenditures of $750 million. Cumulative pre-tax charges were approximately $679 million through June 30, 2021.
- The board raised the annualized dividend rate 25% to $0.75 per share; the Q2 dividend declared was $0.1875 per share. KDP said it remained focused on deleveraging.
- Management cited COVID-19 and consumer preferences, commodity and input-cost inflation, logistics costs, foreign exchange, customer and supplier financial health, credit-market access and seasonal cash flows as uncertainties. A 10% FX move was estimated to affect annual operating income by about $46 million; a 1% interest-rate change was estimated to affect annual interest expense by approximately +$11 million or -$6 million, based on period-end exposures.
- Supplier payment obligations voluntarily sold by suppliers to financial institutions totaled $2.901 billion at June 30, up from $2.578 billion at year-end. KDP said its payment obligations and supplier terms were not changed by the program. The cash conversion cycle was reported as negative 67 days, versus negative 52 days in the prior-year comparison, with DPO of 156 days.
- Unresolved litigation includes direct-purchaser and other Keurig single-serve coffee antitrust claims and an appeal in the Proposition 65 coffee matter. KDP said it could not predict the antitrust outcomes or estimate potential losses; it considered a material loss in the Proposition 65 case remote. Separately, its ABC subsidiary continues litigation against BodyArmor and Coca-Cola over a distribution contract; trial was scheduled for February 2022. No potential recovery could be predicted.
- Unusual items include the $105 million debt-extinguishment loss, restructuring and integration charges, productivity costs, COVID-related costs and commodity derivative mark-to-market effects. For Q2, COVID-19 items affecting comparability were a net benefit of $2 million, including reversals of prior credit-loss allowances; 2020 Q2 had $75 million of such costs.
Important facts for investors to verify
- How much of sales and margin growth is sustainable after considering inflation, pricing, product mix and non-GAAP exclusions.
- The composition and liquidity implications of $1.323 billion in commercial paper, available credit facilities and upcoming debt maturities.
- The scale and terms of supplier-finance arrangements, including the $2.901 billion of supplier obligations sold to financial institutions, and the unusually high reported DPO.
- Progress toward the integration program’s synergy target, expected remaining expenditures and the timing of completion.
- Developments in the antitrust, Proposition 65 and BodyArmor litigation, including any changes to estimated exposure or potential recovery.
- Whether management provides updated full-year guidance or changes its capital spending, deleveraging and dividend priorities.