Keurig Dr Pepper Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Comparisons are with Q1 2020. Amounts are in U.S. dollars.
Business context
KDP is an integrated beverage brand owner, manufacturer and distributor, with four reportable segments: Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages. COVID-19 continued to shift demand between at-home and away-from-home channels. The filing describes strong at-home coffee and brewer demand, while office coffee and fountain foodservice remained pressured.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $2.902B | $2.613B | +11.1% |
| Gross profit / margin | $1.600B / 55.1% | $1.452B / 55.6% | Profit +10.2%; margin -50 bps |
| Income from operations / margin | $640M / 22.1% | $466M / 17.8% | +37.3%; margin +430 bps |
| Net income attributable to KDP | $325M | $156M | +108.3% |
| Diluted EPS | $0.23 | $0.11 | +109.1% |
| Adjusted net income / diluted EPS | $471M / $0.33 | $408M / $0.29 | +15.4% / +13.8% |
| Adjusted operating income / margin | $741M / 25.5% | $684M / 26.2% | +8.3%; margin -70 bps |
Sales growth reflected volume/mix of 10.3%, net price realization of 0.5% and favorable foreign exchange of 0.3%. Gross profit benefited from volume/mix, productivity and merger synergies, partly offset by commodity inflation. GAAP operating income also benefited from lower SG&A and improved comparison with a prior-year investment impairment; results included a $105M loss on early debt extinguishment. Adjusted figures are non-GAAP and exclude specified comparability items.
Segments and material changes
- Coffee Systems: Sales $1.142B, up 17.4%; operating income $336M, up 23.5%. K-Cup pod volume rose 13.7% and brewer volume 61.4%; adjusted operating margin fell to 34.1% from 35.7%, partly due to brewer mix and prior-year asset-sale gains.
- Packaged Beverages: Sales $1.307B, up 7.4%; operating income $175M, down 7.4%. Volume rose 3.8%; margin pressure reflected inflation, higher volume-related costs and comparison with prior-year asset-sale gains.
- Beverage Concentrates: Sales $328M, up 7.2%; operating income $238M, up 20.8%. Higher pricing and lower marketing spending supported results; fountain demand remained affected by COVID-19.
- Latin America Beverages: Sales $125M, up 6.8%; operating income $22M, down 18.5%, with unfavorable foreign exchange and volume/mix partly offset by pricing.
Consolidated SG&A declined 6.5%, including a favorable $72M year-over-year change in commodity mark-to-market effects, reduced marketing and synergies. Adjusted interest expense rose 15.8% to $139M, primarily reflecting the prior-year benefit from unwinding interest-rate swaps. The effective tax rate declined to 18.3% from 23.9%, primarily due to excess tax deductions from vested restricted stock units.
Cash flow, debt and liquidity
- Operating cash flow was $546M, versus $414M; investing cash flow was an outflow of $99M, versus an inflow of $34M. Financing cash flow was an outflow of $355M, versus $328M.
- Cash and cash equivalents were $335M at March 31, 2021; cash, cash equivalents and restricted cash totaled $349M, up from $255M at year-end 2020. Property, plant and equipment purchases were $95M; the filing also reports $259M of capital expenditures included in accounts payable and accrued expenses.
- Debt carrying value was $13.465B, comprising $1.750B current and $11.715B long-term obligations. KDP issued $2.150B of notes at 0.750%, 2.250% and 3.350% with 2024, 2031 and 2051 maturities, and used proceeds to refinance nearer-term debt and repay its term loan. It recorded $105M in debt-extinguishment losses.
- The $1.750B 2021 Merger Notes were due in May 2021; management said repayment would use operating cash and, if needed, available variable-rate borrowing. KDP reported no variable-rate debt outstanding at quarter-end, no amounts drawn on its $2.4B revolver or $1.5B 364-day facility, and compliance with debt covenants. Management said operating cash flow should cover anticipated obligations for the next 12 months.
- Management described liquidity as strong. The cash conversion cycle was negative 66 days, compared with negative 47 days a year earlier, with extended supplier payment terms contributing. Suppliers had elected to sell $2.777B of KDP payment obligations to financial institutions as of quarter-end.
Outlook, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the supplied filing text. Management expected annualized capital expenditures to be approximately 3% of net sales as the company moved beyond the three-year post-merger period.
- The board announced a planned 25% increase in the annualized dividend rate to $0.75 per share, effective with a Q2 dividend subject to board declaration. The Q1 dividend of $0.15 per share was paid April 15, 2021.
- The DPS integration program targeted $600M of synergies over three years and was expected to be completed in 2021. The company estimated total cash expenditures of $750M and cumulative pre-tax charges of approximately $630M through March 31, 2021; Q1 program charges were $43M.
- COVID-19 continued to create both favorable and adverse channel effects. KDP cited commodity and logistics inflation, changing consumer demand and mobility, customer and supplier credit risks, foreign exchange exposure, and possible disruption to supply or demand. A 10% foreign-exchange move was estimated to affect annual operating income by approximately $41M; unhedged commodity-price sensitivity was estimated at $8M for the remainder of 2021.
- Legal contingencies include a $31M settlement with indirect purchasers in Keurig antitrust litigation, paid in January 2021; final court approval was pending, and other antitrust claims remained. KDP said it could not predict outcomes or estimate potential losses for the remaining claims. A Proposition 65 judgment was under appeal; management considered material loss remote. KDP’s ABC subsidiary continued litigation concerning BodyArmor’s distribution contract; outcome and potential recovery were uncertain.
- Other notable items included the prior-year $86M impairment of the Bedford investment, absent in Q1 2021, and a prior-year $42M network-optimization gain from asset sale-leasebacks, which affected comparisons. The company reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the May 2021 $1.750B note maturity was repaid as planned, and the resulting debt, interest expense and liquidity position.
- How much reported and adjusted growth persists after temporary COVID-19 channel shifts, prior-year comparisons and excluded non-GAAP items.
- Whether margin pressure from commodities, logistics, brewer mix and foreign exchange offsets pricing, productivity and merger synergies.
- Progress toward the $600M integration-synergy target, completion timing and remaining program costs.
- Developments in the antitrust, Proposition 65 and BodyArmor proceedings, including any potential financial exposure or recovery.
- The impact of supplier payment terms and the $2.777B supplier-elected financing balance on working capital and cash conversion.