Business context and reporting period
This is Dr Pepper Snapple Group, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017—not a filing under the name Keurig Dr Pepper Inc. The company operates beverage businesses in the U.S., Canada, Mexico and other markets through Beverage Concentrates, Packaged Beverages and Latin America Beverages. Results include Bai Brands from its January 31, 2017 acquisition.
Unless otherwise noted, financial amounts are in U.S. dollars and millions. Comparisons are with the corresponding 2016 period.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $1,797; +6% | $3,307; +4% |
| Gross profit / margin | $1,079 / 60.0% (60.5% prior year) | $1,982 / 59.9% (60.0% prior year) |
| Income from operations | $373; −9% | $658; −9% |
| Net income | $188, versus $260 | $365, versus $442 |
| Diluted EPS | $1.02, versus $1.39 | $1.98, versus $2.35 |
| Operating cash flow | Not separately presented | $410, versus $428 |
Quarterly gross profit increased despite a slightly lower gross margin. SG&A rose 16% in the quarter and 15% year to date, outpacing sales growth. Interest expense was $44 million for the quarter and $84 million year to date. The effective tax rate was 33.2% for the quarter and 31.1% year to date, compared with 35.3% in both prior-year periods.
At June 30, cash and cash equivalents were $286 million, with a further $101 million of restricted cash, principally Bai acquisition escrow; total cash, cash equivalents and restricted cash was $387 million. Current assets were $1,555 million and current liabilities $1,580 million. Senior unsecured notes had a $4,526 million principal amount; total obligations, including capital leases, were $4,703 million, of which $312 million was current. The company had no commercial paper outstanding and the $500 million revolving credit facility was undrawn. It reported compliance with its debt covenants.
Six-month investing cash outflow was $1,595 million, primarily the $1,550 million Bai acquisition payment; financing cash outflow was $220 million. Capital expenditures were $41 million. Dividends paid were $204 million and share repurchases were $177 million.
Material changes versus the prior comparable period
- Sales growth reflected higher shipments and favorable mix, along with $19 million of acquired Bai shipments in the quarter and $30 million year to date. Total volume (BCS) increased 3% in the quarter and 2% year to date.
- Bai Brands was acquired for a preliminary purchase price of $1,649 million, net of the prior ownership interest, with $101 million held in escrow. The acquisition added $568 million of goodwill and $1,073 million of indefinite-lived brand assets. Bai contributed an incremental $19 million of consolidated sales and reduced net income by $7 million in the quarter; year-to-date incremental sales were $30 million and the net income impact was a $18 million reduction.
- The quarter included a $49 million loss on early extinguishment of debt after tender offers for portions of the 2018 and 2038 notes. The company issued $400 million of notes in June. In July, it redeemed the remaining approximately $301 million of 2018 notes; a further approximately $13 million loss was expected in third-quarter 2017.
- Operating income fell as increased SG&A more than offset higher gross profit. Year-to-date SG&A included $62 million of Bai operating costs and $20 million of Bai transaction expenses. Year-to-date results also benefited from a $28 million gain on the Bai step acquisition; the prior-year comparison included a $21 million pension-liability extinguishment gain.
- Packaged Beverages sales increased 6% in the quarter and 4% year to date, but segment operating profit declined 6% and 12%, respectively. Beverage Concentrates sales and operating profit increased in both periods; Latin America sales rose while segment operating profit was flat in the quarter and lower year to date.
Outlook, commentary, risks and unusual items
- Management expected operating cash flows to cover anticipated obligations over the next 12 months, with cash on hand and financing arrangements available if needed. No full-year sales or earnings guidance is stated in the provided filing text.
- Management expected 2017 capital expenditures, net of disposals, of approximately 3% of net sales, funded through operating cash flow.
- Management cited beverage seasonality, weather and holiday timing, economic conditions, customer and supplier credit-market disruption, and integration of Bai as factors that could affect results or liquidity. It also identified exposure to commodity prices, interest rates and foreign exchange rates. A 10% exchange-rate change was estimated to affect annual operating income by approximately $22 million; unhedged commodity price changes of 10% were estimated to affect remaining-2017 operating income by approximately $4 million.
- Gross margin faced packaging and other commodity costs, manufacturing costs and unfavorable foreign exchange. Commodity derivative mark-to-market results were volatile and contributed to unfavorable year-over-year comparisons. The company said it does not use derivatives for speculation.
- The company reported no pending legal matters expected to have a material adverse effect and no material change to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
- Accounting outlook: management expected the 2018 revenue-recognition standard to have no material annual impact, but anticipated higher contract liabilities and possible interim net-sales timing effects. The company expected the 2019 lease standard to have a significant balance-sheet impact due to lease commitments; the full effects were still being evaluated.
Important facts for investors to verify
- Confirm the filing entity: the supplied 10-Q is for Dr Pepper Snapple Group, Inc., despite the request metadata naming Keurig Dr Pepper Inc.
- Assess whether Bai can deliver growth and profitability sufficient to justify its acquisition cost, including integration spending, acquired debt-related interest and the preliminary purchase-price allocation.
- Separate underlying operating trends from the $49 million debt-extinguishment loss, Bai step-acquisition gain, tax benefits and volatile commodity hedge mark-to-market impacts.
- Review cash generation and debt maturities after the July 2017 redemption, and distinguish unrestricted cash from acquisition-related restricted escrow balances.
- Monitor Packaged Beverages’ declining segment operating profit, higher SG&A and commodity, packaging, currency and consumer-demand risks.