Dr Pepper Snapple Group, Inc. — Q1 2010 Form 10-Q
The filing is for the three months ended March 31, 2010, compared with Q1 2009; balance-sheet figures are compared with December 31, 2009. The filing identifies the registrant as Dr Pepper Snapple Group, Inc. (not Keurig Dr Pepper Inc.). Amounts are in millions of dollars except per-share data.
Business context and reporting period
DPS operates beverage businesses in the United States, Canada, Mexico and the Caribbean through Beverage Concentrates, Packaged Beverages and Latin America Beverages. Reported volume (BCS) rose 3% year over year, while sales volume fell 3%; management attributed the divergence partly to prior-period concentrate purchases and contract-manufacturing comparisons.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $1,248 | $1,260 | Down 1% |
| Gross profit / margin | $752 / 60.3% | $729 / 57.9% | Profit up $23 |
| Operating income / margin | $187 / 15.0% | $265 / 21.1% | Down $78 |
| Net income | $89 | $132 | Down 33% |
| Diluted EPS | $0.35 | $0.52 | Down 33% |
| Operating cash flow | $987 | $178 | Up $809 |
| Capital expenditures | $55 | $78 | Down $23 |
Gross margin improved mainly on lower packaging, sweetener and other commodity costs and a product shift toward two-liter PET. Operating results were weighed down by the absence of $62 million of prior-year gains, higher SG&A and transaction costs. Interest expense fell to $34 million from $55 million, principally following debt repayment.
At March 31, cash and cash equivalents were $571, current assets $1,630 and current liabilities $850. Long-term obligations were $2,566, including $2,553 of senior notes and $13 of capital leases; the $405 revolver balance at year-end had been repaid. The revolver had no borrowings and $458 of availability for additional borrowing, subject to facility terms. Operating cash flow included $861 of non-current deferred revenue and $36 of current deferred revenue related to PepsiCo’s upfront payment; it should not be viewed as recurring operating cash generation. Cash from operations less capital expenditures was $932, before financing and other uses.
Material changes and segment results
- PepsiCo licensing: DPS received a one-time, nonrefundable $900 cash payment in February for licensing certain brands and distribution rights. It was recorded as deferred revenue and will be recognized over an estimated 25-year customer-relationship life; $3 of license revenue was recognized in Beverage Concentrates in Q1.
- Segment sales and operating profit: Beverage Concentrates sales were $240 (down $3) and profit $146 (down $4); Packaged Beverages sales were $929 (down $15) and profit $114 (up $7); Latin America sales were $79 (up $6) and profit $7 (down $2).
- DPS repaid $405 of revolver borrowings, repurchased 5.8 million shares for approximately $202, and paid $38 in dividends. The board raised total repurchase authorization to $1 billion.
- Moody’s upgraded DPS to Baa2 with a positive outlook; S&P upgraded it to BBB with a stable outlook.
Outlook, commentary and risks
Management gave no specific earnings or revenue guidance. It stated that operating cash flow should be sufficient for anticipated obligations over the next 12 months, with cash on hand and the revolver available if needed. It expected discretionary annual capital expenditures of approximately 5% of net sales.
The effective tax rate rose to 43.3% from 38.3%, including a $13 tax-provision impact from a change in Ontario’s provincial tax rate. Management noted anticipated Canadian legislation could lead to partial write-downs of Canadian deferred tax assets, partly offset by a reduction in the related Kraft indemnity liability. The filing identifies exposure to foreign exchange, interest rates and commodity prices; a 10% currency move was estimated to affect annual net income by about $11, and a 10% commodity-price move by about $16.
Contingencies include Snapple labeling class actions and a California wage-and-hour class action; outcomes cannot be assured. The company estimated its share of study costs at a New Jersey Superfund site would not exceed $250,000. Management said it did not expect pending legal matters, individually or collectively, to materially affect business or financial condition, though a particular period’s results or cash flows could be affected. The company reported compliance with debt covenants, effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported $987 operating cash flow reflects the nonrecurring $900 PepsiCo payment and deferred-revenue accounting.
- Whether volume growth converts into sustained net-sales and profit growth, given lower sales volume and the divergent performance across segments.
- The recurring cost base and earnings impact after the prior-year $62 gain, PepsiCo-related transaction costs, and Victorville facility start-up costs.
- Debt maturities, interest-rate exposure from swaps, and continued compliance with leverage and interest-coverage covenants.
- Potential effects of Canadian tax legislation, pending litigation and the company’s $1 billion share-repurchase authorization on cash and per-share results.