Keurig Dr Pepper Inc. — Q2 2022 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and financial performance
KDP operates four reportable segments: Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages. The quarter’s sales growth was primarily driven by pricing, with positive volume/mix overall; inflation and higher operating costs pressured margins.
| Metric | Q2 2022 | Q2 2021 | First six months 2022 | First six months 2021 |
|---|---|---|---|---|
| Net sales | $3,554 | $3,140 | $6,632 | $6,042 |
| Gross profit | $1,776 | $1,770 | $3,426 | $3,370 |
| Gross margin | 50.0% | 56.4% | 51.7% | 55.8% |
| Income from operations | $572 | $734 | $1,538 | $1,374 |
| Operating margin | 16.1% | 23.4% | 23.2% | 22.7% |
| Net income attributable to KDP | $218 | $448 | $803 | $773 |
| Diluted EPS | $0.15 | $0.31 | $0.56 | $0.54 |
| Net cash from operating activities | Not separately provided | Not separately provided | $1,339 | $1,139 |
Q2 sales rose 13.2%, reflecting 10.4% favorable net price realization and 3.1% favorable volume/mix, partly offset by 0.3% unfavorable foreign-exchange translation. Q2 diluted EPS fell 51.6%, mainly due to lower operating income, higher interest expense and a $169 million debt-extinguishment loss. For the first half, reported net income rose 3.9%, but included material settlement and refinancing items described below.
On management’s non-GAAP basis, Q2 adjusted diluted EPS was $0.39 versus $0.38 a year earlier, while adjusted income from operations declined 0.8% to $832 million. First-half adjusted diluted EPS was $0.72 versus $0.71, and adjusted income from operations declined 1.0% to $1,564 million. These measures exclude specified items and are not U.S. GAAP results.
Segments and material changes
- Coffee Systems: Q2 sales increased 8.5%, but operating income fell 11.3%; pod volume rose 4.7% and brewer volume declined 4.2%. Inflation, recovery investments and costs pressured results.
- Packaged Beverages: Q2 sales increased 12.8%, while operating income declined 11.1%, reflecting inflation and other costs. First-half reported operating income increased substantially, primarily reflecting the BodyArmor settlement gain and sale-leaseback activity.
- Beverage Concentrates: Q2 sales increased 22.7% and operating income 27.1%; pricing and a favorable comparison with prior-year customer trade accruals contributed to growth.
- Latin America Beverages: Q2 sales increased 26.5% and operating income 38.9%, with favorable pricing and volume/mix.
For the first six months, sales grew 9.8%, with 8.4% from pricing and 1.5% from volume/mix. Gross margin declined 410 basis points, reflecting inflation and commodity mark-to-market effects. Segment comparisons were revised for a 2022 reallocation of certain corporate costs; prior-period segment disclosures were recast.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $552 million; total current assets were $3,771 million and current liabilities $6,761 million.
- Long-term obligations were $11,555 million, with no short-term borrowings or current portion of long-term obligations reported at quarter-end. The company had a $4 billion revolving credit facility with no amounts drawn and stated it was in compliance with its 3.25-to-1.00 minimum interest-coverage covenant.
- First-half cash from operations was $1,339 million; investing cash outflow was $131 million and financing cash outflow $1,221 million. Cash, cash equivalents and restricted cash ended at $554 million, compared with $568 million at year-end 2021.
- Cash purchases of property, plant and equipment were $186 million. Cash dividends paid were $531 million; KDP repurchased $88 million of stock in the first half.
- In April, KDP issued $3 billion of notes and used proceeds to retire or tender existing debt. The transactions reduced the weighted-average coupon on notes from 3.671% to 3.595%, but generated a $169 million Q2 loss on early extinguishment. First-half net debt repayments were reported as $514 million.
- Suppliers had voluntarily sold $3,698 million of KDP payment obligations to financial institutions as of June 30, compared with $3,194 million at year-end. KDP stated the program does not change its obligations to suppliers or scheduled payment terms.
Outlook, management commentary and risks
KDP said it expected inflationary pressures and supply-chain, logistics, manufacturing and labor-cost headwinds to continue through the remainder of 2022. The company had raised prices across its portfolio, while cautioning that pricing could reduce volume or sales and, together with cost inflation, affect margins and operating results. Management said operating cash flow should be sufficient for anticipated obligations over the next 12 months. The filing does not provide a clear numerical full-year earnings or sales guidance target.
Material unusual items included a $299 million gain from settling BodyArmor litigation and a separate $50 million gain related to the sale-related holdback; a $38 million sale-leaseback gain; and $217 million of first-half debt-extinguishment losses, including the Q2 strategic refinancing loss. The Q2 effective tax rate was negative 2.3%, primarily due to revaluation of state deferred tax liabilities; the first-half rate was 17.9%.
Risks highlighted include persistent inflation, supply-chain disruption and labor shortages, possible demand or volume pressure from price increases, and market exposure to interest rates, commodities and foreign exchange. KDP reported no material change to its annual-report risk factors. The Keurig single-serve coffee antitrust litigation remained unresolved; plaintiffs collectively claimed more than $5 billion in damages, KDP disputed the claims and damages calculations, and the company had not accrued a loss because it could not predict the outcome or estimate a possible loss range. Separately, the company recorded $12 million of first-half impairment related to the wind-down of Bedford.
Leadership changes announced in the filing included Ozan Dokmecioglu’s appointment as CEO effective July 29, 2022, and an interim CFO appointment while the company continued its search for a permanent CFO.
Important facts for investors to verify
- Whether price increases can offset cost inflation without materially weakening volume, particularly in Coffee Systems, where first-half operating income and margin declined.
- How much of first-half reported performance depended on BodyArmor settlement and sale-leaseback gains, and how adjusted measures reconcile to GAAP results.
- The eventual outcome and potential financial exposure from the single-serve coffee antitrust litigation; the filing provides no estimated loss range.
- The implications of supplier-finance participation, which involved $3.698 billion of obligations sold by suppliers, for working capital and cash-flow comparability.
- Debt-refinancing economics, interest-rate and commodity exposures, and continued compliance with the revolving-credit covenant.
- Whether subsequent guidance or results confirm the company’s expectation that operating cash flows will cover obligations over the next 12 months.