Business context and reporting period
Dr Pepper Snapple Group, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter ended September 30, 2016. The company owned, manufactured and distributed non-alcoholic beverages through Beverage Concentrates, Packaged Beverages and Latin America Beverages. The filing is not a filing under the later Keurig Dr Pepper name.
Financial results and key metrics
Amounts are in millions of dollars except per-share data, percentages and volume growth.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,680 | $1,630 | $4,862 | $4,736 |
| Gross profit | $997 | $957 | $2,907 | $2,787 |
| Gross margin | 59.3% | 58.7% | 59.8% | 58.8% |
| Income from operations | $373 | $337 | $1,098 | $976 |
| Operating margin | 22.2% | 20.7% | 22.6% | 20.6% |
| Net income | $240 | $202 | $682 | $579 |
| Diluted EPS | $1.29 | $1.05 | $3.64 | $3.00 |
For the nine months, operating cash flow was $683, capital expenditures were $110, investing cash use was $119 and financing cash use was $854. Cash at September 30 was $620, down from $911 at year-end 2015. The company reported total current assets of $1,602 and current liabilities of $1,483.
Debt obligations comprised $3,178 of senior notes and $146 of capital leases, including $368 classified as current and $2,956 as long-term. The company had no commercial paper outstanding and reported no revolver borrowings; $499 of the $500 revolving facility was available, with $1 used for letters of credit. It was in compliance with applicable financial covenants.
Material changes versus comparable periods
- Q3 sales rose 3%; management attributed the increase to favorable product, package and segment mix, shipments and pricing, partly offset by $15 of unfavorable currency translation. Nine-month sales also rose 3%, with $62 of unfavorable currency translation.
- Q3 volume (bottler case sales) increased 2%; nine-month volume increased 1%. Growth in water, including Bai and Fiji, and selected beverage brands was partly offset by declines in certain CSD and juice brands.
- Gross margin improved in both periods. Management cited favorable commodity-derivative mark-to-market comparisons, lower commodity costs, pricing and productivity, partly offset by mix, manufacturing costs and currency.
- Q3 net income increased $38; nine-month net income increased $103. Nine-month operating income rose 13%, while interest expense increased $16, reflecting higher average debt and interest rates.
- Segment sales and operating profit were mixed: Packaged Beverages grew sales 4% and operating profit 7% in Q3; Latin America Beverages sales fell 6% and operating profit fell 13%, despite higher volume, primarily due to currency. Beverage Concentrates sales grew 5% while operating profit was approximately flat.
Outlook, commentary, risks and unusual items
- Management expected 2016 capital expenditures, net of disposals, to be approximately 3% of net sales and expected operating cash flows to cover anticipated obligations over the next 12 months. No specific earnings or revenue guidance was provided in the supplied filing text.
- Q3 included a $17 income-tax benefit, primarily from restructuring ownership of the Canadian business, including an $11 valuation-allowance release; management said it added $0.09 to diluted EPS. A $5 non-taxable step-acquisition gain for Mexican joint ventures IEBM and EMA added $0.03 to diluted EPS. Those ventures became wholly owned in September for approximately $15 cash, with $17 cash acquired.
- A $35 payment settled the multi-employer pension withdrawal liability; the company recognized a $21 gain on extinguishment. A $4 arbitration award related to the Mexican joint venture was recorded in SG&A. The filing also cited a $4 non-recurring employee-benefit program transition charge in the nine-month period.
- After quarter-end, on October 11, 2016, the company redeemed approximately $360 principal of 6.82% notes due 2018. It expected to record an approximately $31 early-extinguishment loss in Q4. The new $400 issue of 2.55% notes due 2026 was intended to fund the redemption and related costs.
- Risks discussed include demand and economic conditions, customer and supplier exposure to financial-market disruption, seasonality, foreign exchange, interest rates and commodity prices. A 10% exchange-rate move was estimated to affect annual operating income by approximately $22. Management said there were no material changes to the risk factors in its latest annual report and no pending legal matters expected to have a material adverse effect.
- The company continued substantial shareholder returns: it repurchased $460 of shares and paid $288 in dividends during the first nine months. Cash outflows, seasonal operating cash flows, debt maturities, capital spending and possible future acquisitions or investments remain relevant liquidity considerations.
Most important facts for investors to verify
- Underlying sales, volume and margin trends by segment, especially continued Packaged Beverages growth and Latin America currency pressure.
- The extent to which earnings growth relied on the Canadian tax benefit, acquisition gain, pension-liability gain and favorable derivative comparisons.
- Cash generation and liquidity after buybacks, dividends, capital spending and the October debt redemption, including the $31 Q4 extinguishment loss.
- Debt balances, interest costs, covenant compliance and access to the revolving facility as maturities approach.
- Whether the stated cash-flow outlook and approximately 3% capital-spending expectation were achieved; the filing provides no specific full-year earnings guidance.