Business context and reporting period
This is Dr Pepper Snapple Group, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2013, covering the three and six months ended on that date. The filing identifies the issuer as Dr Pepper Snapple Group, Inc., not Keurig Dr Pepper Inc. Its three segments are Beverage Concentrates, Packaged Beverages, and Latin America Beverages.
Financial performance
Unless otherwise noted, amounts are in millions of dollars. Comparative periods are the same periods in 2012.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $1,611 | $1,621 | $2,991 | $2,983 |
| Gross profit / margin | $935 / 58.0% | $936 / 57.7% | $1,725 / 57.7% | $1,714 / 57.5% |
| Operating income / margin | $285 / 17.6% | $300 / 18.5% | $482 / 16.2% | $492 / 16.5% |
| Net income | $155 | $178 | $261 | $280 |
| Diluted EPS | $0.76 | $0.83 | $1.27 | $1.31 |
- Revenue and volume: Q2 sales declined 1%; first-half sales were essentially flat. Bottler case sales fell 3% in both periods. U.S. and Canada volume was weaker, while Mexico and Caribbean volume increased 2%.
- Cash flow: First-half operating cash flow was $276, versus cash used of $41 in 2012; the comparison benefited substantially from prior-year tax payments related to licensing agreements. Investing cash outflow was $75, including $61 of capital expenditures and $10 related to the DP/7UP West acquisition. Financing cash outflow was $451.
- Liquidity: Cash was $113 at June 30, down from $366 at year-end 2012. Current assets were $1,213 and current liabilities $1,064. Management said operating cash flows should meet anticipated obligations for the next 12 months.
- Debt: Long-term obligations were $2,521 and short-term borrowings/current maturities were $69, including $68 of commercial paper. The company repaid $250 of notes at maturity, had no revolver borrowings, and reported $430 available under the revolver. It said it complied with debt covenants.
- Shareholder returns: First-half dividends paid were $148; dividends declared were $0.76 per share. First-half share repurchases were $126, with $846 remaining under the board authorization.
Changes, management commentary, and outlook
- Q2 net income fell 13% and diluted EPS declined about 8%. Operating income decreased 5%, primarily as higher SG&A outweighed lower depreciation and amortization. For the first half, net income fell 7% and operating income fell 2%.
- Q2 SG&A increased $20, including $9 of higher marketing investment, a $4 Delaware escheat settlement charge, foreign exchange effects, and a $2 pension settlement loss. Higher marketing and labor and benefit costs also contributed to first-half expense growth.
- A Canadian tax-law change led to a $38 non-cash reduction in the liability to Mondelēz, recorded in other income, and a $50 non-cash reduction in tax assets, increasing income-tax expense. The company said the change reduced Q2 net income by $12 and diluted EPS by $0.06; it increased the effective tax rate by 12.3 percentage points in Q2. The Q2 effective tax rate was 48.0%.
- Gross margin benefited from a favorable LIFO inventory provision comparison and improved net pricing, partly offset by higher commodity costs. First-half results also included an $11 unrealized loss from commodity-derivative mark-to-market activity.
- Segment trends were mixed: Q2 Beverage Concentrates sales rose to $336 but operating profit declined to $205; Packaged Beverages sales and operating profit declined to $1,148 and $145; Latin America Beverages sales and operating profit increased to $127 and $18, respectively.
- Management expected 2013 capital expenditures, net of disposals, to be approximately 3.5% of net sales, funded from operating cash flow. No formal earnings or revenue guidance is stated in the provided filing text. Management cautioned that demand, seasonality, commodity prices, foreign exchange, and access to credit could affect results and liquidity.
- Contingencies include an $18 accrual for an appealed age-discrimination verdict and environmental cleanup exposure at a Superfund site for which costs could not yet be reasonably estimated. The company stated it did not expect pending legal matters to have a material adverse effect, while noting environmental claims could result in material costs or liabilities.
Investor verification priorities
- Verify the filing entity and period: this 10-Q is for Dr Pepper Snapple Group, Inc., quarter ended June 30, 2013.
- Assess the recurring earnings impact of the Canadian tax-law and indemnity-accounting items, including the $12 net-income reduction and related effective-tax-rate increase.
- Check whether volume declines, particularly in U.S. and Canada and in Packaged Beverages, persisted, and whether pricing and product innovation offset them.
- Review cash conversion and working-capital trends, the decline in cash, and the planned level of capital expenditures, dividends, and repurchases.
- Monitor commodity, foreign-exchange, and interest-rate exposures, as well as the appealed verdict and unresolved environmental matter.