Keurig Dr Pepper Inc. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the quarter ended March 31, 2023, compared with Q1 2022. KDP operates beverage and coffee businesses through U.S. Refreshment Beverages, U.S. Coffee and International segments. The company changed its segment structure effective January 1, 2023; prior-period segment results were recast.
Financial performance
- Revenue: Net sales were $3.353 billion, up 8.9% year over year. Higher pricing contributed 9.9%, partly offset by volume/mix down 1.0%. U.S. Refreshment Beverages sales rose 12.7%, U.S. Coffee fell 1.3%, and International rose 17.2%.
- Profit and margins: Gross profit increased 5.7% to $1.744 billion, while gross margin declined 160 basis points to 52.0%. Operating income was $584 million, down 39.5%, and operating margin was 17.4% versus 31.4%. Net income attributable to KDP fell 20.2% to $467 million; diluted EPS was $0.33, down from $0.41.
- Adjusted results: Management’s non-GAAP adjusted operating income was $699 million, down 4.5% on a constant-currency adjusted basis; adjusted operating margin was 20.8% versus 23.8%. Adjusted net income increased 0.6% and adjusted diluted EPS increased approximately 3.0%, to $0.34.
- Cash flow: Operating cash flow was $71 million, versus $663 million in Q1 2022. Investing used $105 million and financing used $303 million. Cash and cash equivalents ended the quarter at $204 million, down from $535 million at year-end 2022.
- Debt and liquidity: Notes had a $11.575 billion carrying value. Commercial paper outstanding was $664 million, and $1.646 billion of long-term obligations was classified as current, bringing short-term borrowings and current debt to $2.310 billion. The company had a $4 billion revolving credit facility with no borrowings and reported covenant compliance. Management said operating cash flows should cover anticipated obligations for the next 12 months.
- Shareholder returns: KDP declared dividends of $0.20 per share and repurchased $231 million of stock. Approximately $3.390 billion remained available under its share repurchase authorization.
Changes and management commentary
- Revenue growth was primarily price-led. Broad-based inflation, higher marketing and other operating costs, and unfavorable commodity mark-to-market activity pressured margins. Productivity and sales growth partly offset those pressures.
- U.S. Coffee was weaker: pod volumes declined and brewer volumes fell sharply amid category softness and retailer inventory shifts. International sales and operating income increased.
- Reported operating income and net income comparisons were materially affected by Q1 2022 items, including a BodyArmor litigation-settlement gain and asset-sale-leaseback activity. Q1 2023 reported interest expense was also reduced by favorable interest-rate derivative mark-to-market activity and gains from terminated cash-flow hedges. Management’s adjusted measures exclude specified comparability items and should not be treated as GAAP results.
- Management described liquidity as strong, cited ongoing productivity and growth initiatives, and said it plans to further reduce leverage while considering inorganic growth opportunities. The filing does not provide a specific new full-year earnings or revenue guidance figure.
Risks, contingencies and unusual items
- Antitrust litigation: Keurig is defending remaining U.S. single-serve coffee antitrust cases. Plaintiffs collectively claimed more than $5 billion in damages; KDP disputes the claims and damages calculations. The company could not predict the outcome or estimate a loss range and recorded no loss contingency for these cases.
- Other risks: Management cited potential effects from inflation, higher interest rates and economic uncertainty on customer payments, supplier availability and consumer demand. KDP also has exposure to commodity, interest-rate and foreign-exchange movements.
- Veyron arrangements: The aggregate maximum undiscounted residual-value guarantees associated with leasing arrangements were $653 million; management said payment was not probable. A separate distribution-rights guarantee has a maximum undiscounted exposure of $142 million, with no liability recorded because payment was not considered probable.
- Moody’s upgraded KDP’s long-term debt rating to Baa1 from Baa2 on April 3, 2023; the outlook remained stable. KDP warned that a ratings downgrade could increase financing costs and reduce cash available for obligations.
Important facts for investors to verify
- Whether pricing-led sales growth can continue without further volume or margin deterioration, particularly in U.S. Coffee.
- How much of the GAAP year-over-year earnings decline reflects prior-period gains and derivative accounting, versus underlying operating performance; review the company’s non-GAAP reconciliations.
- Near-term debt maturities and refinancing needs, including the $500 million 2023 Notes and $1.150 billion 2024 Notes, alongside commercial-paper usage and cash generation.
- Developments in the Keurig antitrust litigation, including any court rulings affecting class certification, damages claims or potential exposure.
- Whether working-capital trends and supplier-payment arrangements support sustainable cash flow, given Q1 operating cash flow of $71 million and a cash conversion cycle of negative 46 days.