Keurig Dr Pepper Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in millions of dollars, except per-share data and percentages. KDP is a North American beverage and single-serve coffee company, reporting through Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $2,613 | $2,504 | +4.4% |
| Gross profit / margin | $1,452 / 55.6% | $1,398 / 55.8% | Margin down 20 bps |
| Income from operations / margin | $466 / 17.8% | $498 / 19.9% | Down 6.4%; margin down 210 bps |
| Net income | $156 | $230 | Down 32.2% |
| Diluted EPS | $0.11 | $0.16 | Down 31.3% |
| Adjusted net income (non-GAAP) | $408 | $362 | Up 12.7% |
| Adjusted diluted EPS (non-GAAP) | $0.29 | $0.25 | Up 16.0% |
| Operating cash flow | $414 | $591 | Down $177 |
Adjusted figures are non-GAAP measures; KDP excludes specified items affecting comparability. Adjusted operating income was $684 million versus $621 million, and adjusted operating margin was 26.2% versus 24.8%.
Sales growth reflected 5.0% favorable volume/mix, partly offset by 0.5% lower net price realization and 0.1% unfavorable foreign exchange. Gross profit benefited from volume/mix, productivity and merger synergies; packaging-cost inflation, tariffs and pricing effects were offsets. Higher SG&A, including commodity mark-to-market impacts and integration/productivity costs, contributed to lower GAAP operating income.
Segments and notable changes
- Packaged Beverages: Sales rose 9.1% to $1,217 million; operating income rose 26.8% to $189 million. Higher volume included late-quarter consumer stock-up demand.
- Coffee Systems: Sales increased 0.5% to $973 million; operating income fell 7.2% to $272 million. K-Cup pod volume grew 5.6%, while brewer volume declined 2.4%; away-from-home coffee demand weakened late in the quarter.
- Beverage Concentrates: Sales rose 0.7% to $306 million, while operating income declined 2.0% to $197 million. Fountain-foodservice weakness late in the quarter was partly offset by retail shipments.
- Latin America Beverages: Sales increased 0.9% to $117 million; operating income rose to $27 million from $11 million, helped by favorable foreign-exchange transaction effects and productivity.
COVID-19 effects varied by channel: at-home demand and stock-up supported some packaged beverage sales, while office, hospitality and fountain-foodservice closures weighed on away-from-home channels. Management said the pandemic had no material net impact on consolidated Q1 operating results, but warned of heightened future volatility.
Cash, debt and liquidity
- Operating cash flow was $414 million, down from $591 million. Management attributed the decline primarily to working-capital changes, including customer incentive payments and deferrals.
- Investing activities provided $34 million, including $201 million of property-sale proceeds, partly offset by $151 million of capital expenditures. Financing activities used $328 million, including debt repayments and $212 million of dividends paid.
- Cash and cash equivalents were $197 million at March 31; cash including restricted balances was $223 million. Short-term borrowings and current long-term obligations were $1,957 million; long-term obligations were $12,431 million.
- In March, KDP shifted $1.0 billion of commercial paper borrowing to its revolver amid commercial-paper market stress. KDP reported compliance with debt covenants at quarter-end.
- Subsequent events: In April, KDP issued $1.5 billion of senior notes due 2030 and 2050 and used proceeds to repay about $1.0 billion of revolver borrowings and $481 million of commercial paper. It also replaced its $750 million 364-day facility with a $1.5 billion facility. Management said these actions extended maturities and increased liquidity; availability under committed facilities was reported at $3.9 billion as of April 30.
Outlook, risks and unusual items
- KDP reaffirmed 2020 guidance despite pandemic uncertainty: constant-currency sales growth of 3%–4%, likely at the low end; adjusted diluted EPS growth of 13%–15%, or $1.38–$1.40.
- Management expected a year-end 2020 management leverage ratio of 3.5x–3.8x and a ratio below 3.0x within two to three years of the July 2018 merger closing.
- A non-cash $86 million impairment charge comprised a full impairment of a $55 million Bedford note receivable and a $31 million impairment of the Bedford investment. KDP cited COVID-19-related outlook changes and a revised projection that delayed potential profitability by two years. The note was placed on non-accrual status.
- Four facility sale-leaseback transactions generated a reported $42 million gain in Q1. KDP also disclosed $610 million of future lease payments for leases not yet commenced, expected to start between Q2 2020 and Q2 2021.
- Key risks include uncertain pandemic duration and recovery, demand shifts between at-home and away-from-home channels, customer and supplier credit or operational disruptions, employee safety and supply-chain continuity, commodity and foreign-exchange exposure, and refinancing/debt-rating risk. KDP said it did not identify COVID-19-related impairment indicators for goodwill or indefinite-lived intangibles at March 31.
- The DPS integration program targets $600 million of synergies over three years, with expected total cash expenditures of $750 million and completion expected by 2021; cumulative pre-tax charges were about $440 million through March 31, 2020.
Important facts for investors to verify
- Whether 2020 sales and adjusted EPS guidance remained achievable as COVID-19 affected channel demand and operating conditions.
- How much of Packaged Beverages’ late-quarter stock-up demand was sustained versus pulled forward, and how away-from-home weakness developed.
- The assumptions behind the Bedford impairment and whether further impairment or credit-loss provisions were needed.
- Progress on merger synergies, integration spending, capital expenditures and the stated deleveraging targets.
- Post-refinancing debt maturities, borrowing costs, facility availability and the company’s ability to maintain liquidity and covenant compliance.