Keurig Dr Pepper Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. KDP operates beverage and single-serve coffee businesses across Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $3.078bn | $2.902bn | +6.1% |
| Gross profit / margin | $1.650bn / 53.6% | $1.600bn / 55.1% | Profit +3.1%; margin -150 bps |
| Income from operations / margin | $966m / 31.4% | $640m / 22.1% | +50.9%; margin +930 bps |
| Net income attributable to KDP | $585m | $325m | +80.0% |
| Diluted EPS | $0.41 | $0.23 | +78.3% |
| Adjusted diluted EPS | $0.33 | $0.33 | Flat |
| Cash from operations | $663m | $546m | +$117m |
Adjusted income from operations was $732m, down 1.2%; adjusted operating margin was 23.8%, versus 25.5%. Adjusted net income was $474m versus $471m, up 0.8%. These are non-GAAP measures and exclude items management considers to affect comparability.
Reported capital expenditures were $109m; an additional $139m of capital expenditures was included in accounts payable and accrued expenses. Cash used in financing was $644m, including $265m of dividends paid. Ending cash and restricted cash totaled $594m.
At March 31, cash and cash equivalents were $592m, current assets $3.490bn and current liabilities $6.448bn. Long-term obligations were $11.584bn, with no short-term borrowings or current debt portion. KDP had an undrawn $4bn revolving credit facility due February 2027 and reported compliance with its interest-coverage covenant. The filing does not provide a debt-to-EBITDA ratio.
Material changes and notable items
- Sales growth reflected 6.3% favorable net price realization, partly offset by 0.2% lower volume/mix. K-Cup pod and brewer volumes each declined 5.2%; CSD volume rose 3.8% and non-carbonated beverage volume fell 0.4%.
- Cost of sales rose 9.7%, and gross margin contracted amid broad-based manufacturing-cost inflation. SG&A rose 5.9%, including higher logistics costs; the increase was partly offset by a $40m one-time reduction in stock-compensation expense from a change in forfeiture accounting.
- Net income included a $299m BodyArmor litigation-settlement gain and a separate $50m gain tied to the holdback from the sale of KDP’s BodyArmor equity interest. A $38m asset sale-leaseback gain also benefited operating income. These items make reported growth materially stronger than adjusted results.
- Interest expense increased 34.3% to $188m, primarily due to unfavorable unrealized mark-to-market losses on interest-rate contracts. KDP recorded a $48m loss on early extinguishment of debt, including redemption of its remaining 2038 Notes.
- Q1 segment sales: Coffee Systems $1.093bn (-4.3%); Packaged Beverages $1.480bn (+13.2%); Beverage Concentrates $359m (+9.5%); Latin America Beverages $146m (+16.8%). Coffee Systems operating income fell 27.2% to $268m; Packaged Beverages’ $486m operating income included a $271m BodyArmor litigation gain.
Outlook, risks and contingencies
The filing provides no specific full-year earnings or sales guidance. Management said inflationary pressures, supply-chain disruption and labor constraints were significant in Q1 and expected to continue through 2022. KDP raised prices on a number of products, while cautioning that pricing and inflation together could reduce volume or sales and pressure margins and operating results. Coffee Systems also faced capacity constraints while prioritizing production to rebuild inventory.
Management cited the continuing effects of COVID-19 and Russia’s invasion of Ukraine on supply chains, input costs, logistics and labor. KDP said its operating cash flows, cash and available financing were expected to meet anticipated obligations for the next 12 months.
In April 2022, after quarter-end, KDP issued $3bn of notes and used proceeds to retire or tender portions of existing notes. Management reported that the refinancing reduced the weighted average coupon from 3.671% at quarter-end to 3.595% afterward.
KDP reported $11m of litigation reserves and said other identified legal matters were not expected to have a material adverse effect, while noting that outcomes may be uncertain. In the Keurig single-serve coffee antitrust litigation, plaintiffs collectively claimed more than $5bn in damages; KDP disputed the claims and had not accrued a loss because it could not predict the outcome or estimate a loss range. The indirect-purchaser class settlement for $31m had received final approval in 2021.
Supplier payment obligations voluntarily sold by suppliers to financial institutions totaled $3.409bn at quarter-end. KDP said its supplier obligations and scheduled payment terms were not changed by the program.
Important facts for investors to verify
- How much of revenue and profit growth reflects sustainable pricing, volume and productivity versus the BodyArmor settlement and asset sale-leaseback gains.
- Whether inflation, logistics costs and Coffee Systems capacity constraints continue to erode margins despite price increases.
- The potential exposure, timing and outcome of the Keurig antitrust cases, given plaintiffs’ stated damages claims and the absence of an accrual.
- The scale and terms of supplier payment obligations sold to financial institutions, and their implications for working capital and cash conversion.
- The post-quarter refinancing’s effect on interest costs, debt maturities and liquidity, alongside the company’s substantial current liabilities and lease commitments.