Business context and reporting period
This is Dr Pepper Snapple Group, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The filing covers a beverage business with Beverage Concentrates, Packaged Beverages, and Latin America Beverages segments. The request identifies Keurig Dr Pepper, but that is not the registrant named in this historical filing.
Financial performance
Amounts are in millions of dollars except per-share data. Three-month and six-month comparisons are against the periods ended June 30, 2015.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $1,695 | $1,655 | $3,182 | $3,106 |
| Gross profit / margin | $1,025 / 60.5% | $981 / 59.3% | $1,910 / 60.0% | $1,830 / 58.9% |
| Operating income / margin | $412 / 24.3% | $369 / 22.3% | $725 / 22.8% | $639 / 20.6% |
| Net income | $260 | $220 | $442 | $377 |
| Diluted EPS | $1.39 | $1.14 | $2.35 | $1.95 |
- Q2 sales rose 2%, operating income 12%, net income 18%, and diluted EPS 22%. First-half sales rose 2%, operating income 13%, net income 17%, and diluted EPS 21%.
- First-half operating cash flow was $407, versus $349; investing cash use was $79, versus $47; financing cash use was $995, versus $409.
- Cash was $245 at June 30, down from $911 at year-end 2015. Total obligations were $2,930 carrying value, including $2,921 long-term and $9 current; the company repaid $500 of notes during the half. The $500 revolving credit facility was undrawn, and the company reported compliance with debt covenants.
- Current assets were $1,325 and current liabilities $1,170. Dividends declared were $1.06 per share for the first half, versus $0.96; dividends paid totaled $190. Share repurchases totaled $303.
Material changes and segment performance
- Gross margin improved year over year, supported by lower commodity costs, productivity, pricing, and more favorable commodity-derivative mark-to-market results; mix and foreign exchange partly offset these gains.
- Q2 sales volume (bottler case sales) increased 1% overall: flat in the U.S. and Canada and up 6% in Mexico and the Caribbean. First-half volume also increased 1%.
- First-half Packaged Beverages sales rose 4% to $2,322 and segment operating profit rose 16% to $384. Beverage Concentrates sales rose 2% to $629 and segment operating profit rose 3% to $417. Latin America Beverages sales fell 8% to $231 and segment operating profit fell 11% to $39, principally reflecting unfavorable currency translation despite higher volume.
- Foreign currency translation reduced sales by $26 in Q2 and $47 in the first half. Water, including allied brands, and Clamato contributed to volume growth; several established brands faced declines, including 7UP and Hawaiian Punch.
Outlook, risks, contingencies, and unusual items
- Management said 2016 net sales could increase approximately 2% versus 2015 and commodity costs were expected to reduce cost of sales approximately 1% on a constant-volume/mix basis. It expected annual capital expenditures, net of disposals, of approximately 3% of sales and stated operating cash flow should cover anticipated obligations for the next 12 months.
- A $35 settlement paid in Q2 extinguished a multi-employer pension withdrawal liability; the resulting $21 gain increased Q2 diluted EPS by $0.06. The company also recorded a $4 arbitration award expense relating to its Mexican joint venture and a separate $4 non-recurring employee-benefit transition charge.
- On July 26, 2016, after quarter-end, the company and San Benedetto signed a letter of intent for the company’s subsidiary to purchase San Benedetto’s joint-venture interest, subject to closing conditions and a definitive agreement. The arbitration had awarded San Benedetto approximately $4, recorded in Q1 SG&A.
- Risks discussed include seasonal cash flows, demand and economic conditions, commodity-price and foreign-exchange exposure, interest rates, and possible effects of credit-rating downgrades. The filing states no material change to previously disclosed risk factors and no expected material adverse effect from pending legal matters.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is Dr Pepper Snapple Group, Inc., not a filing under the Keurig Dr Pepper name.
- Assess how much earnings growth depended on the $21 pension-liability extinguishment gain and favorable commodity-derivative comparisons.
- Review whether volume, brand trends, foreign-exchange effects, and commodity-cost expectations support management’s 2016 sales outlook.
- Track cash use from debt repayment, dividends, and repurchases, alongside the $2.93 billion carrying value of obligations and available revolving credit.
- Check completion and terms of the proposed joint-venture interest purchase, which remained conditional in the filing.