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, 2014—not a filing under the name Keurig Dr Pepper Inc. The company reported three segments: Beverage Concentrates, Packaged Beverages, and Latin America Beverages.
Financial performance
Quarter ended June 30, 2014
- Net sales were $1.631 billion, up 1% year over year. Net income rose 35% to $210 million; diluted EPS was $1.06 versus $0.76.
- Gross profit was $966 million and gross margin 59.2%, versus 58.0%. Operating income increased 22% to $348 million; operating margin was 21.3%, versus 17.6%.
- Volume measured in bottler case sales rose 1% overall: flat in the U.S. and Canada and up 6% in Mexico and the Caribbean. Branded CSD volume grew 2%; branded non-carbonated beverage volume fell 4%.
Six months ended June 30, 2014
- Net sales were $3.029 billion, up 1%. Net income increased 40% to $365 million; diluted EPS rose to $1.84 from $1.27.
- Gross margin improved to 59.8% from 57.7%; operating income rose 26% to $608 million, with a 20.1% operating margin versus 16.2%.
- Operating cash flow was $438 million, compared with $295 million. Investing cash outflow was $68 million and financing cash outflow was $388 million. Cash declined $18 million from year-end to $135 million.
Balance sheet and liquidity at June 30, 2014
- Total debt was approximately $2.609 billion, including $2.537 billion of long-term obligations and $72 million of short-term borrowings and current maturities. Cash was $135 million.
- Current assets were $1.189 billion and current liabilities $1.063 billion. The company had $70 million of commercial paper outstanding and reported $429 million available under its revolving credit facility; it was in compliance with financial covenants.
- Total assets were $8.226 billion and stockholders’ equity $2.269 billion. Dividends declared were $0.41 per share for the quarter and $0.82 per share for the first half.
Material changes and management commentary
- First-half sales growth reflected pricing, mix, increased branded volume and contract manufacturing, partly offset by higher discounts and $18 million of unfavorable foreign currency translation. Overall first-half volume was flat; branded non-carbonated beverage volume declined 3%.
- Higher gross margins primarily reflected lower commodity costs and productivity improvements. These benefits were partly offset by unfavorable product mix, the Mexican sugar tax, customer-incentive adjustments and a less favorable LIFO comparison. First-half commodity-derivative mark-to-market results also improved by $22 million versus the prior-year period ($11 million of unrealized gains versus $11 million of unrealized losses).
- SG&A declined 3% in the first half, including a $25 million reduction in marketing investment. Management also cited lower professional fees and favorable currency and derivative comparisons, partly offset by higher third-party logistics costs amid tight transportation capacity.
- The prior-year comparison includes the 2013 Canadian tax-law change: a $50 million non-cash reduction in tax assets and $38 million of indemnity income from Mondelēz. These items raised the reported 2013 effective tax rate; reported rates were 34.8% for first-half 2014 and 43.7% for first-half 2013.
Outlook, risks and unusual items
- Management expected 2014 capital expenditures, net of disposals, to be approximately 3% of net sales and said operating cash flows should cover anticipated obligations for the next 12 months. The filing provides no specific earnings or revenue guidance.
- Risks include seasonality, commodity-price exposure, currency movements, customer demand and transportation constraints. A 10% currency-rate change was estimated to affect annual operating income by approximately $23 million; a 10% change in unhedged commodity prices was estimated to affect operating income by approximately $7 million for the remainder of 2014.
- The company reported no material change in its previously disclosed risk factors. It said pending legal matters were not expected to have a material adverse effect. A New Jersey Superfund investigation remained unresolved, with no reasonable estimate of total remediation costs; approximately $600,000 had been paid through June 30, 2014. Withdrawal from multi-employer pension plans could also result in liability.
- The filing corrected prior-period cash-flow presentation for the six months ended June 30, 2013; the correction did not affect previously reported cash balances, balance sheets or statements of operations.
Important facts for investors to verify
- Confirm the registrant and filing identity: this 2014 report is for Dr Pepper Snapple Group, Inc., not a contemporaneous Keurig Dr Pepper Inc. filing.
- Assess whether earnings growth is sustainable given modest sales growth, flat first-half volume, lower marketing investment, commodity benefits and the nonrecurring 2013 tax-law comparison.
- Review the company’s ability to maintain dividends and repurchases alongside debt, capital spending and liquidity needs; first-half share repurchases were $206 million, with $366 million remaining under the authorization at June 30.
- Monitor Mexican sugar-tax effects, declining non-carbonated beverage volumes, transportation costs, foreign exchange and commodity exposures, and the unresolved Superfund matter.