Keurig Dr Pepper Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial figures are in millions except per-share data. The filing is unaudited. Effective January 1, 2023, KDP changed its reportable segments; prior-period segment results were recast.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First six months 2023 | First six months 2022 |
|---|---|---|---|---|
| Net sales | $3,789 | $3,554 | $7,142 | $6,632 |
| Gross profit / margin | $2,041 / 53.9% | $1,776 / 50.0% | $3,785 / 53.0% | $3,426 / 51.7% |
| Income from operations / margin | $769 / 20.3% | $572 / 16.1% | $1,353 / 18.9% | $1,538 / 23.2% |
| Net income attributable to KDP | $503 | $218 | $970 | $803 |
| Diluted EPS | $0.36 | $0.15 | $0.69 | $0.56 |
| Operating cash flow | Not presented separately for the quarter | $452 | $1,339 |
- Q2 sales rose 6.6%; higher pricing contributed 8.2% and FX 0.5%, partly offset by a 2.1% unfavorable volume/mix effect. Gross margin expanded 390 basis points. Management attributed gross-profit growth to sales, productivity and a favorable $129 million year-over-year change in unrealized commodity mark-to-market activity, partly offset by inflation.
- Q2 operating income increased 34.4%. Net income more than doubled, partly because the prior-year quarter included a $169 million early debt-extinguishment loss. Q2 GAAP diluted EPS was $0.36; management’s non-GAAP constant-currency adjusted diluted EPS was $0.42, up 7.7%. Adjusted measures exclude specified items and are not GAAP measures.
- For the first six months, sales rose 7.7%, while operating income fell 12.0%. The comparison was affected by the prior-year $299 million litigation-settlement gain in operating income, reduced asset-sale-leaseback activity, and higher SG&A; higher gross profit partly offset these effects. Net income and diluted EPS increased, helped by lower interest expense and the absence of prior-year debt-extinguishment losses.
- Segment trends diverged in Q2: U.S. Refreshment Beverages sales grew 11.8% and operating income 19.1%; U.S. Coffee sales fell 5.7% and operating income 15.3%; International sales grew 10.9% and operating income 14.3%. Coffee weakness reflected lower pod and brewer volumes, including category softness, consumer mobility, contract exits and retailer inventory shifts.
Cash, debt and liquidity
- Cash and cash equivalents were $278 at June 30, 2023, down from $535 at year-end 2022. First-half operating cash flow was $452 versus $1,339 a year earlier, principally reflecting working-capital movements, including lower accounts payable; the prior period also benefited from the BodyArmor settlement.
- Investing cash outflow was $203 and financing cash outflow was $523 in the first six months. Financing included $563 of dividends and $457 of share repurchases. Cash purchases of property, plant and equipment were $149; an additional $214 of capital expenditures was included in accounts payable and accrued expenses.
- At June 30, short-term borrowings and current long-term obligations totaled $2,635, including $988 of commercial paper and $1,647 of current maturities; long-term obligations were $9,934. The current-maturity balance rose from $496 at year-end, with $500 of notes maturing in December 2023 and $1,150 in March 2024. The $4 billion revolving credit facility had no borrowings; KDP reported covenant compliance.
- Current assets were $3,570 and current liabilities $9,056. Management said operating cash flow should be sufficient for anticipated obligations over the next 12 months, with cash and available financing as additional liquidity sources. It also plans to reduce leverage. Ratings were Moody’s Baa1/P-2 and S&P BBB/A-2, both with stable outlooks.
Outlook, risks and notable items
- The supplied filing text does not provide a clear numerical full-year 2023 revenue or earnings guidance. Management discussed ongoing pricing, productivity, innovation, and portfolio and distribution opportunities, while noting inflation, higher interest rates and economic uncertainty could affect costs, liquidity, customers, suppliers and demand.
- In July 2023, KDP agreed to invest $300 million for 33.3% of La Colombe, subject to regulatory approval, alongside RTD coffee distribution and K-Cup licensing, manufacturing and distribution agreements. Distribution was expected to begin in late 2023 and branded K-Cup pods in 2024.
- U.S. single-serve coffee antitrust litigation remains unresolved. Plaintiffs collectively claimed more than $5 billion in damages; KDP disputes the claims and damages calculations, is pursuing dismissal and class-certification challenges, and has not accrued a loss because the outcome and any loss range cannot be predicted. Management stated it did not believe pending legal matters overall would materially adversely affect the company.
- Other exposures include commodity, FX and interest-rate movements; inflation and supply-chain disruptions; and volume softness. KDP disclosed a maximum undiscounted $653 million residual-value guarantee across certain Veyron lease arrangements and a separate $142 million maximum guarantee tied to a distribution-rights agreement; management said payment was not considered probable.
Investor verification points
- Track coffee pod and brewer volumes, pricing and margins, and whether U.S. Coffee weakness persists.
- Reconcile reported and adjusted performance, especially mark-to-market effects and prior-year settlement and refinancing items.
- Monitor operating cash flow, accounts-payable movements, inventory levels, commercial-paper use and upcoming note maturities.
- Review the status and potential exposure of the coffee antitrust cases and the La Colombe investment’s closing and execution.
- Assess progress on leverage reduction, capital spending and shareholder returns, including the remaining share-repurchase authorization.