Keurig Dr Pepper Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report, with unaudited fourth-quarter results also disclosed. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
KDP is an integrated North American beverage brand owner, manufacturer and distributor, with four segments: Coffee Systems; Packaged Beverages; Beverage Concentrates; and Latin America Beverages. Its portfolio includes Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's and Green Mountain.
COVID-19 shifted demand toward at-home consumption and e-commerce, benefiting coffee pods, brewers and many packaged beverages, while office coffee, fountain foodservice and hospitality weakened. Walmart represented approximately 15% of consolidated net sales.
Key financial results
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $11,618 | $11,120 | +4.5% |
| Gross profit / margin | $6,486 / 55.8% | $6,342 / 57.0% | Margin down 120 bps |
| Income from operations / margin | $2,480 / 21.3% | $2,378 / 21.4% | Income +4.3%; margin down 10 bps |
| Net income attributable to KDP | $1,325 | $1,254 | +5.7% |
| Diluted EPS | $0.93 | $0.88 | +5.7% |
| Adjusted net income and diluted EPS (non-GAAP) | $1,988 / $1.40 | $1,727 / $1.22 | +15.1% / +14.8% |
| Adjusted operating margin (non-GAAP) | 27.5% | 26.0% | Up 150 bps |
Sales growth reflected higher volume/mix, partly offset by lower net price realization and unfavorable foreign exchange. Gross margin was pressured by COVID-related costs, manufacturing and logistics costs, pricing and foreign exchange, despite productivity gains and merger synergies. Adjusted measures exclude items affecting comparability and are not U.S. GAAP measures.
Segment sales
| Segment | 2020 sales | Year-over-year change |
|---|---|---|
| Coffee Systems | $4,433 | +4.7% |
| Packaged Beverages | $5,363 | +8.5% |
| Beverage Concentrates | $1,325 | -6.3% |
| Latin America Beverages | $497 | -5.9% |
Coffee pod volume rose 6.3% and brewer volume 21.2%. Packaged Beverages volume increased 7.3%. Beverage Concentrates volume fell 5.1%, largely due to reduced fountain and foodservice demand. Latin America sales were reduced by unfavorable currency translation.
Cash flow, debt and liquidity
- Operating cash flow was $2,456, down from $2,474 in 2019. Investing cash outflow was $316; financing cash outflow was $1,990.
- Capital expenditures were $461, primarily for manufacturing facilities and equipment. Cash, cash equivalents and restricted cash totaled $255 at year-end.
- Debt carrying value totaled $13,488: $13,065 in senior unsecured notes and $423 in term loans. Interest expense was $604, down 7.6%; the company made net repayments of $951 related to notes, term loans and commercial paper.
- Available borrowing capacity under the revolver and 2020 364-day facility was $3.9 billion at year-end. KDP reported compliance with debt covenants and no commercial paper outstanding.
- Current liabilities were $7,694 and current assets were $2,388. The filing describes liquidity as strong and says operating cash flows are expected to cover obligations for the next 12 months.
- Cash dividends paid were $846. In February 2021, the Board approved a 25% increase in the quarterly dividend, beginning with the second-quarter dividend announcement.
Material changes, outlook and commentary
- COVID-19-related compensation and employee-protection costs were $128; total specified COVID-related expenses, including credit allowances and inventory write-downs, were $150. Management also reduced marketing and other discretionary spending.
- KDP recorded a $67 non-cash impairment of the Bai brand and $102 of non-cash investment and note-receivable impairments, principally relating to Bedford and LifeFuels.
- The company continued its DPS Merger integration program, targeting $600 of synergies over three years and expecting completion in 2021. Cumulative pre-tax charges were approximately $587 through year-end 2020; expected total cash expenditures were $750, including capital expenditures and expense.
- Management said the pandemic’s effects on demand and recovery timing remained uncertain and expected heightened sales volatility during and after the pandemic. It did not provide a clear numerical 2021 revenue or earnings forecast in the filing.
- In fourth-quarter 2020, net sales were $3,121 versus $2,934 in fourth-quarter 2019; net income was $428 versus $406; diluted EPS was $0.30 versus $0.29. The quarter included the $67 Bai impairment.
Risks, contingencies and other notable matters
- Key risks include continuing COVID-19 disruption; changing consumer preferences and intense competition; commodity, energy and logistics costs; supply-chain and manufacturing disruption; and reliance on major retailers, bottlers, distributors and coffee-brand partners.
- Walmart accounted for $1,782 of 2020 net sales. KDP also sells concentrates to bottlers whose finished products reach Walmart, adding indirect customer concentration.
- JAB and affiliates owned approximately 34% of KDP at year-end. After JAB ceased to be a controlled-company holder, KDP could rely on certain Nasdaq governance exemptions during a one-year transition period; board independence requirements were due by August 2021.
- KDP agreed to a $31 settlement with indirect purchaser plaintiffs in Keurig pod antitrust litigation; court approval was received in December 2020 and payment was made in January 2021. Other antitrust claims remained pending. In a separate BodyArmor distribution dispute, claims against BodyArmor and Coca-Cola continued, with trial scheduled for November 2021; the outcome was not predictable.
- A distribution arrangement with Veyron SPE includes a residual value guarantee with a maximum undiscounted potential payment of $142. KDP had not recorded a liability because payment was not considered probable.
- Goodwill and other intangible assets were substantial: $20,184 and $23,968, respectively. Future impairment depends on assumptions including brand performance, growth and discount rates.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective at year-end.
Important facts for investors to verify
- Whether at-home demand, brewer growth and packaged-beverage momentum persist as pandemic-related channel shifts unwind, especially against weakness in away-from-home business.
- Whether gross-margin pressures, logistics and manufacturing costs, and lower net price realization improve or offset productivity and merger synergies.
- Debt repayment progress, refinancing needs and liquidity after near-term maturities, including the 2021 notes and 2020 364-day facility maturity.
- Progress and remaining costs to complete the DPS integration program, and whether the targeted synergies are achieved.
- Future performance and impairment headroom for Bai and other brands, plus the status and financial exposure of litigation and the Veyron guarantee.
- How the 25% dividend increase affects cash available for debt reduction, capital investment and other priorities.