Keurig Dr Pepper Inc. — 2019 Form 10-K Summary
Business context and reporting period. KDP is a North American beverage and single-serve coffee company with four reporting segments: Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages. This annual report covers the year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. Comparisons with 2018 require care: KDP’s 2018 reported results include Dr Pepper Snapple Group only after the July 9, 2018 merger close. Management therefore also presents pro forma adjusted comparisons.
Financial performance
| Metric | 2019 | Prior-period comparison |
|---|---|---|
| Net sales | $11.12 billion | Reported sales increased 49.4% from $7.44 billion, largely reflecting the merger. Adjusted pro forma sales increased 0.9%. |
| Profit | Net income attributable to KDP: $1.254 billion; diluted EPS: $0.88 | Reported attributable net income was $586 million and diluted EPS was $0.53 in 2018. Adjusted net income rose 18.4% to $1.727 billion; adjusted diluted EPS rose 17.3% to $1.22. |
| Cash flow | Operating cash flow: $2.474 billion; investing cash outflow: $150 million; financing cash outflow: $2.364 billion | Operating cash flow increased from $1.613 billion. Capital expenditures were $330 million. |
| Margins | Gross margin: 57.0%; operating margin: 21.4% | Reported 2018 margins were 52.2% and 16.6%, respectively. Adjusted operating margin rose to 26.0% from 23.8% on a pro forma basis. |
| Debt and liquidity | Long-term obligations: $12.827 billion; short-term borrowings and current maturities: $1.593 billion. Cash, cash equivalents and restricted cash: $111 million, including $75 million unrestricted cash. | Available capacity under the revolver and 364-day credit agreement was $3.15 billion. KDP reported $2.474 billion of operating cash flow and said it expects operating cash flows to cover anticipated obligations over the next 12 months. |
| Other measures | Dividends declared: $0.60 per share. Goodwill and other intangible assets: $44.289 billion. | Walmart accounted for approximately 13% of consolidated sales. |
Fourth quarter: 2019 net sales were $2.934 billion, operating income was $713 million, net income was $406 million and diluted EPS was $0.29.
Material changes and segment trends
- Adjusted pro forma sales growth was 0.9%, comprising underlying growth of 3.2%—volume/mix up 2.6% and pricing up 0.6%—offset in part by a 2.1% adverse impact from changes in the allied-brand portfolio and 0.2% unfavorable foreign currency.
- Coffee Systems sales rose 2.8% on an adjusted basis; K-Cup pod volume increased 9.0% and brewer volume 8.2%. Lower pricing and unfavorable pod mix partly offset volume gains.
- Packaged Beverages adjusted sales declined 2.4%, chiefly due to allied-brand portfolio changes, despite underlying sales growth of 2.3%. Adjusted operating income increased 13.3%.
- Beverage Concentrates adjusted sales increased 6.2%, driven mainly by 5.3% higher pricing and 1.1% higher volume/mix. Adjusted operating income rose 11.1%.
- Latin America Beverages adjusted sales increased 4.3%, primarily from pricing, while adjusted operating income decreased 1.2% and adjusted margin fell 90 basis points.
- KDP repaid approximately $1.286 billion of senior notes, term loans and commercial paper during 2019 and refinanced its term loan in February 2019. The company also paid $844 million in dividends.
Outlook, management commentary and key risks
- For 2020, management expected net sales growth of 3.0%–4.0% and adjusted diluted EPS growth of 13%–15%, or $1.38–$1.40 per share. It projected adjusted interest expense of $530–$545 million, an adjusted effective tax rate of 24.5%–25.0%, and a management leverage ratio of 3.5x–3.8x at year-end.
- Management projected $200 million of merger synergies in 2020, consistent with its target of $200 million annually over 2019–2021. The integration program targets $600 million in synergies over three years and had incurred approximately $387 million of cumulative pre-tax charges through year-end 2019; total cash expenditures are expected to be $750 million, including capital expenditures and expenses.
- Management cited investments in innovation, partnerships, execution, marketing and research and development as intended drivers of growth. These are forward-looking expectations, not guarantees.
- Key business risks include competition and changing consumer preferences, commodity and packaging cost volatility, reliance on major retailers and third-party bottlers, supply-chain and manufacturing disruptions, cybersecurity, foreign-exchange exposure, and high indebtedness. KDP noted that K-Cup pods represented approximately 80% of Coffee Systems net sales.
- Legal matters include single-serve coffee antitrust litigation, Proposition 65 coffee-warning litigation and KDP’s lawsuit concerning BodyArmor’s attempted early termination of a distribution agreement. The filing says outcomes or potential losses cannot be predicted or reasonably estimated for certain matters.
- Unusual and comparison-affecting items included prior-year merger transaction costs and inventory step-up, 2019 merger integration and productivity costs, a $30 million gain on sale-leaseback of three manufacturing facilities, and costs related to a February 2019 malware incident. The auditor issued an unqualified opinion on the financial statements and internal controls; no goodwill or indefinite-lived intangible impairment was recorded in 2019.
Important facts for investors to verify
- Evaluate underlying performance using pro forma adjusted comparisons, and review the company’s definitions and reconciliations of non-GAAP measures; reported year-over-year growth is materially affected by the 2018 merger timing.
- Track debt reduction, interest costs, commercial paper usage and the leverage ratio against management’s 2020 targets; cash and cash equivalents were modest relative to obligations.
- Assess whether projected sales growth and merger synergies are achieved, particularly given portfolio changes, pricing pressure and input-cost inflation.
- Monitor Coffee Systems pod dependence, major-customer concentration and KDP’s reliance on independent bottlers and brand partners.
- Follow the cited litigation and the valuation sensitivity of goodwill and intangible assets, which together represented a substantial portion of total assets.