Keurig Dr Pepper Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts are in U.S. dollars. Financial statements are unaudited.
Business context and reporting period
KDP is an integrated beverage company with four reportable segments: Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages. Its portfolio includes Keurig, Dr Pepper, Canada Dry, Snapple and Bai, among other owned, licensed and partner brands.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Net sales | $3.622bn | $3.250bn | $10.254bn | $9.292bn |
| Gross profit / margin | $1.901bn / 52.5% | $1.835bn / 56.5% | $5.327bn / 52.0% | $5.205bn / 56.0% |
| Operating income / margin | $394m / 10.9% | $795m / 24.5% | $1.932bn / 18.8% | $2.169bn / 23.3% |
| Net income attributable to KDP | $180m | $530m | $983m | $1.303bn |
| Diluted EPS | $0.13 | $0.37 | $0.69 | $0.91 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $2.098bn | $1.933bn |
Q3 sales rose 11.4%, reflecting 12.1% favorable net price realization, partly offset by 0.3% unfavorable volume/mix and 0.4% unfavorable foreign exchange. For the first nine months, sales increased 10.4%, led by pricing and 0.9% volume/mix growth. Cost of sales grew faster than sales in both periods, and reported gross margin fell 400 basis points.
Management’s Q3 adjusted, non-GAAP results were operating income of $947m and diluted EPS of $0.46, compared with $931m and $0.44 in Q3 2021. Adjusted net income was $656m versus $631m. For the first nine months, adjusted operating income was $2.511bn in both years; adjusted net income was $1.684bn versus $1.640bn, and adjusted diluted EPS was $1.18 versus $1.15. These measures exclude items management identifies as affecting comparability and are not GAAP results.
Segment results, Q3 2022 versus Q3 2021
| Segment | Net sales | Income from operations | Key comparison |
|---|---|---|---|
| Coffee Systems | $1.209bn, +4.7% | $295m, down from $365m | Margin 24.4%, down 720 bps; pod volume +3.5%, brewer volume -15.3%. |
| Packaged Beverages | $1.756bn, +13.5% | $10m, down from $291m | Results included the $311m Bai impairment; segment margin was 0.6%. |
| Beverage Concentrates | $459m, +17.1% | $347m, up from $287m | Margin 75.6%, up 240 bps. |
| Latin America Beverages | $198m, +26.9% | $39m, up from $37m | Margin 19.7%, down 400 bps. |
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $925m, restricted cash was $3m, and long-term obligations were $11.561bn. There were no short-term borrowings or current debt maturities reported.
- KDP had an undrawn $4bn revolving credit facility maturing in 2027 and stated it was in compliance with the facility’s minimum interest-coverage covenant. The company said operating cash flows should meet anticipated obligations for the next 12 months.
- For the first nine months, investing activities used $213m and financing activities used $1.515bn. Cash dividends paid were $796m; KDP repurchased $88m of shares. Cash, cash equivalents and restricted cash increased by $360m from year-end, partly due to the BodyArmor settlement.
- Accounts payable were $5.284bn. Suppliers had voluntarily sold $3.923bn of KDP payment obligations to financial institutions through third-party programs; KDP stated its supplier obligations and payment terms were not changed by those arrangements.
Material changes and unusual items
- Q3 reported operating income included a non-cash $311m impairment of the Bai indefinite-lived brand, following identified performance and margin challenges. Management reported no other impairment-triggering events for goodwill or indefinite-lived intangibles during the period.
- First-nine-month GAAP results included a $299m gain from the BodyArmor litigation settlement, a $50m gain associated with the BodyArmor sale holdback, a $38m sale-leaseback gain, $217m of debt-extinguishment losses and a $12m impairment related to the Bedford investment and note receivable.
- Interest expense was $207m in Q3, up 78.4%, including unfavorable unrealized mark-to-market losses on interest-rate contracts. First-nine-month interest expense was $570m, up 49.6%.
- In April, KDP issued $3bn of notes and used proceeds to retire or tender existing debt. Management said the refinancing reduced expected interest payments and annual cash requirements; it recorded related extinguishment costs.
- The Q3 effective tax rate was 2.2%, versus 22.0%, primarily due to state deferred-tax liability revaluation and income mix in lower-tax jurisdictions. The nine-month rate was 15.4%, versus 22.9%.
Outlook, management commentary and risks
The filing provides no specific numerical full-year earnings or revenue guidance. Management expected inflationary and supply-chain headwinds to continue through the remainder of 2022. It cited inflation in inputs, logistics, manufacturing and labor, and said pricing actions could reduce volume or net sales and, together with cost pressures, affect margins and results.
Management described liquidity as strong and noted ongoing productivity, gross-margin and portfolio-growth efforts. KDP announced a 6.7% increase in its annualized dividend rate to $0.80 per share, effective with the quarterly dividend announced September 14. It acquired the global rights to the Atypique ready-to-drink cocktail brand for $30m and announced an October strategic partnership to distribute Red Bull Energy Drink in Mexico, expected to begin in Q4 2022.
In the Keurig single-serve coffee antitrust litigation, plaintiffs collectively claimed more than $5bn in damages. KDP disputes the claims and damage calculations, is pursuing dispositive and other motions, and stated it could not predict the outcome or estimate a loss; no loss contingency was accrued. Separately, the California Court of Appeals affirmed the trial court ruling in the CERT Proposition 65 case in October 2022; KDP said a material loss was remote. The company reported no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether pricing can continue to offset input, logistics and labor inflation without materially weakening volumes or margins.
- Progress in Coffee Systems profitability and the performance assumptions underlying the Bai brand valuation after its impairment.
- Cash-flow and working-capital trends, including the substantial supplier payment obligations sold to financial institutions.
- Debt refinancing benefits, exposure to interest-rate and commodity mark-to-market volatility, and compliance with credit-facility covenants.
- Developments in the Keurig antitrust cases, for which claimed damages exceed $5bn and no loss estimate was recorded.
- Delivery against portfolio initiatives, including Atypique and the planned Red Bull distribution launch in Mexico; the filing gives no specific numerical full-year guidance.