Keurig Dr Pepper Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and first nine months ended September 30, 2021. Amounts are in U.S. dollars; financial figures are in millions except per-share data. KDP operates four reportable segments: Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Net sales | $3,250 | $3,020 | $9,292 | $8,497 |
| Gross profit | $1,835 | $1,704 | $5,205 | $4,718 |
| Income from operations | $795 | $753 | $2,169 | $1,780 |
| Net income attributable to KDP | $530 | $443 | $1,303 | $897 |
| Diluted EPS | $0.37 | $0.31 | $0.91 | $0.63 |
| Gross margin | 56.5% | 56.4% | 56.0% | 55.5% |
| Operating margin | 24.5% | 24.9% | 23.3% | 20.9% |
- Q3 growth drivers: Net sales rose 7.6%, reflecting net price realization of 3.6%, volume/mix growth of 3.2% and favorable foreign exchange translation of 0.8%. Income from operations increased 5.6%; operating margin declined 40 basis points. Net income attributable to KDP rose 19.6%, also benefiting from lower interest expense and the absence of the prior-year LifeFuels impairment.
- Adjusted Q3 measures: Adjusted operating income was $931, up 6.5%; adjusted net income was $631, up 13.3%; and adjusted diluted EPS was $0.44, up 12.8%. Adjusted operating margin was 28.6%, down 30 basis points. These are non-GAAP measures and exclude specified comparability items.
- Nine-month growth: Sales increased 9.4%, with volume/mix growth of 6.3%, net price realization of 2.1% and favorable FX translation of 1.0%. Reported operating income rose 21.9%, while adjusted operating income increased 7.6% to $2,511 and adjusted diluted EPS increased 13.9% to $1.15. Reported results include a $105 debt-extinguishment loss in 2021; the prior-year period included $102 of investment impairments and a $42 gain on facility sale-leasebacks.
- Segment trends: Q3 sales increased across all segments: Coffee Systems 5.3%, Packaged Beverages 6.9%, Beverage Concentrates 11.4% and Latin America Beverages 25.8%. Coffee pod volume rose 6.3%, brewer volume 2.2%, CSD volume 2.8%, while non-carbonated beverage volume fell 6.4%. Packaged Beverages’ Q3 sales growth was primarily price-led; Coffee Systems adjusted margin fell 140 basis points and Packaged Beverages adjusted margin fell 80 basis points.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $1,933, versus $1,666 in 2020. Purchases of property, plant and equipment were $325; net cash used in investing activities was $350. Financing activities used $1,630, including $687 of dividends paid. Cash, cash equivalents and restricted cash totaled $203 at period-end, including $200 unrestricted cash.
- At September 30, total debt carrying value was approximately $12,725: $11,727 long-term obligations and $998 commercial paper. KDP had no drawn balance on its $2,400 revolving credit facility or $1,500 364-day facility. It reported compliance with debt covenants and described its financial condition and liquidity as strong.
- In March, KDP issued $2,150 of long-term notes and used proceeds to refinance and repay existing debt, including the 2019 term loan. The refinancing generated a reported $105 loss on early extinguishment of debt for the first nine months. KDP reported $872 of net debt repayments since the DPS merger during the first nine months of 2021.
- Accounts payable were $4,072. Suppliers had elected to sell $3,027 of KDP payment obligations to financial institutions under the supplier payment program; KDP said supplier obligations and scheduled terms were not changed by those elections.
Outlook, commentary and notable items
- Management said COVID-related disruption, supply-chain constraints and labor shortages were contributing to significant input, logistics, manufacturing and labor cost inflation. It expected these headwinds to continue through the remainder of 2021 and into 2022, and had raised prices on several products; management cautioned that pricing could reduce volume or sales and that inflation could pressure margins and results.
- The company stated operating cash flows should be sufficient for anticipated obligations over the next 12 months. It expected annualized capital spending to be approximately 3% of net sales as it moved beyond the post-merger investment period. No specific earnings or sales guidance for 2021 is stated in the supplied filing text.
- The DPS integration program had incurred approximately $732 of cumulative pre-tax charges through September 30, 2021, against an expected $750 of total cash expenditures; completion was expected in 2021. The program targeted $600 of synergies over three years.
- On October 1, KDP announced authorization for up to $4 billion of share repurchases, effective January 1, 2022 through December 31, 2025; purchases are not required. The board had increased the annualized dividend rate 25% to $0.75 per share in 2021. On October 25, KDP acquired a $20 investment in Vita Coco.
- Key contingencies include ongoing single-serve coffee antitrust litigation, for which KDP said outcomes and potential losses could not be predicted, and a California Proposition 65 appeal that KDP believed was unlikely to result in a material loss. A separate BodyArmor distribution lawsuit remained pending, with trial scheduled for February 2022; outcome and potential recovery were uncertain.
- KDP used derivatives to manage foreign-exchange, interest-rate and commodity exposures, not for speculation. The company said it had fully utilized relevant commodity hedges and supplier pricing agreements to limit further inflation exposure in Q4 2021. A 10% FX change was estimated to affect annual operating income by about $42; a 1% interest-rate change was estimated to change annual interest expense by approximately +$8 or −$3.
Important facts for investors to verify
- Whether price increases can offset continuing inflation and supply-chain costs without materially weakening volumes or margins.
- The sustainability of adjusted earnings growth, including the effect of non-GAAP exclusions and prior-period comparison items.
- Commercial-paper exposure, refinancing and maturity profile, liquidity-facility availability, and the scale and terms of supplier payment arrangements.
- Progress and remaining costs of the DPS integration program, and whether anticipated synergies are realized.
- Developments in the antitrust, Proposition 65 and BodyArmor litigation, including any change to estimated exposure.
- Execution of the announced repurchase authorization alongside dividends, investment needs and debt-reduction priorities.