Keurig Dr Pepper Inc. quarterly report, Q3 FY2010

Filing summary

Entity and period: The supplied filing is Dr Pepper Snapple Group, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2010—not a filing under the name Keurig Dr Pepper Inc. The company reported Beverage Concentrates, Packaged Beverages, and Latin America Beverages segments. Dollar amounts are in millions unless stated otherwise.

Financial performance

MetricQ3 2010Q3 2009Nine months 2010Nine months 2009
Net sales$1,457$1,434$4,224$4,175
Gross profit$857$855$2,535$2,469
Income from operations$260$272$757$834
Net income$144$151$416$441
Diluted EPS$0.60$0.59$1.68$1.73
Gross margin58.8%59.6%60.0%59.1%
Operating margin17.8%18.9%17.9%20.0%
  • Q3: Sales rose 2%, while operating income fell 4% and net income fell 5%. Lower interest expense helped support diluted EPS, which increased from $0.59 to $0.60.
  • Nine months: Sales rose 1%, but net income declined 6% and diluted EPS declined 3%. 2009 operating income included approximately $62 million of one-time gains, primarily from terminated distribution agreements.
  • Cash flow: Operating cash flow was $1,539 versus $701 in the first nine months of 2009. The 2010 figure included approximately $899 million of deferred-revenue cash inflow associated with PepsiCo licensing. Investing cash use was $151; financing cash use was $1,447. Capital expenditures were $170.
  • Liquidity: Cash was $224 at September 30, down from $280 at year-end 2009. Current assets were $1,299 and current liabilities $984. The company reported $2,571 of long-term obligations, including $2,560 of senior notes, and no revolver borrowings; $486 was available for additional revolver borrowing and letters of credit. It reported compliance with debt covenants.

Material changes and operating drivers

  • Beverage Concentrates performed strongly: Q3 sales increased 7% to $278 and segment operating profit (SOP) rose $24 to $182. Nine-month sales rose 7% to $837 and SOP increased to $535.
  • Packaged Beverages Q3 sales were nearly flat at $1,082, but SOP fell $32 to $136. Nine-month sales declined to $3,102 and SOP to $413. Lower contract manufacturing weighed on sales and volume; NCB growth, including Snapple, partly offset declines.
  • Latin America Q3 sales were $97 and SOP fell to $6 from $18. Nine-month sales rose to $285, while SOP declined to $31 from $41. Flooding in southern Mexico disrupted deliveries, and Peñafiel volume weakened.
  • Consolidated Q3 volume (BCS) increased 2%; nine-month volume increased 3%. Management cited growth in Snapple and Crush, among other brands, while certain core CSD brands declined.

Outlook, unusual items, and risks

  • No formal earnings or revenue guidance is provided in the supplied filing text. Management expected approximately $120 million of discretionary capital expenditures for the remainder of 2010 and said operating cash flow should meet anticipated obligations over the next 12 months.
  • A labor strike at the Williamson, New York facility ended September 13, 2010. Management attributed $15 million of Q3 and $19 million of nine-month higher labor, co-packing, yield, and manufacturing-overhead costs to the work stoppage and its effects.
  • PepsiCo paid $900 million in 2010 for licensing arrangements; the payment is deferred revenue to be recognized over an estimated 25-year customer relationship. Separately, the company received a $715 million Coke payment on October 4, 2010, after quarter-end, also to be deferred and recognized over an estimated 25 years. The filing does not treat the Coke receipt as September 30 cash.
  • The company repurchased 25.2 million shares for approximately $910 million and paid $136 million in dividends during the first nine months. The board authorized an additional $1 billion of repurchases over three years, after the prior authorization is used.
  • Risks include commodity-price, foreign-exchange, interest-rate, consumer-demand, and execution exposures. Management estimated that a 10% currency move could affect annual net income by approximately $11 million and a 10% commodity-price move by approximately $3 million.
  • Contingencies include Snapple labeling class actions, a tentative $4.25 million California wage-and-hour settlement subject to court approval and a settlement agreement, and a Superfund site matter for which the company estimated its study-cost allocation at approximately $350,000. Management said pending legal matters were not expected to materially adversely affect business or financial condition, while noting possible period-specific effects on results or cash flows.
  • Other notable items: nine-month effective tax rate was 38.2%, including a $13 million impact from an Ontario provincial tax-rate change. Potential Canadian legislation could prompt partial write-downs of tax assets and related Kraft indemnity liabilities. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Key facts for investors to verify

  • Confirm the entity and filing match the intended issuer: this document identifies Dr Pepper Snapple Group, Inc., not Keurig Dr Pepper Inc.
  • Assess operating cash flow excluding the unusually large PepsiCo deferred-revenue receipt, and distinguish the subsequent $715 million Coke payment from quarter-end liquidity.
  • Review the sustainability of segment profitability, particularly Packaged Beverages and Latin America SOP declines, and the effects of the ended strike and contract-manufacturing reductions.
  • Verify debt maturities, covenant headroom, revolver availability, and the company’s capital allocation after substantial repurchases and dividends.
  • Track the Coke licensing arrangements, long-term deferred-revenue recognition, legal proceedings, and potential Canadian tax changes.