filings.toolsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto in our Annual Report.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, in particular, statements about the impact of the global COVID-19 pandemic, inflation, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters, supply chain issues and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as “outlook,” “guidance,” “anticipate,” “expect,” “believe,” “could,” “estimate,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar words, phrases or expressions and variations or negatives of these words in this Quarterly Report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report, as well as our subsequent filings with the SEC. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them, after the date of this Quarterly Report on Form 10-Q, except to the extent required by applicable securities laws.
This Quarterly Report on Form 10-Q contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands. All of the product names included in this Quarterly Report on Form 10-Q are either our registered trademarks or those of our licensors.
OVERVIEW
KDP is a leading beverage company in North America, with a diverse portfolio of LRBs, including flavored (non-cola) CSDs, water (enhanced and flavored), ready-to-drink tea and coffee, juice, juice drinks, mixers and specialty coffee, and is a leading producer of innovative single serve brewing systems. With a wide range of hot and cold beverages that meet virtually any consumer need, our key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Mott's, Clamato, Core, Green Mountain Coffee Roasters and The Original Donut Shop. We have some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. We offer more than 125 owned, licensed, and partner brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S., according to IRi, which are available nearly everywhere people shop and consume beverages.
KDP operates as an integrated brand owner, manufacturer and distributor. We believe our integrated business model strengthens our route-to-market and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our DSD and our WD systems. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, e-commerce retailers, office superstores, vending machines, grocery and drug stores, and convenience stores; to restaurants, hotel chains, office product and coffee distributors, and partner brand owners; and directly to consumers through its websites. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.
Effective January 1, 2023, the Company revised its segment structure to align with how the Company’s Chief Operating Decision Maker manages the business, assesses performance and allocates resources. The Company's reportable segments consist of the following:
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The U.S. Refreshment Beverages segment reflects sales in the U.S. from the manufacture and distribution of branded concentrates, syrup and finished beverages, including the sales of the Company's own brands and third-party brands, to third-party bottlers, distributors and retailers.
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The U.S. Coffee segment reflects sales in the U.S. from the manufacture and distribution of finished goods relating to the Company's K-Cup pods, single-serve brewers and other coffee products to partners, retailers and directly to consumers through our Keurig.com website.
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The International segment reflects sales in international markets, including the following:
◦Sales in Canada, Mexico, the Caribbean and other international markets from the manufacture and distribution of branded concentrates, syrup and finished beverages, including sales of the Company's own brands and third-party brands, to third-party bottlers, distributors and retailers.
◦Sales in Canada from the manufacture and distribution of finished goods relating to the Company’s single-serve brewers, K-Cup pods and other coffee products.
COMPARABLE RESULTS OF OPERATIONS
Management believes that there are certain non-GAAP financial measures that allow management to evaluate our results, trends and ongoing performance on a comparable basis. In order to derive the adjusted financial information, we adjust certain financial statement captions and metrics prepared under U.S. GAAP for certain items affecting comparability and the impact of foreign currency. See Non-GAAP Financial Measures for further information.
EXECUTIVE SUMMARY
Financial Overview - First Quarter of 2023 as compared to First Quarter of 2022
As Reported, in millions (except EPS)
As Adjusted, in millions (except EPS)
RESULTS OF OPERATIONS
We eliminate from our financial results all applicable intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees.
References in the financial tables to percentage changes that are not meaningful are denoted by "NM".
First Quarter of 2023 Compared to First Quarter of 2022
Consolidated Operations
The following table sets forth our unaudited condensed consolidated results of operations for the first quarter of 2023 and 2022:
| First Quarter | Dollar | Percentage | |||||||||||||||||||||
| ($ in millions, except per share amounts) | 2023 | 2022 | Change | Change | |||||||||||||||||||
| Net sales | $ | 3,353 | $ | 3,078 | $ | 275 | 8.9 | % | |||||||||||||||
| Cost of sales | 1,609 | 1,428 | 181 | 12.7 | |||||||||||||||||||
| Gross profit | 1,744 | 1,650 | 94 | 5.7 | |||||||||||||||||||
| Selling, general and administrative expenses | 1,165 | 1,018 | 147 | 14.4 | |||||||||||||||||||
| Gain on litigation settlement | — | (299) | 299 | NM | |||||||||||||||||||
| Other operating income, net | (5) | (35) | 30 | NM | |||||||||||||||||||
| Income from operations | 584 | 966 | (382) | (39.5) | |||||||||||||||||||
| Interest expense | 23 | 188 | (165) | (87.8) | |||||||||||||||||||
| Loss on early extinguishment of debt | — | 48 | (48) | NM | |||||||||||||||||||
| Gain on sale of equity method investment | — | (50) | 50 | NM | |||||||||||||||||||
| Impairment of investments and note receivable | — | 6 | (6) | NM | |||||||||||||||||||
| Other (income) expense, net | (20) | 9 | (29) | NM | |||||||||||||||||||
| Income before provision for income taxes | 581 | 765 | (184) | (24.1) | |||||||||||||||||||
| Provision for income taxes | 114 | 180 | (66) | (36.7) | |||||||||||||||||||
| Net income including non-controlling interest | 467 | 585 | (118) | (20.2) | |||||||||||||||||||
| Less: Net loss attributable to non-controlling interest | — | — | — | NM | |||||||||||||||||||
| Net income attributable to KDP | $ | 467 | $ | 585 | (118) | (20.2) | |||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Basic | $ | 0.33 | $ | 0.41 | $ | (0.08) | (19.5) | % | |||||||||||||||
| Diluted | 0.33 | 0.41 | (0.08) | (19.5) | |||||||||||||||||||
| Gross margin | 52.0 | % | 53.6 | % | (160) bps | ||||||||||||||||||
| Operating margin | 17.4 | % | 31.4 | % | NM | ||||||||||||||||||
| Effective tax rate | 19.6 | % | 23.5 | % | (390) bps |
Sales Volume. The following table provides the percentage change in sales volumes compared to the prior year period:
| Percentage Change | ||||||||
| LRB | 0.8 | % | ||||||
| K-Cup pods | (0.6) | |||||||
| Brewers | (25.7) |
Net Sales. Net sales increased $275 million, or 8.9%, to $3,353 million for the first quarter of 2023 compared to $3,078 million in the prior year period. This performance reflected favorable net price realization across all segments totaling 9.9%, slightly offset by unfavorable volume/mix of 1.0%.
Gross Profit. Gross profit increased $94 million, or 5.7%, to $1,744 million for the first quarter of 2023 compared to $1,650 million in the prior year period. This performance primarily reflected the benefits of net sales growth and productivity, partially offset by broad-based inflation, and an unfavorable change in unrealized commodity mark-to-market activity. Gross margin decreased 160 bps versus the year ago period to 52.0%.
Selling, General and Administrative Expenses. SG&A expenses increased $147 million, or 14.4%, to $1,165 million for the first quarter of 2023 compared to $1,018 million in the prior year period. The increase was driven by broad-based inflation, an unfavorable comparison to the stock award forfeiture accounting policy change in the prior year period of $40 million, higher marketing expense and increases in other operating costs.
Gain on Litigation Settlement. Gain on litigation settlement reflected the portion of the settlement payment from BodyArmor which was allocated to the gain on the full settlement of the existing claims against BodyArmor in the first quarter of 2022.
Other Operating Income, net. Other operating income, net decreased $30 million for the first quarter of 2023 compared to the prior year period, primarily driven by a $32 million reduction in year-over-year asset sale-leaseback activity relating to our strategic asset investment program.
Income from Operations. Income from operations decreased $382 million, or 39.5%, to $584 million for the first quarter of 2023 compared to $966 million in the prior year period, primarily driven by unfavorable comparison to the gain on the litigation settlement and on the reduction in asset sale-leaseback activity. Other factors include higher SG&A expenses, partially offset by increased gross profit.
Interest Expense. Interest expense decreased $165 million, or 87.8%, to $23 million for the first quarter of 2023 compared to $188 million for the prior year period, primarily driven by the favorable change in unrealized mark-to-market activity of $164 million on interest rate contracts.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt reflected a loss of $48 million in the prior year period associated with our 2022 Strategic Refinancing and our early retirement of our 2038 Notes, the 2021 364-Day Credit Agreement and the KDP Revolver.
Gain on Sale of Equity Method Investment. Gain on sale of equity method investment reflected the portion of the settlement payment from BodyArmor in the first quarter of 2022 which was allocated to the satisfaction of the holdback amount owed to us in association with the sale of our equity interest in BodyArmor in 2021.
Impairment of Investments and Note Receivable. Impairment on investments and note receivable reflected a non-cash impairment charge of $6 million in the first quarter of 2022 associated with the wind-down of Bedford.
Other Non-operating (Income) Expense, net. Other (income) expense, net reflected a favorable change of $29 million from the prior year period, driven by gains on the Company’s investments in equity securities, primarily led by Nutrabolt’s preferred dividend and mark-to-market on our Vita Coco investment.
Effective Tax Rate. The effective tax rate decreased 390 bps to 19.6% for the first quarter of 2023, compared to 23.5% in the prior year period, primarily driven by the tax benefit received from favorable adjustments upon foreign tax return filing and excess tax deductions that were generated from the vesting of RSUs during the first quarter of 2023.
Net Income Attributable to KDP. Net income attributable to KDP decreased $118 million, or 20.2%, to $467 million for the first quarter of 2023 as compared to $585 million in the prior year period, primarily driven by lower income from operations and the unfavorable comparison to the gain in the prior year period for the sale of our equity method investment in BodyArmor, partially offset by reduced interest expense, the favorable comparison to the loss on extinguishment of debt in the prior year, and the decrease in our effective tax rate.
Diluted EPS. Diluted EPS decreased 19.5% to $0.33 per diluted share as compared to $0.41 in the prior year period.
Results of Operations by Segment
The following tables provide net sales and income from operations for our reportable segments for the first quarter of 2023 and 2022, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP.
| (in millions) | First Quarter | ||||||||||
| Net sales | 2023 | 2022 | |||||||||
| U.S. Refreshment Beverages | $ | 2,007 | $ | 1,781 | |||||||
| U.S. Coffee | 931 | 943 | |||||||||
| International | 415 | 354 | |||||||||
| Total net sales | $ | 3,353 | $ | 3,078 | |||||||
| Income from operations | |||||||||||
| U.S. Refreshment Beverages | $ | 490 | $ | 704 | |||||||
| U.S. Coffee | 232 | 255 | |||||||||
| International | 80 | 64 | |||||||||
| Unallocated corporate costs | (218) | (57) | |||||||||
| Total income from operations | $ | 584 | $ | 966 |
U.S. REFRESHMENT BEVERAGES
The following table provides selected information about our U.S. Refreshment Beverages segment's results:
| First Quarter | Dollar | Percent | |||||||||||||||||||||
| (in millions) | 2023 | 2022 | Change | Change | |||||||||||||||||||
| Net sales | $ | 2,007 | $ | 1,781 | $ | 226 | 12.7 | % | |||||||||||||||
| Income from operations | 490 | 704 | (214) | (30.4) | |||||||||||||||||||
| Operating margin | 24.4 | % | 39.5 | % | (1510) bps |
Sales Volume. Sales volumes for the first quarter of 2023 were flat compared to the prior year period. Growth in Dr Pepper, driven by our Strawberries & Cream innovation, and C4 Energy as a result of our recently announced sales and distribution partnership, was fully offset by declines in our still portfolio.
Net Sales. Net sales increased 12.7% to $2,007 million in the first quarter of 2023, compared to $1,781 million in the prior year period, driven by favorable net price realization of 12.5% and volume/mix growth of 0.2%.
Income from Operations. Income from operations decreased $214 million, or 30.4%, to $490 million for the first quarter of 2023 compared to $704 million for the prior year period, primarily driven by the unfavorable comparison to the gains on the settlement of litigation with BodyArmor of $271 million and a reduction in year-over-year asset sale-leaseback activity of $32 million for our strategic asset investment program. Other drivers included the benefits of net sales growth and productivity, partially offset by broad-based inflation, higher marketing expense, and increases in other operating costs.
U.S. COFFEE
The following table provides selected information about our U.S. Coffee segment's results:
| First Quarter | Dollar | Percent | |||||||||||||||||||||
| (in millions) | 2023 | 2022 | Change | Change | |||||||||||||||||||
| Net sales | $ | 931 | $ | 943 | $ | (12) | (1.3) | % | |||||||||||||||
| Income from operations | 232 | 255 | (23) | (9.0) | |||||||||||||||||||
| Operating margin | 24.9 | % | 27.0 | % | (210) bps |
Sales Volume. K-Cup pod volume decreased 1.9% for the first quarter of 2023 compared to the prior year period, as improvements in our away-from-home business, driven by increasing office occupancy, were more than offset by softness in our at-home business, driven by higher consumer mobility versus the prior year period. Brewer volume decreased 29.0% in the first quarter of 2023, driven by retailer inventory shifts and category softness in small appliances.
Net Sales. Net sales decreased 1.3% to $931 million for the first quarter of 2023 compared to $943 million in the prior year period, driven by volume/mix declines of 6.6% partially offset by favorable net price realization of 5.3%.
Income from Operations. Income from operations decreased $23 million, or 9.0%, to $232 million for the first quarter of 2023, compared to $255 million in the prior year period, as a result of inflation in input costs, declines in volume/mix and increases in other operating costs. These decreases were partially offset by the benefits of pricing actions and productivity. Operating margin declined 210 bps versus the year ago period to 24.9% due to these inflationary headwinds.
INTERNATIONAL
The following table provides selected information about our International segment's results:
| First Quarter | Dollar | Percent | |||||||||||||||||||||
| (in millions) | 2023 | 2022 | Change | Change | |||||||||||||||||||
| Net sales | $ | 415 | $ | 354 | $ | 61 | 17.2 | % | |||||||||||||||
| Income from operations | 80 | 64 | 16 | 25.0 | |||||||||||||||||||
| Operating margin | 19.3 | % | 18.1 | % | 120 bps |
Sales Volume. The following table provides the percentage change in sales volumes for the International segment compared to the prior year period:
| Percentage Change | ||||||||
| LRB | 5.8 | % | ||||||
| K-Cup pods | 9.5 | |||||||
| Brewers | 2.5 |
Net Sales. Net sales increased 17.2% to $415 million in the first quarter of 2023, compared to $354 million in the prior year period, reflecting higher net price realization of 9.0%, volume/mix growth of 7.7%, and favorable FX translation effects of 0.5%.
Income from Operations. Income from operations increased $16 million, or 25.0%, to $80 million for the first quarter of 2023 compared to $64 million in the prior year period. This performance reflected the benefits of net sales growth and productivity, partially offset by broad-based inflation and higher costs associated with higher volumes. Operating margin increased 120 bps versus the year ago period to 19.3%.
NON-GAAP FINANCIAL MEASURES
To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented for certain constant currency adjusted or adjusted financial measures for the first quarter of 2023 and 2022, which are considered non-GAAP financial measures. The non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. The non-GAAP financial measures are not substitutes for their comparable U.S. GAAP financial measures, such as income from operations, net income, diluted EPS or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures. We use these non-GAAP financial measures, in addition to U.S. GAAP financial measures, to evaluate our operating and financial performance and to compare such performance to that of prior periods and to the performance of our competitors. Additionally, we use these non-GAAP financial measures in making operational and financial decisions and in our budgeting and planning process. We believe that providing these non-GAAP financial measures to investors helps investors evaluate our operating performance, profitability and business trends in a way that is consistent with how management evaluates such performance and consistent with guidance previously provided by us. The non-GAAP measures are defined as follows:
Adjusted: Defined as certain financial statement captions and metrics adjusted for certain items affecting comparability.
Items affecting comparability: Defined as certain items that are excluded for comparison to prior year periods, adjusted for the tax impact as applicable. Tax impact is determined based upon an approximate rate for each item. For each period, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S. GAAP that do not have an offsetting risk reflected within the financial results, as well as the unrealized mark-to-market impact of our Vita Coco investment; (ii) the amortization associated with definite-lived intangible assets; (iii) the amortization of the deferred financing costs associated with the DPS Merger; (iv) the amortization of the fair value adjustment of the senior unsecured notes obtained as a result of the DPS Merger; (v) stock compensation expense and the associated windfall tax benefit attributable to the matching awards made to employees who made an initial investment in KDP; (vi) non-cash changes in deferred tax liabilities related to goodwill and other intangible assets as a result of tax rate or apportionment changes; and (vii) other certain items that are excluded for comparison purposes to prior year periods.
For the first quarter of 2023, the other certain items excluded for comparison purposes include productivity expenses.
For the first quarter of 2022, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant non-routine legal matters, specifically the antitrust litigation; (iv) the loss on early extinguishment of debt related to the redemption of debt; (v) incremental costs to our operations related to risks associated with the COVID-19 pandemic, which were incurred to either maintain the health and safety of our front-line employees or temporarily increase compensation to such employees to ensure essential operations continue during the pandemic; (vi) the gain on the sale of our investment in BodyArmor as a result of the settlement of the associated holdback liability; (vii) the gain on the settlement of our prior litigation with BodyArmor, excluding recoveries of previously incurred litigation expenses which were included in our adjusted results; and (viii) losses recognized with respect to our equity method investment in Bedford as a result of funding our share of their wind-down costs.
Constant currency adjusted: Defined as certain financial statement captions and metrics adjusted for certain items affecting comparability, calculated on a constant currency basis by converting our current period local currency financial results using the prior period foreign currency exchange rates.
For the first quarter of 2023 and 2022, the supplemental financial data set forth below includes reconciliations of adjusted and constant currency adjusted financial measures to the applicable financial measure presented in the unaudited condensed consolidated financial statements for the same period.
KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
(Unaudited, in millions, except per share and percentages)
| Cost of sales | Gross profit | Gross margin | Selling, general and administrative expenses | Gain on litigation settlement | Other operating income, net | Income from operations | Operating margin | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the First Quarter of 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported | $ | 1,609 | $ | 1,744 | 52.0 | % | $ | 1,165 | $ | — | $ | (5) | $ | 584 | 17.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mark to market | 14 | (14) | (12) | — | — | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangibles | — | — | (34) | — | — | 34 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | (5) | — | — | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Productivity | (38) | 38 | (40) | — | — | 78 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted | $ | 1,585 | $ | 1,768 | 52.7 | % | $ | 1,074 | $ | — | $ | (5) | $ | 699 | 20.8 | % | |||||||||||||||||||||||||||||||||||||||||||
| Impact of foreign currency | — | % | 0.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Constant currency adjusted | 52.7 | % | 20.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the First Quarter of 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported | $ | 1,428 | $ | 1,650 | 53.6 | % | $ | 1,018 | $ | (299) | $ | (35) | $ | 966 | 31.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mark to market | 59 | (59) | 26 | — | — | (85) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangibles | — | — | (34) | — | — | 34 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | 7 | — | — | (7) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring and integration costs | — | — | (33) | — | (3) | 36 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Productivity | (28) | 28 | (22) | — | — | 50 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-routine legal matters | — | — | (4) | — | — | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| COVID-19 | (4) | 4 | (1) | — | — | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on litigation | — | — | — | 271 | — | (271) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted | $ | 1,455 | $ | 1,623 | 52.7 | % | $ | 957 | $ | (28) | $ | (38) | $ | 732 | 23.8 | % |
Refer to page 35 for reconciliations of reported net sales to constant currency net sales and adjusted income from operations to constant currency adjusted income from operations.
KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
(Unaudited, in millions, except per share and percentages)
| Interest expense | Loss on early extinguishment of debt | Gain on sale of equity method investment | Impairment of investments and note receivable | Other (income) expense, net | Income before provision for income taxes | Provision for income taxes | Effective tax rate | Net income attributable to KDP | Diluted earnings per share | ||||||||||||||||||||||||||||||||||||||||||||||||||
| For the First Quarter of 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported | $ | 23 | $ | — | $ | — | $ | — | $ | (20) | $ | 581 | $ | 114 | 19.6 | % | $ | 467 | $ | 0.33 | |||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mark to market | 93 | — | — | — | 9 | (104) | (29) | (75) | (0.05) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangibles | — | — | — | — | — | 34 | 10 | 24 | 0.02 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of fair value debt adjustment | (4) | — | — | — | — | 4 | 1 | 3 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | — | — | — | 5 | 2 | 3 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Productivity | — | — | — | — | — | 78 | 21 | 57 | 0.04 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted | $ | 112 | $ | — | $ | — | $ | — | $ | (11) | $ | 598 | $ | 119 | 19.9 | % | $ | 479 | $ | 0.34 | |||||||||||||||||||||||||||||||||||||||
| Impact of foreign currency | 0.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Constant currency adjusted | 20.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the First Quarter of 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reported | $ | 188 | $ | 48 | $ | (50) | $ | 6 | $ | 9 | $ | 765 | $ | 180 | 23.5 | % | $ | 585 | $ | 0.41 | |||||||||||||||||||||||||||||||||||||||
| Items Affecting Comparability: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mark to market | (71) | — | — | — | (3) | (11) | (2) | (9) | (0.01) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangibles | — | — | — | — | — | 34 | 9 | 25 | 0.02 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of deferred financing costs | (1) | — | — | — | — | 1 | — | 1 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of fair value of debt adjustment | (5) | — | — | — | — | 5 | 1 | 4 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | — | — | — | (7) | (1) | (6) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring and integration costs | — | — | — | — | — | 36 | 9 | 27 | 0.02 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Productivity | — | — | — | — | — | 50 | 12 | 38 | 0.03 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairment of investment | — | — | — | (6) | — | 6 | — | 6 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | — | (48) | — | — | — | 48 | 11 | 37 | 0.03 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-routine legal matters | — | — | — | — | — | 4 | 1 | 3 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| COVID-19 | — | — | — | — | — | 5 | 1 | 4 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on litigation | — | — | — | — | — | (271) | (68) | (203) | (0.14) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of equity-method investment | — | — | 50 | — | — | (50) | (12) | (38) | (0.03) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted | $ | 111 | $ | — | $ | — | $ | — | $ | 6 | $ | 615 | $ | 141 | 22.9 | % | $ | 474 | $ | 0.33 | |||||||||||||||||||||||||||||||||||||||
| Change - adjusted | 0.9 | % | 1.1 | % | 3.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of foreign currency | — | % | (0.5) | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change - constant currency adjusted | 0.9 | % | 0.6 | % | 3.0 | % |
Diluted earnings per common share may not foot due to rounding.
KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED SEGMENT MEASURES
TO CERTAIN NON-GAAP ADJUSTED AND CURRENCY NEUTRAL ADJUSTED SEGMENT MEASURES
(Unaudited)
| (in millions) | Reported | Items Affecting Comparability | Adjusted | ||||||||||||||
| For the first quarter of 2023: | |||||||||||||||||
| Income from operations | |||||||||||||||||
| U.S. Refreshment Beverages | $ | 490 | $ | 18 | $ | 508 | |||||||||||
| U.S. Coffee | 232 | 53 | 285 | ||||||||||||||
| International | 80 | 4 | 84 | ||||||||||||||
| Unallocated corporate costs | (218) | 40 | (178) | ||||||||||||||
| Total income from operations | $ | 584 | $ | 115 | $ | 699 | |||||||||||
| For the first quarter of 2022: | |||||||||||||||||
| Income from operations | |||||||||||||||||
| U.S. Refreshment Beverages | $ | 704 | $ | (249) | $ | 455 | |||||||||||
| U.S. Coffee | 255 | 46 | 301 | ||||||||||||||
| International | 64 | 7 | 71 | ||||||||||||||
| Unallocated corporate costs | (57) | (38) | (95) | ||||||||||||||
| Total income from operations | $ | 966 | $ | (234) | $ | 732 |
| Reported | Impact of Foreign Currency | Constant Currency | ||||||||||||||||||
| For the first quarter of 2023: | ||||||||||||||||||||
| Net sales | ||||||||||||||||||||
| U.S. Refreshment Beverages | 12.7 | % | — | % | 12.7 | % | ||||||||||||||
| U.S. Coffee | (1.3) | — | (1.3) | |||||||||||||||||
| International | 17.2 | (0.5) | 16.7 | |||||||||||||||||
| Total net sales | 8.9 | — | 8.9 |
| Adjusted | Impact of Foreign Currency | Constant Currency Adjusted | ||||||||||||||||||
| For the first quarter of 2023: | ||||||||||||||||||||
| Income from operations | ||||||||||||||||||||
| U.S. Refreshment Beverages | 11.6 | % | — | % | 11.6 | % | ||||||||||||||
| U.S. Coffee | (5.3) | — | (5.3) | |||||||||||||||||
| International | 18.3 | — | 18.3 | |||||||||||||||||
| Total income from operations | (4.5) | — | (4.5) |
| Reported | Items Affecting Comparability | Adjusted | Impact of Foreign Currency | Constant Currency Adjusted | ||||||||||||||||||||||||||||
| For the first quarter of 2023: | ||||||||||||||||||||||||||||||||
| Operating margin | ||||||||||||||||||||||||||||||||
| U.S. Refreshment Beverages | 24.4 | % | 0.9 | % | 25.3 | % | — | % | 25.3 | % | ||||||||||||||||||||||
| U.S. Coffee | 24.9 | 5.7 | 30.6 | — | 30.6 | |||||||||||||||||||||||||||
| International | 19.3 | 0.9 | 20.2 | 0.1 | 20.3 | |||||||||||||||||||||||||||
| Total operating margin | 17.4 | 3.4 | 20.8 | 0.1 | 20.9 |
CONSTANT CURRENCY ADJUSTED RESULTS OF OPERATIONS
First Quarter of 2023 Compared to First Quarter of 2022
The following discussion of our results for the first quarter of 2023 is presented on a constant currency adjusted basis. These adjusted financial results are calculated on a constant currency basis by converting our current-period local currency financial results using the prior-period foreign currency exchange rates
Consolidated Operations
Constant Currency Net Sales. Constant currency net sales increased 8.9% in the first quarter of 2023 compared to the prior year period, driven by favorable net price realization of 9.9%, partially offset by lower volume/mix of 1.0%.
Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations decreased 4.5% compared to the prior year period. This decrease primarily resulted from the impacts of broad-based inflation, higher marketing expense, increases in other operating costs, and the unfavorable comparison of a number of prior year benefits, partially offset by the benefits of strong net sales growth and productivity. In the prior year period, we had the benefit of the change in our accounting policy related to the recognition of forfeitures for our stock awards, the asset sale-leaseback activity related to our strategic asset investment program, and the portion of the settlement payment from BodyArmor for the reimbursement of attorney fees.
Constant Currency Adjusted Interest Expense. Constant currency adjusted interest expense increased 0.9% compared to the prior year period, primarily driven by increased use of our commercial paper facility in the current year period.
Constant Currency Adjusted Effective Tax Rate. The constant currency adjusted effective tax rate was 20.2% for the first quarter of 2023 compared to 22.9% for the prior year period, primarily driven by the tax benefit received from favorable adjustments upon foreign tax return filing and excess tax deductions that were generated from the vesting of RSUs during the first quarter of 2023.
Constant Currency Adjusted Net Income Attributable to KDP. Constant currency adjusted net income attributable to KDP increased 0.6% compared to the prior year period, as the decrease in our effective tax rate and the benefit of Nutrabolt’s preferred dividend was partially offset by lower constant currency adjusted income from operations.
Constant Currency Adjusted Diluted EPS. Constant currency adjusted diluted EPS increased approximately 3.0% over the prior year period, driven by lower weighted average shares outstanding compared to the prior year period and the increase in constant currency adjusted net income attributable to KDP.
Results of Operations by Segment
U.S. REFRESHMENT BEVERAGES
Constant Currency Net Sales. Constant currency net sales increased 12.7%, reflecting favorable net price realization of 12.5% and volume/mix growth of 0.2%.
Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the first quarter of 2023 increased 11.6% compared to the prior year period, driven by the benefits of net sales growth and productivity, partially offset by broad-based inflation, the unfavorable comparison to asset sale-leaseback activity relating to our strategic asset initiative in the prior year period, higher marketing expense and increases in other operating costs.
U.S. COFFEE
Constant Currency Net Sales. Constant currency net sales decreased 1.3%, driven by unfavorable volume/mix of 6.6%, partially offset by higher net price realization of 5.3%.
Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations decreased 5.3% compared to the prior year period, as a result of inflation in input costs and declines in volume/mix. These decreases were partially offset by the benefits of pricing actions and productivity.
INTERNATIONAL
Constant Currency Net Sales. Constant currency net sales increased 16.7%, driven by favorable net price realization of 9.0% and volume/mix growth of 7.7%.
Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations increased 18.3% compared to the prior year period, driven by the benefits of net sales growth and productivity, partially offset by broad-based inflation and higher costs associated with higher volumes.
CRITICAL ACCOUNTING ESTIMATES
The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. These critical accounting estimates are discussed in greater detail in Part II, Item 7 of our Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We believe our financial condition and liquidity remain strong. We continue to manage all aspects of our business, including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies through our productivity initiatives, and developing new opportunities for growth such as innovation and agreements with partners to distribute brands that are accretive to our portfolio.
The following summarizes our cash activity for the first quarter of 2023 and 2022:
Cash, cash equivalents, restricted cash and restricted cash equivalents decreased $331 million from December 31, 2022 to March 31, 2023, primarily driven by the reduction in cash provided by operating activities, dividend payments and share repurchases, partially offset by net issuances of commercial paper.
Cash generated by our foreign operations is generally repatriated to the U.S. periodically as working capital funding requirements, where allowed. We do not expect restrictions or taxes on repatriation of cash held outside the U.S. to have a material effect on our overall business, liquidity, financial condition or results of operations for the foreseeable future.
Principal Sources of Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from our operations and borrowing capacity currently available under our 2022 Revolving Credit Agreement. Additionally, we have an uncommitted commercial paper program where we can issue unsecured commercial paper notes on a private placement basis. Based on our current and anticipated level of operations, we believe that our operating cash flows will be sufficient to meet our anticipated obligations for the next twelve months. To the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may utilize cash on hand or amounts available under our financing arrangements, if necessary.
Sources of Liquidity - Operations
Net cash provided by operating activities decreased $592 million for the first quarter of 2023, as compared to the first quarter of 2022, driven by the decrease in net income adjusted for non-cash items, led by the unfavorable year-over-year impact of the $349 million gain from BodyArmor in the first quarter of 2022 and a reduction in our cash conversion cycle.
Cash Conversion Cycle
Our cash conversion cycle is defined as DIO and DSO less DPO. The calculation of each component of the cash conversion cycle is provided below:
| Component | Calculation (on a trailing twelve month basis) | |||||||
| DIO | (Average inventory divided by cost of sales) * Number of days in the period | |||||||
| DSO | (Accounts receivable divided by net sales) * Number of days in the period | |||||||
| DPO | (Accounts payable * Number of days in the period) divided by cost of sales and SG&A expenses |
The following table summarizes our cash conversion cycle:
| March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| DIO | 71 | 60 | ||||||||||||
| DSO | 37 | 34 | ||||||||||||
| DPO | 154 | 164 | ||||||||||||
| Cash conversion cycle | (46) | (70) |
Our cash conversion cycle increased 24 days to approximately (46) days as of March 31, 2023 as compared to (70) days as of March 31, 2022. The increase in DIO reflects our efforts to restore inventory to meet customer service levels and the build up of our inventory of C4, and the increase in DSO was primarily driven by rising inflation during the year. The decrease in DPO was driven by the reduction of payment terms for certain suppliers.
Accounts Payable Program
As part of our ongoing efforts to improve our cash flow and related liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. Excluding our suppliers who require cash at date of purchase or sale, our current payment terms with our suppliers generally range from 10 to 360 days. We also enter into agreements with third party administrators to allow participating suppliers to track payment obligations from us, and if voluntarily elected by the supplier, sell payment obligations from us to financial institutions. Suppliers can sell one or more of our payment obligations at their sole discretion and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. Refer to Note 13 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information on our obligations to participating suppliers.
Sources of Liquidity - Financing
Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of our financing arrangements.
We also have an active shelf registration statement, filed with the SEC on August 19, 2022, which allows us to issue an indeterminate number or amount of common stock, preferred stock, debt securities and warrants from time to time in one or more offerings at the direction of our Board.
Sources of Liquidity - Asset Sale-Leaseback Transactions
We have leveraged our strategic asset investment program to create value from certain assets to enable reinvestment in KDP. These transactions are accounted for as sale-leaseback transactions. We received $7 million and $77 million of cash proceeds from our strategic asset investment program during the first quarter of 2023 and 2022, respectively, which are included in Proceeds from sales of property, plant and equipment in the unaudited Condensed Consolidated Statements of Cash Flows.
Debt Ratings
Our credit ratings are as follows:
| Rating Agency | Long-Term Debt Rating | Commercial Paper Rating | Outlook | |||||||||||||||||
| Moody's(1) | Baa1 | P-2 | Stable | |||||||||||||||||
| S&P | BBB | A-2 | Stable |
(1)On April 3, 2023, Moody’s upgraded our long-term debt rating to Baa1 from Baa2 and affirmed our P-2 commercial paper rating and outlook.
These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.
As of March 31, 2023, we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.
Principal Uses of Capital Resources
Over the past several years, our principal uses of our capital resources were deleveraging, providing shareholder return to our investors through regular quarterly dividends, and investing in KDP to capture market share and drive growth through innovation and routes to market.
Now that we have met our post-merger goals, we plan to further reduce our leverage ratio. We also plan to invest in inorganic value creation through mergers or acquisitions, which may include portfolio expansion, distribution scale, geographic expansion, and new capabilities. In addition, we have repurchased shares of our outstanding common stock, as described below.
Regular Quarterly Dividends
For the first quarter of 2023, we have declared total dividends of $0.20 per share.
Repurchases of Common Stock
Our Board authorized a four-year share repurchase program, ending December 31, 2025, of up to $4 billion of our outstanding common stock, potentially enabling us to return value to shareholders. We repurchased and retired $231 million of common stock during the first quarter of 2023. As of March 31, 2023, $3,390 million remained available for repurchase under the authorized share repurchase program.
Capital Expenditures
We are investing in state-of-the-art manufacturing and warehousing facilities, including expansive investments in facilities in Spartanburg, South Carolina; and Allentown, Pennsylvania, in 2023 and 2022, in order to optimize our supply chain network.
Purchases of property, plant and equipment were $62 million and $109 million for the first quarter of 2023 and 2022, respectively.
Capital expenditures, which includes both purchases of property, plant and equipment and amounts included in accounts payable and accrued expenses, for the first quarter of 2023 and 2022 primarily related to the manufacturing and warehousing facilities discussed above. Capital expenditures included in accounts payable and accrued expenses were $222 million and $139 million for the first quarter of 2023 and 2022, respectively, which primarily related to these investments.
Investments in Unconsolidated Affiliates
From time to time, we expect to invest in beverage startup companies or in brand ownership companies to grow our presence in certain product categories, or enter into various licensing and distribution agreements to expand our product portfolio. Our investments in beverage startup companies generally involve acquiring a minority interest in equity securities of a company, in certain cases with a protected path to ownership at our future option.
Purchases of Intangible Assets
We have invested in the expansion of our DSD network through transactions with strategic independent bottlers or third-party brand ownership companies to ensure competitive distribution scale. From time to time, we additionally acquire brand ownership companies to expand our portfolio. These transactions are generally accounted for as an asset acquisition, as the majority of the transaction price represents the acquisition of an intangible asset. Purchases of intangible assets were $51 million and $10 million for the first quarter of 2023 and 2022, respectively.
Uncertainties and Trends Affecting Liquidity
Disruptions in financial and credit markets, including those caused by inflation, global economic uncertainty and rising interest rates, may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials.
Customer and consumer demand for our products may also be impacted by the risk factors discussed under "Risk Factors" in Part 1, Item 1A of our Annual Report, as well as subsequent filings with the SEC, that could have a material effect on production, delivery and consumption of our products, which could result in a reduction in our sales volume.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Notes are fully and unconditionally guaranteed by certain of our direct and indirect subsidiaries (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by us and jointly and severally guarantee, subject to the release provisions described below, our obligations under the Notes. None of our subsidiaries organized outside of the U.S., any of the subsidiaries held by Maple Parent Holdings Corp. prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of our other indebtedness, our exercise of the legal defeasance option with respect to the Notes and the discharge of our obligations under the applicable indenture.
The following schedules present the summarized financial information for Keurig Dr Pepper Inc. (the “Parent”) and the Guarantors on a combined basis after intercompany eliminations; the Parent and the Guarantors' amounts due from and amounts due to Non-Guarantors are disclosed separately. The consolidating schedules are provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.
The summarized financial information for the Parent and Guarantors were as follows:
| (in millions) | For the First Quarter of 2023 | ||||
| Net sales | $ | 2,082 | |||
| Income from operations | 188 | ||||
| Net income attributable to KDP | 467 |
| (in millions) | March 31, 2023 | December 31, 2022 | |||||||||
| Current assets | $ | 1,842 | $ | 1,712 | |||||||
| Non-current assets | 45,795 | 45,721 | |||||||||
| Total assets(1) | $ | 47,637 | $ | 47,433 | |||||||
| Current liabilities | $ | 6,007 | $ | 4,797 | |||||||
| Non-current liabilities | 16,481 | 17,463 | |||||||||
| Total liabilities(2) | $ | 22,488 | $ | 22,260 |
(1)Includes $4 million and $3 million of intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of March 31, 2023 and December 31, 2022, respectively.
(2)Includes $1,450 million and $1,186 million of intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of March 31, 2023 and December 31, 2022, respectively.
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