0001418135 kdp:A2048MergerNotesMember us-gaap:SeniorNotesMember 2019-12-31
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019MARCH 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 001-33829
|
| | | | |
| Keurig Dr Pepper Inc. | |
| (Exact name of registrant as specified in its charter) | |
|
| | | |
Delaware | 98-0517725 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) |
| | | |
| 53 South Avenue | |
| Burlington, | Massachusetts | |
| 01803 | |
(Address of principal executive offices) |
| (802)(781) | 244-5621418-7000 | |
(Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common stock | | KDP | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer ☒ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common stock | | KDP | | New York Stock Exchange |
As of August 6, 2019,April 28, 2020, there were 1,406,735,4681,407,151,408 shares of the registrant's common stock, par value $0.01 per share, outstanding.
KEURIG DR PEPPER INC.
FORM 10-Q TABLE OF CONTENTS
KEURIG DR PEPPER INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020
MASTER GLOSSARY
|
| | |
Term | | Definition |
2019 Incentive Plan | | Keurig Dr Pepper Inc. Omnibus Incentive Plan of 2019 |
2019 KDP Term Loan | | The Company refinanced the 2018 KDP Term Loan on February 8, 2019 and entered into the 2019 KDP Term Loan Agreement |
2019 KDP Term Loan Agreement | | The agreement executed on February 8, 2019 between KDP and the Term Loan Lenders in order to refinance the 2018 KDP Term Loan with the 2019 KDP Term Loan |
2019 364-Day Credit Agreement | | The Company's $750 million credit agreement, which was entered into on May 29, 2019 |
2020 364-Day Credit Agreement | | The Company's $1,500 million credit agreement, which was entered into on April 12, 2020 |
2030 Notes | | $750 million aggregate principal amount of 3.20% senior unsecured notes due May 1, 2030 |
2050 Notes | | $750 million aggregate principal amount of 3.80% senior unsecured notes due May 1, 2050 |
A Shoc | | Adrenaline Shoc |
ABI | | Anheuser-Busch InBev SA/NV |
Annual Report | | Annual Report on Form 10-K for the year ended December 31, 2019 |
AOCI | | Accumulated other comprehensive income or loss |
ASU | | Accounting Standards Update |
ASU 2016-13 | | Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments |
ASU 2018-13 | | Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements |
ASU 2020-01 | | Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 |
ASU 2020-04 | | Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting |
Bai Acquisition | | The acquisition of Bai by DPS |
Bedford | | Bedford Systems, LLC |
Big Red Acquisition | | The acquisition of Big Red by KDP |
BodyArmor | | BA Sports Nutrition, LLC |
bps | | basis points |
Company | | Keurig Dr Pepper Inc. |
Core | | Core Nutrition LLC |
Core Acquisition | | The acquisition of Core by KDP |
CSD | | Carbonated soft drink |
DIO | | Days inventory outstanding |
DPO | | Days of payables outstanding |
DPS | | Dr Pepper Snapple Group, Inc. |
DPS Merger | | The acquisition of DPS by Maple, whereby Merger Sub merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS as of July 9, 2018 |
DPS Merger Agreement | | The Agreement and Plan of Merger by and among DPS, Maple and Merger Sub to effect the DPS Merger |
DSD | | Direct Store Delivery |
DSO | | Days sales outstanding |
EPS | | Earnings per share |
Exchange Act | | Securities Exchange Act of 1934, as amended |
FASB | | Financial Accounting Standards Board |
FX | | Foreign exchange |
IRi | | Information Resources, Inc. |
JAB | | JAB Holding Company S.a.r.l. |
JP Morgan | | JPMorgan Chase Bank, N.A. |
KEURIG DR PEPPER INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020
|
| | |
KDP | | Keurig Dr Pepper Inc. |
KDP Credit Agreements | | Collectively, the KDP Revolver, the 2019 364-Day Credit Agreement, and the 2019 KDP Term Loan |
KDP Revolver | | The Company's $2,400 million revolving credit facility, which was entered into on February 28, 2018 |
LIBOR | | London Interbank Offered Rate |
Maple | | Maple Parent Holdings Corp. |
Merger Sub | | Salt Merger Sub, Inc. |
NCB | | Non-carbonated beverage |
Notes | | Collectively, the Company's senior unsecured notes |
Parent | | Keurig Dr Pepper, Inc. |
RSU | | Restricted stock unit |
RTD | | Ready to drink |
S&P | | Standard & Poors |
SEC | | Securities and Exchange Commission |
SG&A | | Selling, general and administrative |
Term Loan Lenders | | The lenders party to the 2019 KDP Term Loan, with JP Morgan as the administrative agent of the 2019 KDP Term Loan Agreement |
U.S. | | United States |
U.S. GAAP | | Accounting principles generally accepted in the U.S. |
WD | | Warehouse Direct |
WIP | | Work-in-process |
PART I - FINANCIAL INFORMATION
| |
ITEM 1. | Financial Statements (Unaudited) |
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the SecondFirst Quarter of 2020 and First Six Months of 2019 and 2018
(Unaudited)
| | | Second Quarter | | First Six Months | First Quarter |
(in millions, except per share data) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Net sales | $ | 2,812 |
| | $ | 949 |
| | $ | 5,316 |
| | $ | 1,897 |
| $ | 2,613 |
| | $ | 2,504 |
|
Cost of sales | 1,186 |
| | 458 |
| | 2,292 |
| | 925 |
| 1,161 |
| | 1,106 |
|
Gross profit | 1,626 |
| | 491 |
| | 3,024 |
| | 972 |
| 1,452 |
| | 1,398 |
|
Selling, general and administrative expenses | 1,028 |
| | 321 |
| | 1,939 |
| | 621 |
| 1,028 |
| | 911 |
|
Other operating expense, net | 11 |
| | 3 |
| | — |
| | 6 |
| |
Other operating income, net | | (42 | ) | | (11 | ) |
Income from operations | 587 |
| | 167 |
| | 1,085 |
| | 345 |
| 466 |
| | 498 |
|
Interest expense | 170 |
| | 51 |
| | 339 |
| | 49 |
| 153 |
| | 169 |
|
Interest expense - related party | — |
| | 26 |
| | — |
| | 51 |
| |
Loss on early extinguishment of debt | — |
| | — |
| | 9 |
| | 2 |
| 2 |
| | 9 |
|
Other expense (income), net | 1 |
| | (8 | ) | | 6 |
| | 5 |
| |
Impairment on investment and note receivable | | 86 |
| | — |
|
Other expense, net | | 20 |
| | 5 |
|
Income before provision for income taxes | 416 |
| | 98 |
| | 731 |
| | 238 |
| 205 |
| | 315 |
|
Provision for income taxes | 102 |
| | 13 |
| | 187 |
| | 64 |
| 49 |
| | 85 |
|
Net income | 314 |
| | 85 |
| | 544 |
| | 174 |
| $ | 156 |
| | $ | 230 |
|
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards | — |
| | 2 |
| | — |
| | 3 |
| |
Net income attributable to KDP | $ | 314 |
| | $ | 83 |
| | $ | 544 |
| | $ | 171 |
| |
Earnings per common share: | | | | | | | | | | |
Basic | $ | 0.22 |
| | $ | 0.10 |
| | $ | 0.39 |
| | $ | 0.21 |
| $ | 0.11 |
| | $ | 0.16 |
|
Diluted | 0.22 |
| | 0.10 |
| | 0.38 |
| | 0.21 |
| 0.11 |
| | 0.16 |
|
Weighted average common shares outstanding: | | | | | | | | | | |
Basic | 1,406.7 |
| | 790.5 |
| | 1,406.5 |
| | 790.5 |
| 1,407.0 |
| | 1,406.3 |
|
Diluted | 1,419.2 |
| | 790.5 |
| | 1,418.5 |
| | 790.5 |
| 1,420.1 |
| | 1,417.7 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the SecondFirst Quarter of 2020 and First Six Months of 2019 and 2018
(Unaudited)
| | | Second Quarter | | First Six Months | First Quarter |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Comprehensive income | $ | 402 |
| | $ | 66 |
| | $ | 725 |
| | $ | 130 |
| |
Comprehensive (loss) income | | $ | (428 | ) | | $ | 323 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2019March 31, 2020 and December 31, 20182019
| | | June 30, | | December 31, | March 31, | | December 31, |
(in millions, except share and per share data) | 2019 | | 2018 | 2020 | | 2019 |
Assets | Current assets: | | | | | | |
Cash and cash equivalents | $ | 106 |
| | $ | 83 |
| $ | 197 |
| | $ | 75 |
|
Restricted cash and restricted cash equivalents | 44 |
| | 46 |
| 26 |
| | 26 |
|
Trade accounts receivable, net | 1,068 |
| | 1,150 |
| 1,037 |
| | 1,115 |
|
Inventories | 686 |
| | 626 |
| 682 |
| | 654 |
|
Prepaid expenses and other current assets | 317 |
| | 254 |
| 335 |
| | 403 |
|
Total current assets | 2,221 |
| | 2,159 |
| 2,277 |
| | 2,273 |
|
Property, plant and equipment, net | 2,290 |
| | 2,310 |
| 2,017 |
| | 2,028 |
|
Investments in unconsolidated affiliates | 170 |
| | 186 |
| 105 |
| | 151 |
|
Goodwill | 20,039 |
| | 20,011 |
| 19,898 |
| | 20,172 |
|
Other intangible assets, net | 24,228 |
| | 23,967 |
| 23,706 |
| | 24,117 |
|
Other non-current assets | 572 |
| | 259 |
| 811 |
| | 748 |
|
Deferred tax assets | 27 |
| | 26 |
| 29 |
| | 29 |
|
Total assets | $ | 49,547 |
| | $ | 48,918 |
| $ | 48,843 |
| | $ | 49,518 |
|
Liabilities and Stockholders' Equity | Current liabilities: | | | | | | |
Accounts payable | $ | 2,909 |
| | $ | 2,300 |
| $ | 3,238 |
| | $ | 3,176 |
|
Accrued expenses | 869 |
| | 1,012 |
| 960 |
| | 939 |
|
Structured payables | 595 |
| | 526 |
| 258 |
| | 321 |
|
Short-term borrowings and current portion of long-term obligations | 1,806 |
| | 1,458 |
| 1,957 |
| | 1,593 |
|
Other current liabilities | 516 |
| | 406 |
| 445 |
| | 445 |
|
Total current liabilities | 6,695 |
| | 5,702 |
| 6,858 |
| | 6,474 |
|
Long-term obligations | 13,164 |
| | 14,201 |
| 12,431 |
| | 12,827 |
|
Deferred tax liabilities | 6,034 |
| | 5,923 |
| 5,917 |
| | 6,030 |
|
Other non-current liabilities | 771 |
| | 559 |
| 997 |
| | 930 |
|
Total liabilities | 26,664 |
| | 26,385 |
| 26,203 |
| | 26,261 |
|
Commitments and contingencies |
| |
|
| |
|
Stockholders' equity: | | | | | | |
Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued | — |
| | — |
| — |
| | — |
|
Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,406,706,062 and 1,405,944,922 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | 14 |
| | 14 |
| |
Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,407,079,951 and 1,406,852,305 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | | 14 |
| | 14 |
|
Additional paid-in capital | 21,524 |
| | 21,471 |
| 21,579 |
| | 21,557 |
|
Retained earnings | 1,294 |
| | 1,178 |
| 1,527 |
| | 1,582 |
|
Accumulated other comprehensive income (loss) | 51 |
| | (130 | ) | |
Accumulated other comprehensive (loss) income | | (480 | ) | | 104 |
|
Total stockholders' equity | 22,883 |
| | 22,533 |
| 22,640 |
| | 23,257 |
|
Total liabilities and stockholders' equity | $ | 49,547 |
| | $ | 48,918 |
| $ | 48,843 |
| | $ | 49,518 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the First Six MonthsQuarter of 20192020 and 20182019
| | | First Six Months | First Quarter |
(in millions) | 2019 | | 2018 | 2020 | | 2019 |
Operating activities: | | | | | | |
Net income | $ | 544 |
| | $ | 174 |
| $ | 156 |
| | $ | 230 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation expense | 172 |
| | 66 |
| 98 |
| | 85 |
|
Amortization expense | 172 |
| | 65 |
| |
Amortization of intangibles | | 33 |
| | 31 |
|
Other amortization expense | | 32 |
| | 36 |
|
Provision for sales returns | 16 |
| | 22 |
| 7 |
| | 9 |
|
Deferred income taxes | (5 | ) | | (38 | ) | (5 | ) | | 1 |
|
Employee stock-based compensation expense | 34 |
| | 20 |
| 19 |
| | 14 |
|
Loss on early extinguishment of debt | 9 |
| | 2 |
| 2 |
| | 9 |
|
Unrealized (gain) loss on foreign currency | (25 | ) | | 13 |
| |
Unrealized (gain) loss on derivatives | 43 |
| | (39 | ) | |
Equity in earnings of unconsolidated affiliates | 27 |
| | 7 |
| |
Gain on disposal of property, plant and equipment | | (43 | ) | | — |
|
Unrealized loss (gain) on foreign currency | | 22 |
| | (17 | ) |
Unrealized loss on derivatives | | 43 |
| | 7 |
|
Equity in loss of unconsolidated affiliates | | 15 |
| | 15 |
|
Impairment on investment and note receivable of unconsolidated affiliate | | 86 |
| | — |
|
Other, net | (19 | ) | | 20 |
| 22 |
| | (4 | ) |
Changes in assets and liabilities: | | | | | | |
Trade accounts receivable | 68 |
| | 119 |
| 42 |
| | 126 |
|
Inventories | (56 | ) | | (30 | ) | (38 | ) | | (36 | ) |
Income taxes receivable and payables, net | 64 |
| | 21 |
| (29 | ) | | 68 |
|
Other current and non-current assets | (149 | ) | | (59 | ) | (179 | ) | | (102 | ) |
Accounts payable and accrued expenses | 339 |
| | 215 |
| 150 |
| | 125 |
|
Other current and non-current liabilities | (31 | ) | | — |
| (19 | ) | | (6 | ) |
Net change in operating assets and liabilities | 235 |
| | 266 |
| (73 | ) | | 175 |
|
Net cash provided by operating activities | 1,203 |
| | 578 |
| 414 |
| | 591 |
|
Investing activities: | | | | | | |
Acquisitions of businesses | (8 | ) | | — |
| |
Issuance of related party note receivable | (14 | ) | | (2 | ) | (6 | ) | | (7 | ) |
Investments in unconsolidated affiliates | (11 | ) | | (22 | ) | |
Purchases of property, plant and equipment | (118 | ) | | (44 | ) | (151 | ) | | (62 | ) |
Proceeds from sales of property, plant and equipment | 19 |
| | — |
| 201 |
| | 18 |
|
Purchases of intangibles | (4 | ) | | (12 | ) | (15 | ) | | (2 | ) |
Other, net | 22 |
| | — |
| 5 |
| | 8 |
|
Net cash used in investing activities | (114 | ) | | (80 | ) | |
Net cash provided by (used in) investing activities | | 34 |
| | (45 | ) |
Financing activities: | | | | | | |
Proceeds from senior unsecured notes | — |
| | 8,000 |
| |
Proceeds from unsecured credit facility | | 1,000 |
| | — |
|
Proceeds from term loan | 2,000 |
| | — |
| — |
| | 2,000 |
|
Net issuance of commercial paper | 381 |
| | — |
| |
Net (repayment) issuance of commercial paper | | (387 | ) | | 594 |
|
Proceeds from structured payables | 78 |
| | — |
| 44 |
| | 78 |
|
Payments on structured payables | (9 | ) | | — |
| (107 | ) | | (9 | ) |
Payments on senior unsecured notes | (250 | ) | | — |
| (250 | ) | | (250 | ) |
Repayment of term loan | (2,848 | ) | | (254 | ) | (405 | ) | | (2,758 | ) |
Payments on finance leases | (19 | ) | | (9 | ) | (13 | ) | | (10 | ) |
Deferred financing charges paid | — |
| | (35 | ) | |
Cash contributions from redeemable non-controlling interest shareholders | — |
| | 12 |
| |
Cash dividends paid | (423 | ) | | (23 | ) | (212 | ) | | (211 | ) |
Other, net | 10 |
| | (1 | ) | 2 |
| | 10 |
|
Net cash (used in) provided by financing activities | (1,080 | ) | | 7,690 |
| |
Net cash used in financing activities | | (328 | ) | | (556 | ) |
Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from: | | | | | | |
Operating, investing and financing activities | 9 |
| | 8,188 |
| 120 |
| | (10 | ) |
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | 12 |
| | 1 |
| (8 | ) | | 10 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 139 |
| | 95 |
| 111 |
| | 139 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 160 |
| | $ | 8,284 |
| $ | 223 |
| | $ | 139 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the SecondFirst Quarter of 2020 and First Six Months of 2019 and 2018
| | | Common Stock Issued | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | Common Stock Issued | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
(in millions, except per share data) | Shares | | Amount | | Shares | | Amount | |
Balance as of January 1, 2020 | | 1,406.8 |
| | $ | 14 |
| | $ | 21,557 |
| | $ | 1,582 |
| | $ | 104 |
| | $ | 23,257 |
|
Net income | | — |
| | — |
| | — |
| | 156 |
| | — |
| | 156 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (584 | ) | | (584 | ) |
Dividends declared, $0.15 per share | | — |
| | — |
| | — |
| | (211 | ) | | — |
| | (211 | ) |
Shares issued under employee stock-based compensation plans and other | | 0.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation and stock options exercised | | — |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
Balance as of March 31, 2020 | | 1,407.1 |
| | $ | 14 |
| | $ | 21,579 |
| | $ | 1,527 |
| | $ | (480 | ) | | $ | 22,640 |
|
| | | | | | | | | | | | |
Balance as of January 1, 2019 | 1,405.9 |
| | $ | 14 |
| | $ | 21,471 |
| | $ | 1,178 |
| | $ | (130 | ) | | $ | 22,533 |
| 1,405.9 |
| | $ | 14 |
| | $ | 21,471 |
| | $ | 1,178 |
| | $ | (130 | ) | | $ | 22,533 |
|
Adoption of new accounting standards | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Net income attributable to KDP | — |
| | — |
| | — |
| | 230 |
| | — |
| | 230 |
| |
Net income | | — |
| | — |
| | — |
| | 230 |
| | — |
| | 230 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 93 |
| | 93 |
| — |
| | — |
| | — |
| | — |
| | 93 |
| | 93 |
|
Dividends declared, $0.15 per share | — |
| | — |
| | — |
| | (211 | ) | | — |
| | (211 | ) | — |
| | — |
| | — |
| | (211 | ) | | — |
| | (211 | ) |
Measurement period adjustment | — |
| | — |
| | 11 |
| | — |
| | — |
| | 11 |
| — |
| | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
Shares issued under employee stock-based compensation plans and other | 0.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Shares issued under stock-based compensation plans and other | | 0.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation and stock options exercised | — |
| | — |
| | 23 |
| | — |
| | — |
| | 23 |
| — |
| | — |
| | 23 |
| | — |
| | — |
| | 23 |
|
Balance as of March 31, 2019 | 1,406.7 |
| | 14 |
| | 21,505 |
| | 1,192 |
| | (37 | ) | | 22,674 |
| 1,406.7 |
| | $ | 14 |
| | $ | 21,505 |
| | $ | 1,192 |
| | $ | (37 | ) | | $ | 22,674 |
|
Net income attributable to KDP | — |
| | — |
| | — |
| | 314 |
| | — |
| | 314 |
| |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 88 |
| | 88 |
| |
Dividends declared, $0.15 per share | — |
| | — |
| | — |
| | (212 | ) | | — |
| | (212 | ) | |
Stock-based compensation and stock options exercised | — |
| | — |
| | 19 |
| | — |
| | — |
| | 19 |
| |
Balance as of June 30, 2019 | 1,406.7 |
| | $ | 14 |
| | $ | 21,524 |
| | $ | 1,294 |
| | $ | 51 |
| | $ | 22,883 |
| |
| | | | | | | | | | | | |
Balance as of January 1, 2018 | 790.5 |
| | $ | 8 |
| | $ | 6,377 |
| | $ | 914 |
| | $ | 99 |
| | $ | 7,398 |
| |
Adoption of new accounting standards | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | |
Net income attributable to KDP | — |
| | — |
| | — |
| | 88 |
| | — |
| | 88 |
| |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (24 | ) | | (24 | ) | |
Dividends declared | — |
| | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) | |
Adjustment of non-controlling interests to fair value | — |
| | — |
| | — |
| | (13 | ) | | — |
| | (13 | ) | |
Balance as of March 31, 2018 | 790.5 |
| | 8 |
| | 6,377 |
| | 974 |
| | 75 |
| | 7,434 |
| |
Net income attributable to KDP | — |
| | — |
| | — |
| | 83 |
| | — |
| | 83 |
| |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (16 | ) | | (16 | ) | |
Dividends declared | — |
| | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) | |
Adjustment of non-controlling interests to fair value | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) | |
Balance as of June 30, 2018 | 790.5 |
| | $ | 8 |
| | $ | 6,377 |
| | $ | 1,040 |
| | $ | 59 |
| | $ | 7,484 |
| |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
ORGANIZATION
On January 29, 2018, Dr Pepper Snapple Group, Inc. ("DPS")DPS entered into anthe DPS Merger Agreement and Plan of Merger (the "Merger Agreement") by and among DPS, Maple Parent Holdings Corp. (“Maple”) and Salt Merger Sub, Inc. (“Merger Sub”), whereby Merger Sub would be merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS (the “DPS Merger”).Sub. The DPS Merger was consummated on July 9, 2018, (the "Merger Date"), at which time DPS changed its name to "Keurig Dr Pepper Inc.".
References in this Quarterly Report on Form 10-Q to "KDP" or "the Company" refer to Keurig Dr Pepper Inc. and all entities included in the unaudited condensed consolidated financial statements. Definitions of terms used in this Quarterly Report on Form 10-Q are included within the Master Glossary.
This Quarterly Report on Form 10-Q refers to some of KDP's owned or licensed trademarks, trade names and service marks, which are referred to as the Company's brands. All of the product names included herein are either KDP registered trademarks or those of the Company's licensors.
BASIS OF PRESENTATION
For financial reporting and accounting purposes, Maple was the acquirer of DPS upon completion of the DPS Merger. The accompanying unaudited condensed consolidated financial statements as of June 30, 2019 and December 31, 2018 and for the second quarter and first six months of 2019 and 2018 reflect the results of operations and financial position of Maple for the periods presented. Amounts reported as of June 30, 2019 and December 31, 2018, and for the second quarter and first six months of 2019, include the results of operations and financial position of DPS, as the DPS Merger was completed on July 9, 2018.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP")GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements.statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with KDP's consolidated financial statements and accompanying notes, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.Report.
Except as otherwise specified, references to the "second"first quarter" indicate the Company's quarterly periods ended June 30, 2019March 31, 2020 and 2018.2019.
PRINCIPLES OF CONSOLIDATION
KDP consolidates all wholly owned subsidiaries. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes KDP's proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors or similar governing body, participation in policy-making decisions and material intercompany transactions.
The Company is also required to consolidate entities that are variable interest entities (“VIEs”) of which KDP is the primary beneficiary. Judgments are made in assessing whether KDP is the primary beneficiary, including determination of the activities that most significantly impact the VIE’s economic performance.
KDP eliminates from its financial results all intercompany transactions between entities included in the unaudited condensed consolidated financial statements.
USE OF ESTIMATES
The process of preparing KDP's KDP's unaudited condensed consolidatedfinancial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. These estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
RECLASSIFICATIONS
The Company reclassified the following amounts fromin the unaudited condensed consolidated balance sheets asStatement of December 31, 2018Cash Flows for the first quarter of 2019 in connection with the adoption of Accounting Standards Codification ("ASC") Topic 842, Leases ("ASC 842"):order to conform to current year presentation:
|
| | | | | | | | |
(in millions) | | Prior Presentation | | Revised Presentation | | December 31, 2018 |
Capital lease and financing obligations | | Current portion of capital lease and financing obligations | | Other current liabilities | | $ | 26 |
|
Capital lease and financing obligations | | Capital lease and financing obligations, less current | | Other non-current liabilities | | 305 |
|
|
| | | | | | | | |
(in millions) | | Prior Presentation | | Revised Presentation | | First Quarter of 2019 |
Net cash provided by operating activities: | | | | | | |
Amortization of intangibles | | Amortization expense | | Amortization of intangibles | | $ | 31 |
|
Other amortization expense(1) | | Amortization expense | | Other amortization expense | | 36 |
|
Amortization of deferred financing fees | | Amortization expense | | Other, net | | 4 |
|
Amortization of bond fair value | | Amortization expense | | Other, net | | 7 |
|
Equity in loss of unconsolidated affiliates | | Other, net | | Equity in loss of unconsolidated affiliates | | 15 |
|
Net cash provided by (used in) investing activities: | | | | | | |
Proceeds from sales of property, plant and equipment | | Other, net | | Proceeds from sales of property, plant and equipment | | 18 |
|
Purchase of intangibles | | Other, net | | Purchases of intangibles | | (2 | ) |
Net cash provided by (used in) financing activities: | | | | | | |
Proceeds from stock options exercised | | Proceeds from stock options exercised | | Other, net | | 8 |
|
| |
(1) | Primarily includes amortization of customer rebates and upfront payments. |
Refer to Recently Adopted Provisions of U.S. GAAP below for further information about the adoption of ASC 842. Refer to Note 3 for information about the Company's leases and Note 12 for disclosure of the components of other current liabilities and other non-current liabilities.RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2016,January 2020, the Financial Accounting Standards Board (the "FASB")FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): MeasurementASU 2020-01. The objective of Credit Losses on Financial Instruments ("ASU 2016-13"). The standard provides2020-01 is to clarify the interaction of the accounting for a new impairment model which requires measurementequity securities, investments accounted for under the equity method of accounting and recognition of expected credit lossesthe accounting for most financial assets held. Thecertain forward contracts and purchased options accounted under different topics in U.S. GAAP. ASU 2020-01 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019.2020. The Company is currently evaluating the impact of ASU 2020-01 but expects the impact to be immaterial to KDP's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04. The objective of ASU 2020-04 is to provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04 to KDP's consolidated financial statements.
RECENTLY ADOPTED PROVISIONS OF U.S. GAAP
Credit Losses
As of January 1, 2020, the Company adopted ASU 2016-13, which replaced the incurred loss methodology with an expected loss methodology. The objective of ASU 2016-13 was to provide for a new impairment model which requires measurement and recognition of current expected credit losses (CECL) for most financial assets held. The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost, which means that results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption of ASU 2016-13 did not have an impact on the Company's unaudited condensed consolidated financial statements.
In August 2018,Refer to Note 13 for additional information.
Other Accounting Standards
As of January 1, 2020, the FASB issuedCompany adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements ("ASU 2018-13").2018-13. The objective of the ASU 2018-13 is to improve the disclosures related to fair value measurement by removing, modifying, or adding disclosure requirements related to recurring and non-recurring fair value measurements. ASU 2018-13 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company is currently assessing the changes in disclosure requirements and does not believe there will be a material impact to KDP's unaudited condensed consolidated financial statements.
RECENTLY ADOPTED PROVISIONS OF U.S. GAAP
Leases
As of January 1, 2019, the Company adopted ASC 842. ASC 842 replaced the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures.
The Company elected to apply the optional transition method provided by ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which allows companies to adopt the standard on a modified retrospective basis and to apply the new leases standard as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, amounts reported in the unaudited condensed consolidated financial statements for all periods prior to January 1, 2019 have not been recast under ASC 842 and continue to be reported in accordance with ASC 840. The Company elected the package of practical expedients which allows the Company to carry forward its historical assessments of whether contracts contain leases, lease classification, and initial direct costs, for leases in existence prior to January 1, 2019.
The adoption of ASC 842 resulted in an increase to KDP's total assets of approximately $314 million, an increase to KDP's total liabilities of approximately $319 million, and an impact to KDP's retained earnings of approximately $5 million, as of January 1, 2019.
Refer to Note 3 for additional information.
Other Accounting Standards
As of January 1, 2019, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") on a prospective basis. The objective of the ASU is to improve the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance. The adoption of ASU 2017-122018-13 did not have a materialan impact on the Company's unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
As of January 1, 2019, the Company early adopted ASU 2018-15, Intangibles - Goodwill2. Long-term Obligations and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. The ASU was adopted on a prospective basis and did not have a material impact on the Company's unaudited condensed consolidated financial statements.
2.Acquisitions and Investments in Unconsolidated AffiliatesBorrowing Arrangements
ACQUISITION OF DR PEPPER SNAPPLE GROUP, INC.The following table summarizes the Company's long-term obligations:
Overview and Total Consideration Exchanged |
| | | | | | | |
(in millions) | March 31, 2020 | | December 31, 2019 |
Senior unsecured notes | $ | 11,559 |
| | $ | 11,802 |
|
Term loan | 970 |
| | 1,372 |
|
Subtotal | 12,529 |
| | 13,174 |
|
Less - current portion | (98 | ) | | (347 | ) |
Long-term obligations | $ | 12,431 |
| | $ | 12,827 |
|
As discussed in Note 1,The following table summarizes the General, CompanyMaple merged with DPS on July 9, 2018. The DPS Merger was accounted for as a reverse merger under the acquisition method's short-term borrowings and current portion of accounting for business combinations. Maple was considered to be the financial and accounting acquirer, and DPS was considered the legal acquirer. Under the acquisition method of accounting, total consideration exchanged was $22,482 million.long-term obligations:
Allocation of Consideration |
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | March 31, 2020 | | December 31, 2019 |
(in millions) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Commercial paper notes | 2 | | $ | 859 |
| | $ | 859 |
| | $ | 1,246 |
| | $ | 1,246 |
|
Revolving credit facilities | 2 | | 1,000 |
| | 1,000 |
| | — |
| | — |
|
Current portion of long-term obligations: | | | | | | | | | |
Senior unsecured notes | 2 | | — |
| | — |
| | 250 |
| | 250 |
|
Term loan | 2 | | 98 |
| | 98 |
| | 97 |
| | 97 |
|
Short-term borrowings and current portion of long-term obligations | | | $ | 1,957 |
| | $ | 1,957 |
| | $ | 1,593 |
| | $ | 1,593 |
|
SENIOR UNSECURED NOTES
The Company's preliminary allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the DPS Merger is based on estimated fair values as of July 9, 2018. The following is a summaryNotes consisted of the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the DPS Merger as of June 30, 2019:following:
|
| | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | Fair Value Hierarchy Level | | March 31, 2020 | | December 31, 2019 |
Issuance | | Maturity Date | | Rate | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
2020 Notes(1) | | January 15, 2020 | | 2.000% | | 2 | | $ | — |
| | $ | — |
| | $ | 250 |
| | $ | 250 |
|
2021 Merger Notes | | May 25, 2021 | | 3.551% | | 2 | | 1,750 |
| | 1,766 |
| | 1,750 |
| | 1,785 |
|
2021-A Notes | | November 15, 2021 | | 3.200% | | 2 | | 250 |
| | 250 |
| | 250 |
| | 254 |
|
2021-B Notes | | November 15, 2021 | | 2.530% | | 2 | | 250 |
| | 247 |
| | 250 |
| | 251 |
|
2022 Notes | | November 15, 2022 | | 2.700% | | 2 | | 250 |
| | 247 |
| | 250 |
| | 251 |
|
2023 Merger Notes | | May 25, 2023 | | 4.057% | | 2 | | 2,000 |
| | 2,075 |
| | 2,000 |
| | 2,110 |
|
2023 Notes | | December 15, 2023 | | 3.130% | | 2 | | 500 |
| | 504 |
| | 500 |
| | 514 |
|
2025 Merger Notes | | May 25, 2025 | | 4.417% | | 2 | | 1,000 |
| | 1,059 |
| | 1,000 |
| | 1,090 |
|
2025 Notes | | November 15, 2025 | | 3.400% | | 2 | | 500 |
| | 507 |
| | 500 |
| | 521 |
|
2026 Notes | | September 15, 2026 | | 2.550% | | 2 | | 400 |
| | 387 |
| | 400 |
| | 400 |
|
2027 Notes | | June 15, 2027 | | 3.430% | | 2 | | 500 |
| | 503 |
| | 500 |
| | 520 |
|
2028 Merger Notes | | May 25, 2028 | | 4.597% | | 2 | | 2,000 |
| | 2,184 |
| | 2,000 |
| | 2,253 |
|
2038 Notes | | May 1, 2038 | | 7.450% | | 2 | | 125 |
| | 187 |
| | 125 |
| | 167 |
|
2038 Merger Notes | | May 25, 2038 | | 4.985% | | 2 | | 500 |
| | 559 |
| | 500 |
| | 587 |
|
2045 Notes | | November 15, 2045 | | 4.500% | | 2 | | 550 |
| | 580 |
| | 550 |
| | 605 |
|
2046 Notes | | December 15, 2046 | | 4.420% | | 2 | | 400 |
| | 417 |
| | 400 |
| | 435 |
|
2048 Merger Notes | | May 25, 2048 | | 5.085% | | 2 | | 750 |
| | 886 |
| | 750 |
| | 905 |
|
Principal amount | | | | | | | | $ | 11,725 |
| | $ | 12,358 |
| | $ | 11,975 |
| | $ | 12,898 |
|
Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger | | | | (166 | ) | | | | (173 | ) | | |
Carrying amount | | | | | | | | $ | 11,559 |
| | | | $ | 11,802 |
| | |
|
| | | | | | | | | | | |
(in millions) | Initial Allocation of Consideration | | Measurement Period Adjustments | | Allocation of Consideration as of June 30, 2019 |
Cash and cash equivalents | $ | 147 |
| | $ | — |
| | $ | 147 |
|
Investments in unconsolidated affiliates | 90 |
| | — |
| | 90 |
|
Property, plant and equipment(1) | 1,549 |
| | (74 | ) | | 1,475 |
|
Other intangible assets | 20,404 |
| | (326 | ) | | 20,078 |
|
Long-term obligations | (4,049 | ) | | — |
| | (4,049 | ) |
Finance leases | (214 | ) | | 9 |
| | (205 | ) |
Acquired assets, net of assumed liabilities(2) | 107 |
| | (26 | ) | | 81 |
|
Deferred tax liabilities, net of deferred tax assets(3) | (4,959 | ) | | (82 | ) | | (5,041 | ) |
Goodwill | 9,407 |
| | 499 |
| | 9,906 |
|
Total consideration exchanged | $ | 22,482 |
| | $ | — |
| | $ | 22,482 |
|
Fair value of stock and replacement equity awards not converted to cash | 3,643 |
| | — |
| | 3,643 |
|
Acquisition of business | $ | 18,839 |
| | $ | — |
| | $ | 18,839 |
|
| |
(1) | The Company valued personal property using a combination of the market approach and the cost approach, which is based upon current replacement or reproduction cost of the asset as newly adjusted for any depreciation attributable to physical, functional and economic factors. The Company assigned personal property a useful life ranging from 1 year to 24 years. We valued real property using the cost approach and land using the sales comparison approach. The Company assigned real property a useful life between 1 year and 41 years. |
| |
(2) | The Company used existing carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, asOn January 15, 2020, the Company determined that they representedrepaid the fair value of those items as of the Merger Date. The Company valued work-in-process ("WIP") and finished goods inventory2020 Notes at maturity, using a net realizable value approach resulting in a step-up of $131 million which was recognized in the cost of goods sold for the third quarter of 2018 as the related inventory was sold during that period. Raw materials were carried at net book value. |
| |
(3) | Net deferred tax liabilities represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases.commercial paper notes. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The DPS Merger resulted in $9,906 millionfair value amounts of goodwill as of June 30, 2019.the Notes were based on current market rates available to the Company. The goodwill recognized is attributable to operational and general and administrative cost synergies resulting fromdifference between the warehouse and transportation integration, direct procurement savings on overlapping materials, purchasing scale on indirect spend categories and optimization of duplicate positions and processes. The Company may also recognize revenue synergies, driven by a strong portfolio of brands with exposure to higher growth segmentsfair value and the abilitycarrying value represents the theoretical net premium or discount that would be paid or received to leverage our collective distribution strength.retire all the Notes and related unamortized costs to be incurred at such date. The goodwill createdcarrying amount includes the unamortized discounts, debt issuance costs and the fair value adjustment for the DPS Merger.
BORROWING ARRANGEMENTS
The KDP Credit Agreements consisted of the following carrying values and estimated fair values that are not required to be measured at fair value in the DPS Merger is not deductible for tax purposes.
The preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:unaudited Condensed Consolidated Balance Sheets:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | Fair Value Hierarchy Level | | March 31, 2020 | | December 31, 2019 |
Issuance | | Maturity Date | | | Available Balances | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
2019 KDP Term Loan(1) | | February 2023 | | 2 | | $ | — |
| | $ | 975 |
| | $ | 975 |
| | $ | 1,380 |
| | $ | 1,380 |
|
KDP Revolver(2) | | February 2023 | | 2 | | 1,400 |
| | 1,000 |
| | 1,000 |
| | — |
| | — |
|
2019 364-Day Credit Agreement | | May 2020 | | 2 | | 750 |
| | — |
| | — |
| | — |
| | — |
|
Principal amount | | | | | | | | $ | 1,975 |
| | $ | 1,975 |
| | $ | 1,380 |
| | $ | 1,380 |
|
Unamortized discounts and debt issuance costs | | | | (5 | ) | | | | (8 | ) | | |
Carrying amount | | | | | | | | $ | 1,970 |
| | | | $ | 1,372 |
| | |
|
| | | | | | |
(in millions) | | Fair Value | | Estimated Life (in years) |
Brands(1) | | $ | 19,556 |
| | n/a |
Contractual arrangements(2) | | 127 |
| | n/a |
Customer relationships(3) | | 390 |
| | 10-40 |
Favorable leases(4) | | 5 |
| | 5-12 |
Total other intangible assets | | $ | 20,078 |
| | |
| |
(1) | The Company valuedborrowed $380 million of commercial paper to voluntarily prepay a portion of its outstanding obligations under the brand portfolio utilizing2019 KDP Term Loan. As a result of these voluntary prepayments, the multi-period excess earnings method,Company recorded a form$2 million loss on early extinguishment during the first quarter of the income approach.2020 |
| |
(2) | The Company valued contractual arrangements with bottlersKDP Revolver has $200 million letters of credit availability and distributors utilizing the distributor method, a formNaN utilized as of the income approach. |
| |
(3) | The Company identified two types of customer relationships, retail and food service. We preliminarily valued retail and food service customer relationships utilizing the distributor method, a form of the income approach. |
| |
(4) | The Company valued favorable leases utilizing the income approach.March 31, 2020. |
Pro Forma Information
Assuming DPS had been acquired asAs of DecemberMarch 31, 2016, and2020, the results of DPS had been includedCompany was in operations beginning on January 1, 2017, the following tables provide estimated unaudited pro forma results of operations for the second quarter and first six months of 2018 under U.S. GAAP.
The estimated pro forma net income includes the alignment of accounting policies, the effect of fair value adjustments relatedcompliance with all financial covenant requirements relating to the DPS Merger, the associated tax effects and the impact of the additional debt to finance the DPS Merger.KDP Credit Agreements.
|
| | | | | | | |
| Second Quarter | | First Six Months |
(Unaudited, in millions) | 2018 | | 2018 |
Net sales | $ | 2,822 |
| | $ | 5,351 |
|
Net income | 323 |
| | 534 |
|
Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the DPS Merger been completed on the date indicated or the future operating results.
ACQUISITION OF BIG RED
Overview and Purchase Price
On July 9, 2018, KDP entered into an Agreement and Plan of Merger (the "Big Red Merger Agreement") with Big Red Group Holdings, LLC ("Big Red"), pursuant to which we agreed to acquire Big Red for an enterprise value of $300 million, subject to certain adjustments outlined in the Big Red Merger Agreement (the "Big Red Acquisition"). On August 31, 2018 (the "Big Red Merger Date"), the Company completed the Big Red Acquisition.
Allocation of Purchase Price
The Company's preliminary allocation of purchase price to the net tangible and intangible assets acquired and liabilities assumed in the Big Red Acquisition is based on estimated fair values as of the Big Red Acquisition Date.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The following is a summary of the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the Big Red Acquisition as of June 30, 2019:
|
| | | | | | | | | | | |
(in millions) | Initial Allocation of Consideration | | Measurement Period Adjustments | | Allocation of Consideration as of June 30, 2019 |
Cash and cash equivalents | $ | 3 |
| | — |
| | $ | 3 |
|
Other intangible assets | 240 |
| | (2 | ) | | 238 |
|
Assumed liabilities, net of acquired assets(1) | (28 | ) | | (20 | ) | | (48 | ) |
Goodwill | 89 |
| | 24 |
| | 113 |
|
Total consideration exchanged(2) | $ | 304 |
| | $ | 2 |
| | $ | 306 |
|
Less: Company's previous ownership interest | 22 |
| | — |
| | 22 |
|
Less: Holdback placed in escrow | 15 |
| | — |
| | 15 |
|
Acquisition of business | $ | 267 |
| | $ | 2 |
| | $ | 269 |
|
| |
(1) | The Company valued WIP and finished goods inventory using a net realizable value approach, which resulted in a step-up of $2 million which was recognized in the cost of goods sold for the year ended December 31, 2018 as the related inventory was sold during that period. Raw materials were carried at net book value. |
| |
(2) | The Company paid $2 million in additional consideration during the fourth quarter of 2018 as a result of working capital adjustments determined pursuant to the terms of the Big Red Acquisition Agreement. |
The Big Red Acquisition resulted in $113 million of goodwill. The goodwill recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, purchasing scale on various spend categories and optimization of duplicate positions and processes. The goodwill created in the Big Red Acquisition is not deductible for tax purposes.
The preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:
|
| | | | | |
(in millions) | Fair Value | | Estimated Life (in years) |
Brands(1) | $ | 220 |
| | n/a |
Brands(1) | 11 |
| | 5 |
Contractual arrangements(2) | 6 |
| | 12 |
Customer relationships(3) | 1 |
| | 8-40 |
Total other intangible assets | $ | 238 |
| | |
| |
(1) | The Company valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach. |
| |
(2) | The Company valued contractual arrangements with bottlers and distributors utilizing the distributor method, a form of the income approach. |
| |
(3) | The Company identified two types of customer relationships, retail and industrial. We valued retail and industrial customer relationships utilizing the distributor method, a form of the income approach. |
ACQUISITION OF CORE NUTRITION, LLC
Overview and Purchase PriceCommercial Paper Program
On September 27, 2018, KDP entered into a definitive agreement with Core Nutrition, LLC ("Core"), pursuant to which we agreed to acquire Core for merger consideration, which represented an enterprise value of $525 million (subject to customary post-closing working capital and other adjustments), comprised substantially of shares of common stock of KDP, subject to certain adjustments paid in cash (the "Core Acquisition"). On November 30, 2018 (the "Core Acquisition Date"), the Company completed the Core Acquisition.
Allocation of Purchase Price
The Company's preliminary allocation of purchase price to the net tangible and intangible assets acquired and liabilities assumed in the Core Acquisition is based on estimated fair values as of the Core Acquisition Date.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The following is a summary of the preliminary allocation of purchase price to the estimated fair values of assets acquired and liabilities assumed in the Core Acquisition as of June 30, 2019:
|
| | | | | | | | | | | |
(in millions) | Initial Allocation of Consideration | | Measurement Period Adjustments | | Allocation of Consideration as of June 30, 2019 |
Cash and cash equivalents | $ | 10 |
| | $ | — |
| | $ | 10 |
|
Other intangible assets | 273 |
| | — |
| | 273 |
|
Assumed liabilities, net of acquired assets(1) | (12 | ) | | (3 | ) | | (15 | ) |
Goodwill | 236 |
| | 12 |
| | 248 |
|
Total purchase price | $ | 507 |
| | $ | 9 |
| | $ | 516 |
|
Company's previous ownership interest | 31 |
| | — |
| | 31 |
|
Less: Holdback placed in Escrow | 27 |
| | (2 | ) | | 25 |
|
Acquisition of business | $ | 449 |
| | $ | 11 |
| | $ | 460 |
|
| |
(1) | The Company preliminarily valued WIP and finished goods inventory using a net realizable value approach resulting in a step-up of $4 million, of which $1 million and $3 million was recognized in cost of goods sold in 2018 and 2019, respectively, due to the timing of the sale of the related inventory. Raw materials were carried at net book value. |
The Core Acquisition preliminarily resulted in $248 million of goodwill. The preliminary goodwill to be recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, purchasing scale on various spend categories and optimization of duplicate positions and processes. The goodwill created in the Core Acquisition is expected to be deductible for tax purposes.
The preliminary allocation of purchase price to other intangible assets acquired is as follows:
|
| | | | | | |
(in millions) | | Fair Value | | Estimated Life (in years) |
Brands(1) | | $ | 254 |
| | n/a |
Contractual arrangements(2) | | 19 |
| | 10 |
Total other intangible assets | | $ | 273 |
| | |
| |
(1) | The Company preliminarily valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach. |
| |
(2) | The Company preliminarily valued contractual arrangements utilizing the distributor method, a form of the income approach. |
OTHER ACQUISITIONS
The Company also spent an aggregate of $8 million in connection with other immaterial acquisitions during the first six months of 2019, which resulted in the recognition of fixed assets, intangible assets and goodwill. Pro forma financial information has not been presented for these acquisitions as the impact to our unaudited condensed consolidated financial statements was not material.
TRANSACTION EXPENSES
The following table provides information about the Company's transaction expenses incurred during the second quarter and first six months of 2019 and 2018:Company's weighted average borrowings under its commercial paper program:
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
DPS Merger | $ | 4 |
| | $ | 39 |
| | $ | 6 |
| | $ | 75 |
|
Other transaction expenses | 4 |
| | — |
| | 7 |
| | — |
|
Total transaction expenses incurred | $ | 8 |
| | $ | 39 |
| | $ | 13 |
| | $ | 75 |
|
|
| | | | | | | |
| First Quarter |
(in millions, except %) | 2020 | | 2019 |
Weighted average commercial paper borrowings | $ | 1,670 |
| | $ | 1,748 |
|
Weighted average borrowing rates | 1.85 | % | | 2.90 | % |
Transaction expenses primarily consistedLetter of professional fees for advisory and consulting services and other incremental costs relatedCredit Facility
In addition to the acquisitions.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The following table summarizes investments in unconsolidated affiliatesportion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility. Under this facility, $100 million is available for the issuance of letters of credit, $44 million of which was utilized as of June 30, 2019March 31, 2020 and December 31, 2018:
|
| | | | | | | | | | | |
| | | | June 30, | | December 31, |
(in millions) | | Ownership Interest | | 2019 | | 2018 |
BA Sports Nutrition, LLC ("BA") | | 12.5 | % | | $ | 52 |
| | $ | 62 |
|
Bedford Systems, LLC | | 30.0 | % | | 65 |
| | 79 |
|
Dyla LLC | | 12.6 | % | | 14 |
| | 15 |
|
Force Holdings LLC | | 33.3 | % | | 5 |
| | 6 |
|
Beverage startup companies | | (various) |
| | 28 |
| | 19 |
|
Other | | (various) |
| | 6 |
| | 5 |
|
Investments in unconsolidated affiliates | | | | $ | 170 |
| | $ | 186 |
|
$56 million of which remains available for use.3. Leases
The Company leases certain facilities and machinery and equipment, including fleet. These leases expire at various dates through 2044. Some lease agreements contain standard renewal provisions that allow us to renew the lease at rates equivalent to fair market value at the end of the lease term. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.
Operating leases are included within other non-current assets, other current liabilities, and other non-current liabilities within our unaudited Condensed Consolidated Balance Sheets. Refer to Note 12 for further information. Finance leases are included within property, plant and equipment, net, other current liabilities, and other non-current liabilities. Leases with an initial term of 12 months or less are not recognized on the balance sheet.
Right of use assets and lease liabilities are recognized in the unaudited Condensed Consolidated Balance Sheets at the present value of future minimum lease payments over the lease term on the commencement date. As the rate implicit in the lease is generally not provided to the Company, KDP uses its incremental borrowing rate based on information available at the commencement date to determine the present value of future minimum lease payments. KDP's incremental borrowing rate is determined using a portfolio of secured borrowing rates commensurate with the term of the lease and is reassessed on a quarterly basis.
KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.
The following table presents the components of lease cost:
|
| | | | | | | |
| Second Quarter | | First Six Months |
(in millions) | 2019 | | 2019 |
Operating lease cost | $ | 20 |
| | $ | 40 |
|
Finance lease cost | | | |
Amortization of right-of-use assets | 10 |
| | 20 |
|
Interest on lease liabilities | 3 |
| | 7 |
|
Variable lease cost(1) | 8 |
| | 14 |
|
Short-term lease cost | 2 |
| | 3 |
|
Sublease income | (1 | ) | | (1 | ) |
Total lease cost | $ | 42 |
| | $ | 83 |
|
| |
(1) | Variable lease cost primarily consists of common area maintenance costs, property taxes, and adjustments for inflation. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The following table presents supplemental cash flow information about the Company's leases:
|
| | | |
| First Six Months |
(in millions) | 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 38 |
|
Operating cash flows from finance leases | 7 |
|
Financing cash flows from finance leases | 19 |
|
The following table presents information about the Company's weighted average discount rate and remaining lease term as of June 30, 2019:
|
| | |
Weighted average discount rate | |
Operating leases | 4.6 | % |
Finance leases | 5.3 | % |
Weighted average remaining lease term | |
Operating leases | 8 years |
|
Finance leases | 12 years |
|
Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as follows:
|
| | | | | | | |
(in millions) | Operating Leases | | Finance Leases |
Remainder of 2019 | $ | 39 |
| | $ | 26 |
|
2020 | 70 |
| | 49 |
|
2021 | 56 |
| | 42 |
|
2022 | 47 |
| | 36 |
|
2023 | 39 |
| | 33 |
|
2024 | 37 |
| | 30 |
|
Thereafter | 133 |
| | 171 |
|
Total future minimum lease payments | 421 |
| | 387 |
|
Less: imputed interest | (70 | ) | | (97 | ) |
Present value of minimum lease payments | $ | 351 |
| | $ | 290 |
|
Future minimum lease payments under non-cancellable leases as of December 31, 2018 under ASC 840 were as follows:
|
| | | | | | | | | | | |
(in millions) | Operating Leases | | Capital Leases | | Financing Obligations |
2019 | $ | 58 |
| | $ | 35 |
| | $ | 10 |
|
2020 | 53 |
| | 34 |
| | 10 |
|
2021 | 44 |
| | 33 |
| | 10 |
|
2022 | 34 |
| | 33 |
| | 10 |
|
2023 | 25 |
| | 30 |
| | 10 |
|
Thereafter | 98 |
| | 189 |
| | 62 |
|
Total future minimum lease payments | $ | 312 |
| | 354 |
| | 112 |
|
Less: imputed interest | | | (98 | ) | | (37 | ) |
Present value of minimum lease payments | | | $ | 256 |
| | $ | 75 |
|
SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED
As of June 30, 2019, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $470 million. These leases will commence between 2020 and 2021, with initial lease terms ranging from 7 years to 16 years.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
4. Goodwill and Other Intangible Assets
GOODWILL
Changes in the carrying amount of goodwill by reportable segment are as follows:
| | | Coffee Systems | | Packaged Beverages | | Beverage Concentrates | | Latin America Beverages | | Unallocated | | Total | |
Balance as of January 1, 2019 | $ | 9,725 |
| | $ | 4,878 |
| | $ | 4,265 |
| | $ | 618 |
| | $ | 525 |
| | $ | 20,011 |
| |
(in millions) | | Coffee Systems | | Packaged Beverages | | Beverage Concentrates | | Latin America Beverages | | Total |
Balance as of January 1, 2020 | | $ | 9,775 |
| | $ | 5,301 |
| | $ | 4,526 |
| | $ | 570 |
| | $ | 20,172 |
|
Foreign currency translation | 46 |
| | 27 |
| | 16 |
| | 14 |
| | — |
| | 103 |
| (74 | ) | | (57 | ) | | (37 | ) | | (112 | ) | | (280 | ) |
Acquisitions(1) | 3 |
| | 254 |
| | 242 |
| | (73 | ) | | (501 | ) | | (75 | ) | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
Balance as of June 30, 2019 | $ | 9,774 |
| | $ | 5,159 |
| | $ | 4,523 |
| | $ | 559 |
| | $ | 24 |
| | $ | 20,039 |
| |
Balance as of March 31, 2020 | | $ | 9,701 |
| | $ | 5,250 |
| | $ | 4,489 |
| | $ | 458 |
| | $ | 19,898 |
|
| |
(1) | Amounts primarily represent measurement period adjustments for the DPS Merger, the Big Red Acquisition, and the Core Acquisition. Refer to Note 2 for further information. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
INTANGIBLE ASSETS OTHER THAN GOODWILL
The net carrying amounts of intangible assets other than goodwill with indefinite lives are as follows:
| | | | June 30, 2019 | | December 31, 2018 | |
(in millions) | | | March 31, 2020 | | December 31, 2019 |
Brands(1) | | $ | 20,025 |
| | $ | 19,712 |
| | $ | 19,569 |
| | $ | 19,948 |
|
Trade names | | 2,479 |
| | 2,479 |
| | 2,479 |
| | 2,479 |
|
Contractual arrangements | | 122 |
| | 119 |
| | 120 |
| | 122 |
|
Distribution rights | | 2 |
| | — |
| | 19 |
| | 16 |
|
Total | | $ | 22,628 |
| | $ | 22,310 |
| | $ | 22,187 |
| | $ | 22,565 |
|
| |
(1) | Approximately $113The decrease of $379 million of the increase in brands with indefinite lives was due to foreign currency translation during the period. The remaining change represents measurement period adjustments for the DPS Merger. Refer to Note 2 for further information.first quarter of 2020. |
The net carrying amounts of intangible assets other than goodwill with definite lives are as follows:
| | | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
(in millions) | Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount | Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
Acquired technology | $ | 1,146 |
| | $ | (218 | ) | | $ | 928 |
| | $ | 1,146 |
| | $ | (182 | ) | | $ | 964 |
| $ | 1,146 |
| | $ | (273 | ) | | $ | 873 |
| | $ | 1,146 |
| | $ | (255 | ) | | $ | 891 |
|
Customer relationships | 638 |
| | (85 | ) | | 553 |
| | 629 |
| | (67 | ) | | 562 |
| 632 |
| | (109 | ) | | 523 |
| | 638 |
| | (102 | ) | | 536 |
|
Trade names | 127 |
| | (47 | ) | | 80 |
| | 127 |
| | (40 | ) | | 87 |
| 126 |
| | (58 | ) | | 68 |
| | 128 |
| | (55 | ) | | 73 |
|
Contractual arrangements | 25 |
| | (2 | ) | | 23 |
| | 26 |
| | (1 | ) | | 25 |
| 24 |
| | (4 | ) | | 20 |
| | 24 |
| | (3 | ) | | 21 |
|
Brands | 11 |
| | (1 | ) | | 10 |
| | 9 |
| | — |
| | 9 |
| 15 |
| | (2 | ) | | 13 |
| | 10 |
| | (2 | ) | | 8 |
|
Distribution rights | 6 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| 24 |
| | (2 | ) | | 22 |
| | 24 |
| | (1 | ) | | 23 |
|
Favorable leases(1) | — |
| | — |
| | — |
| | 13 |
| | (3 | ) | | 10 |
| |
Total | $ | 1,953 |
| | $ | (353 | ) | | $ | 1,600 |
| | $ | 1,950 |
| | $ | (293 | ) | | $ | 1,657 |
| $ | 1,967 |
| | $ | (448 | ) | | $ | 1,519 |
| | $ | 1,970 |
| | $ | (418 | ) | | $ | 1,552 |
|
| |
(1) | Amounts recorded as favorable lease intangible assets were reclassified to operating lease right-of-use assets in connection with the adoption of ASC 842 as of January 1, 2019. Refer to Note 3 for further information regarding the adoption of ASC 842. |
Amortization expense for intangible assets with definite lives was as follows:
| | | Second Quarter | | First Six Months | First Quarter |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Amortization expense for intangible assets with definite lives | $ | 32 |
| | $ | 29 |
| | $ | 63 |
| | $ | 59 |
| $ | 33 |
| | $ | 31 |
|
Amortization expense of these intangible assets over the remainder of 20192020 and the next five years is expected to be as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Remainder of 2019 | | For the Years Ending December 31, |
(in millions) | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 |
Expected amortization expense for intangible assets with definite lives | $ | 63 |
| | $ | 126 |
| | $ | 126 |
| | $ | 126 |
| | $ | 126 |
| | $ | 121 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Remainder of 2020 | | For the Years Ending December 31, |
(in millions) | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
Expected amortization expense for intangible assets with definite lives | $ | 100 |
| | $ | 133 |
| | $ | 133 |
| | $ | 132 |
| | $ | 123 |
| | $ | 111 |
|
IMPAIRMENT TESTING
KDP conducts impairment tests on goodwill and all indefinite lived intangible assets annually, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. The Company did not identify any circumstances, which included the recent COVID-19 pandemic, that indicated that the carrying amount of any goodwill or any indefinite lived intangible asset may not be recoverable as of June 30, 2019.March 31, 2020.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
4.Investments in Unconsolidated Affiliates
The following table summarizes investments in unconsolidated affiliates as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | |
| | | | March 31, | | December 31, |
(in millions) | | Ownership Interest | | 2020 | | 2019 |
BodyArmor | | 12.5 | % | | $ | 51 |
| | $ | 52 |
|
Bedford | | 30.0 | % | | 1 |
| | 46 |
|
Dyla LLC | | 12.4 | % | | 13 |
| | 13 |
|
Force Holdings LLC | | 33.3 | % | | 5 |
| | 5 |
|
Beverage startup companies | | (various) |
| | 30 |
| | 30 |
|
Other | | (various) |
| | 5 |
| | 5 |
|
Investments in unconsolidated affiliates | | | | $ | 105 |
| | $ | 151 |
|
Impairment of Bedford Investment and Related Party Note Receivable
The Company and ABI, in conjunction with the creation of Bedford, had executed a line of credit agreement with Bedford on March 3, 2017, which was amended on December 7, 2018 to increase the line of credit. The Company committed and funded the $51 million capacity, which incurs a fixed interest rate of 8.1% per annum. The credit agreement with Bedford matures on March 3, 2024.
During the first quarter of 2020, the Company reduced its expectation of future operating performance for Bedford based on COVID-19 and a new revised five-year projection during the first quarter of 2020 from the management of Bedford that projected the possibility of profitability two years later than previously anticipated. As a result of these indicators of impairment, the Company tested the Bedford investment for an other-than-temporary impairment using a discounted cash flow framework with multiple scenarios, including the conversion of the note receivable into equity. The results of its analysis indicated that the note receivable of $55 million was fully impaired and the investment in unconsolidated affiliates was impaired by $31 million on the impairment on investment line in the Condensed Consolidated Statements of Income. As a result of the other-than-temporary impairment, the Company has placed the note receivable in non-accrual status.
5. Restructuring and Integration Costs
The Company implements restructuring programs from time to time and incurs costs that are designed to improve operating effectiveness and lower costs. When the Company implements these programs, the Company incurs expenses, such as employee separations, lease terminations and other direct exit costs, that qualify as exit and disposal costs under U.S. GAAP.
The Company also incurs expenses that are an integral component of, and directly attributable to, its restructuring activities, which do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments, implementation costs and other incremental costs. These costs are recorded within SG&A expenses on the income statement and are held primarily within unallocated corporate costs.
Restructuring and integration charges incurred on the defined programs were as follows:
| | | Second Quarter | | First Six Months | First Quarter |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Keurig 2.0 exit | $ | — |
| | $ | 7 |
| | $ | 1 |
| | $ | 12 |
| $ | — |
| | $ | 1 |
|
Integration program | 32 |
| | 26 |
| | 92 |
| | 26 |
| |
Other restructuring programs | — |
| | 1 |
| | — |
| | 2 |
| |
DPS integration program | | 53 |
| | 60 |
|
Total restructuring and integration charges | $ | 32 |
| | $ | 34 |
| | $ | 93 |
| | $ | 40 |
| $ | 53 |
| | $ | 61 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
Restructuring liabilities that qualify as exit and disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements. Restructuring liabilities as of June 30, 2019 and DecemberMarch 31, 20182020 along with charges to expense, cash payments and non-cash charges for the period specific to the Integration Program were as follows:
|
| | | |
(in millions) | Workforce Reduction Costs |
Balance as of January 1, 2020 | $ | 15 |
|
Charges to expense | 12 |
|
Cash payments | (2 | ) |
Non-cash adjustment items | (2 | ) |
Balance as of March 31, 2020 | $ | 23 |
|
|
| | | | | | | | | | | |
(in millions) | Workforce Reduction Costs | | Other(1) | | Total |
Balance as of December 31, 2018 | $ | 28 |
| | $ | 1 |
| | $ | 29 |
|
Charges to expense | 10 |
| | — |
| | 10 |
|
Cash payments | (34 | ) | | — |
| | (34 | ) |
Non-cash adjustment items | 1 |
| | (1 | ) | | — |
|
Balance as of June 30, 2019 | $ | 5 |
| | $ | — |
| | $ | 5 |
|
| |
(1) | Primarily reflects activities associated with the closure of certain facilities, excluding contract termination costs, which include any associated asset write-downs and accelerated depreciation. |
RESTRUCTURING PROGRAMS
DPS Integration Program
As part of the DPS Merger, the Company established a transformation management office to enable integration and maximize value capture. The Company developed a program to deliver $600 million in synergies over a three-year period through supply chain optimization, reduction of indirect spend through new economies of scale, elimination of duplicative support functions and advertising and promotion optimization. The Company expects to incur total cash expenditures of $750 million, comprised of both capital expenditures and expense, and expects to complete the program by 2021. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $247$440 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through June 30, 2019.March 31, 2020.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
6. Income Taxes
OurThe effective tax rates were as follows:
|
| | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2019 | | 2018 | | 2019 | | 2018 |
Effective tax rate | 24.5 | % | | 13.3 | % | | 25.6 | % | | 26.9 | % |
The increase in our effective tax rate fromfor the secondfirst quarter of 2018 to2020 and 2019 were 23.9% and 27.0%, respectively. For the secondfirst quarter of 2020, the provision for income taxes was lower than the first quarter of 2019 was primarily due to the benefit received infrom the second quarterrevaluation of 2018 from refining the estimated impact relatedCompany’s deferred tax liabilities and the decrease of income tax reserves due to the legislation commonly known as the Tax Cuts and Jobs Act, which was enacted on December 22, 2017 (“TCJA”). The decreaselapse in our effective tax rate from the first six monthsstatute of 2018 to the first six months of 2019 was primarily due to reduction in the U.S. federal tax rate from 24.5% to 21% and exclusion of DPS Merger-related non-deductible transaction costs, partially offset by the loss of tax benefits associated with the U.S. domestic manufacturing deduction in 2019. The TCJA reduced the U.S. federal statutory tax rate from 35% to 21% and eliminated the domestic manufacturing deduction. Guidance under the TCJA for non-calendar year filers resulted in a 24.5% federal statutory rate for companies with a September tax year-end for the period ended June 30, 2018. limitations.
7. Long-term Obligations and Borrowing Arrangements
The following table summarizes the Company's long-term obligations:
|
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
Senior unsecured notes | $ | 11,785 |
| | $ | 12,019 |
|
Term loans | 1,724 |
| | 2,561 |
|
Subtotal | 13,509 |
| | 14,580 |
|
Less - current portion | (345 | ) | | (379 | ) |
Long-term obligations | $ | 13,164 |
| | $ | 14,201 |
|
The following table summarizes the Company's short-term borrowings and current portion of long-term obligations:
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | June 30, 2019 | | December 31, 2018 |
(in millions) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Commercial paper | 2 | | $ | 1,461 |
| | $ | 1,461 |
| | $ | 1,079 |
| | $ | 1,079 |
|
Current portion of long-term obligations: | | | | | | | | | |
Senior unsecured notes | 2 | | 248 |
| | 249 |
| | 250 |
| | 250 |
|
Term loans | 2 | | 97 |
| | 97 |
| | 129 |
| | 129 |
|
Short-term borrowings and current portion of long-term obligations | | | $ | 1,806 |
| | $ | 1,807 |
| | $ | 1,458 |
| | $ | 1,458 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
SENIOR UNSECURED NOTES
The Company's senior unsecured notes (collectively, the "Notes") consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | Fair Value Hierarchy Level | | June 30, 2019 | | December 31, 2018 |
Issuance | | Maturity Date | | Rate | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
2019 Notes(1) | | January 15, 2019 | | 2.600% | | 2 | | $ | — |
| | $ | — |
| | $ | 250 |
| | $ | 250 |
|
2020 Notes | | January 15, 2020 | | 2.000% | | 2 | | 250 |
| | 249 |
| | 250 |
| | 245 |
|
2021 Merger Notes | | May 25, 2021 | | 3.551% | | 2 | | 1,750 |
| | 1,823 |
| | 1,750 |
| | 1,742 |
|
2021-A Notes | | November 15, 2021 | | 3.200% | | 2 | | 250 |
| | 253 |
| | 250 |
| | 244 |
|
2021-B Notes | | November 15, 2021 | | 2.530% | | 2 | | 250 |
| | 250 |
| | 250 |
| | 240 |
|
2022 Notes | | November 15, 2022 | | 2.700% | | 2 | | 250 |
| | 249 |
| | 250 |
| | 237 |
|
2023 Merger Notes | | May 25, 2023 | | 4.057% | | 2 | | 2,000 |
| | 2,152 |
| | 2,000 |
| | 1,988 |
|
2023 Notes | | December 15, 2023 | | 3.130% | | 2 | | 500 |
| | 506 |
| | 500 |
| | 474 |
|
2025 Merger Notes | | May 25, 2025 | | 4.417% | | 2 | | 1,000 |
| | 1,072 |
| | 1,000 |
| | 999 |
|
2025 Notes | | November 15, 2025 | | 3.400% | | 2 | | 500 |
| | 509 |
| | 500 |
| | 467 |
|
2026 Notes | | September 15, 2026 | | 2.550% | | 2 | | 400 |
| | 383 |
| | 400 |
| | 346 |
|
2027 Notes | | June 15, 2027 | | 3.430% | | 2 | | 500 |
| | 505 |
| | 500 |
| | 458 |
|
2028 Merger Notes | | May 25, 2028 | | 4.597% | | 2 | | 2,000 |
| | 2,180 |
| | 2,000 |
| | 1,981 |
|
2038 Notes | | May 1, 2038 | | 7.450% | | 2 | | 125 |
| | 163 |
| | 125 |
| | 151 |
|
2038 Merger Notes | | May 25, 2038 | | 4.985% | | 2 | | 500 |
| | 548 |
| | 500 |
| | 483 |
|
2045 Notes | | November 15, 2045 | | 4.500% | | 2 | | 550 |
| | 554 |
| | 550 |
| | 478 |
|
2046 Notes | | December 15, 2046 | | 4.420% | | 2 | | 400 |
| | 398 |
| | 400 |
| | 342 |
|
2048 Merger Notes | | May 25, 2048 | | 5.085% | | 2 | | 750 |
| | 839 |
| | 750 |
| | 716 |
|
Principal amount | | | | | | | | $ | 11,975 |
| | $ | 12,633 |
| | $ | 12,225 |
| | $ | 11,841 |
|
Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger | | | | (190 | ) | | | | (206 | ) | | |
Carrying amount | | | | | | | | $ | 11,785 |
| | | | $ | 12,019 |
| | |
| |
(1) | On January 15, 2019, the Company repaid the 2019 Notes at maturity, using Commercial Paper. |
The fair value amounts of the Notes were based on current market rates available to the Company. The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all the Notes and related unamortized costs to be incurred at such date. The carrying amount includes the unamortized discounts, debt issuance costs and the fair value adjustment for the DPS Merger.
BORROWING ARRANGEMENTS
Term Loan Agreements
On February 8, 2019, the Company terminated its term loan executed in conjunction with the DPS Merger ("KDP Term Loan") and entered into a new term loan agreement among the Company ("New KDP Term Loan"), the lenders party thereto (the "New Term Lenders"), and JP Morgan, as administrative agent (the "2019 New Term Loan Agreement"), pursuant to which the New Term Lenders provided $2 billion of the New KDP Term Loan to refinance the KDP Term Loan in order to achieve a more favorable interest rate. As a result of the extinguishment of the KDP Term Loan, the Company recorded approximately $3 million of loss on early extinguishment during the first six months of 2019.
The interest rate applicable to the 2019 Term Loan Agreement ranges from a rate equal to LIBOR plus a margin of 0.75% to 1.25% or a base rate plus a margin of 0.00% to 0.25%, depending on the rating of certain indexed debt of KDP. Under the 2019 New Term Loan Agreement, KDP must repay the unpaid principal amount quarterly commencing on March 29, 2019 in an amount equal to 1.25% of the aggregate principal amount made on the effective date of the New KDP Term Loan, resulting in annual mandatory repayments of $100 million. The 2019 Term Loan Agreement matures on February 8, 2023.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
364-Day Credit Agreement
The Company entered into a new credit agreement on May 29, 2019 (the "364-Day Credit Agreement") among the Company, the banks party thereto and JP Morgan, as administrative agent, pursuant to which the Company obtained a $750 million commitment. The 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes. Under this credit agreement, $750 million is available for issuance, none of which was utilized as of June 30, 2019.
The interest rate applicable to borrowings under the 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 1.000% to 1.625% or a base rate plus a margin of 0.000% to 0.625%, depending on the rating of certain index debt of the Company. The 364-Day Credit Agreement will mature on May 27, 2020, subject to the Company’s option to extend the maturity date by one year so long as certain customary conditions are satisfied.
KDP Revolving Credit Facility
The following table provides amounts utilized and available under the Company's revolving credit facilities ("KDP Revolver") as of June 30, 2019:
|
| | | | | | | |
(in millions) | Amount Utilized | | Balances Available |
KDP Revolver | $ | — |
| | $ | 2,400 |
|
Letters of credit | — |
| | 200 |
|
The Company's KDP Revolver, 364-Day Credit Agreement and term loans, collectively the ("KDP Credit Agreements"), consisted of the following carrying values and estimated fair values that are not required to be measured at fair value in the unaudited Condensed Consolidated Balance Sheets:
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | Fair Value Hierarchy Level | | June 30, 2019 | | December 31, 2018 |
Issuance | | Maturity Date | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
KDP Term Loan(1) | | February 2023 | | 2 | | $ | — |
| | $ | — |
| | $ | 2,583 |
| | $ | 2,583 |
|
New KDP Term Loan(2) | | February 2023 | | 2 | | 1,735 |
| | 1,735 |
| | — |
| | — |
|
KDP Revolver | | February 2023 | | 2 | | — |
| | — |
| | — |
| | — |
|
364-Day Credit Agreement | | May 2020 | | 2 | | — |
| | — |
| | — |
| | — |
|
Principal amount | | | | | | $ | 1,735 |
| | $ | 1,735 |
| | $ | 2,583 |
| | $ | 2,583 |
|
Unamortized discounts and debt issuance costs | | | (11 | ) | | | | (22 | ) | | |
Carrying amount | | | | | | $ | 1,724 |
| | | | $ | 2,561 |
| | |
| |
(1) | In January 2019, the Company borrowed $583 million of Commercial Paper to prepay a portion of its outstanding obligations under the KDP Term Loan, all of which was a voluntary prepayment. As a result of these voluntary prepayments, the Company recorded no loss on extinguishment of debt during the second quarter of 2019 and $5 million of loss on early extinguishment during the first six months of 2019. This KDP Term Loan was refinanced with the New KDP Term Loan in February 2019. |
| |
(2) | The Company borrowed $65 million and $215 million of Commercial Paper during the second quarter and first six months of 2019, respectively, to prepay a portion of its outstanding obligations under the 2019 New Term Loan Agreement, all of which were voluntary prepayments. As a result of these voluntary prepayments, the Company recorded no loss on extinguishment of debt during the second quarter of 2019 and $1 million of loss on early extinguishment during the first six months of 2019. |
As of June 30, 2019, the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements.
Commercial Paper Program
The following table provides information about the Company's weighted average borrowings under its commercial paper program:
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
| 2019 | | 2018 | | 2019 | | 2018 |
Weighted average commercial paper borrowings | $ | 2,074 |
| | $ | — |
| | $ | 1,911 |
| | $ | — |
|
Weighted average borrowing rates | 2.76 | % | | — | % | | 2.83 | % | | — | % |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
Letter of Credit Facility
In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility. Under this facility, $100 million is available for the issuance of letters of credit, $48 million of which was utilized as of June 30, 2019 and $52 million of which remains available for use.
8. Derivatives
KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and foreign exchange ("FX")FX rates.
KDP manages these risks through a variety of strategies, including the use of interest rate contracts, FX forward contracts, commodity forward, future, swap and option contracts and supplier pricing agreements. KDP does not designate these contracts as hedges for accounting purposes, and KDP does not hold or issue derivative financial instruments for trading or speculative purposes.
INTEREST RATES
The Company is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate swaps to provide predictability in the Company'sCompany's overall cost structure, including both receive-fixed, pay-variable and receive-variable, pay-fixed swaps. A natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in interest expense in the unaudited Condensed Consolidated Statements of Income. TheseAs of March 31, 2020, all interest rate swap contracts have maturities between approximately 2 years and 19 years as of June 30, 2019.will mature in March 2025.
FOREIGN EXCHANGE
The Company's Canadian and Mexican businesses purchase certain inventory under extended payment terms in most cases through transactions denominated and settled in U.S. dollars, a currency different from the functional currency of those businesses. The Company additionally has a subsidiary in Canada with intercompany notes denominated and settled in U.S. dollars, a currency different from the functional currency of the Canadian business. TheseThe accounts payable related to the inventory purchases and the intercompany notes are subject to exposure from movements in exchange rates. During the secondfirst quarter of 2020 and first six months of 2019, and 2018, the Company held FX forward contracts to economically manage the exposures resulting from changes in these foreign currencyFX exchange rates. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same caption of the unaudited Condensed Consolidated Statements of Income as the associated risk. These FX contracts have maturities ranging from less than 1 monthApril 2020 to approximately 5 yearsSeptember 2024 as of June 30, 2019.March 31, 2020.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
COMMODITIES
KDP centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. The intent of these contracts is to provide a certain level of predictability in the Company's overall cost structure. During the secondfirst quarter of 2020 and first six months of 2019, and 2018, the Company held forward, future, swap and option contracts that economically hedged certain of its risks. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations. These commodity contracts have maturities ranging from less than 1 monthApril 2020 to approximately 6 yearsJune 2022 as of June 30, 2019.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
March 31, 2020.
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS
The following table presents the notional amounts of the Company's outstanding derivative instruments by type:
| | | June 30, | | December 31, | March 31, | | December 31, |
(in millions) | 2019 | | 2018 | 2020 | | 2019 |
Interest rate contracts | | | | | | |
Receive-fixed, pay-variable interest rate swaps(1) | $ | 50 |
| | $ | 1,070 |
| $ | — |
| | $ | 50 |
|
Receive-variable, pay-fixed interest rate swaps(2) | 575 |
| | 2,125 |
| 450 |
| | 575 |
|
FX contracts | 475 |
| | 348 |
| 471 |
| | 523 |
|
Commodity contracts | 271 |
| | 296 |
| 317 |
| | 150 |
|
| |
(1) | During the first six monthsquarter of 2019,2020, the Company elected to terminate $920$50 million notional amount of receive-fixed, pay-variable interest rate swaps and received cash of $2$18 million. |
| |
(2) | During the first six monthsquarter of 2019,2020, the Company elected to terminate $1,400$575 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $38$2 million. |
FAIR VALUE OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS
The following table summarizes the fair value hierarchy and the location of the fair value of the Company's derivative instruments not designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018:Sheets:
| | (in millions) | Fair Value Hierarchy Level | | Balance Sheet Location | | June 30, 2019 | | December 31, 2018 | Fair Value Hierarchy Level | | Balance Sheet Location | | March 31, 2020 | | December 31, 2019 |
Assets: | | | | | | | | |
Interest rate contracts | 2 | | Prepaid expenses and other current assets | | $ | 1 |
| | $ | 2 |
| 2 | | Prepaid expenses and other current assets | | $ | — |
| | $ | 1 |
|
FX contracts | 2 | | Prepaid expenses and other current assets | | 1 |
| | 4 |
| 2 | | Prepaid expenses and other current assets | | 19 |
| | — |
|
Commodity contracts | 2 | | Prepaid expenses and other current assets | | 8 |
| | 3 |
| 2 | | Prepaid expenses and other current assets | | 7 |
| | 30 |
|
Interest rate contracts | 2 | | Other non-current assets | | 20 |
| | 77 |
| 2 | | Other non-current assets | | — |
| | 18 |
|
FX contracts | 2 | | Other non-current assets | | 9 |
| | 15 |
| 2 | | Other non-current assets | | 14 |
| | — |
|
Commodity contracts | 2 | | Other non-current assets | | 6 |
| | 3 |
| 2 | | Other non-current assets | | 6 |
| | 1 |
|
| |
| |
|
| |
| |
|
|
Liabilities: | | | | | | | | | | | | |
Interest rate contracts | 2 | | Other current liabilities | | $ | — |
| | $ | 7 |
| 2 | | Other current liabilities | | $ | 2 |
| | $ | — |
|
FX contracts | 2 | | Other current liabilities | | 2 |
| | — |
| 2 | | Other current liabilities | | — |
| | 2 |
|
Commodity contracts | 2 | | Other current liabilities | | 27 |
| | 27 |
| 2 | | Other current liabilities | | 37 |
| | 10 |
|
Interest rate contracts | 2 | | Other non-current liabilities | | — |
| | 6 |
| 2 | | Other non-current liabilities | | 3 |
| | — |
|
FX contracts | | 2 | | Other non-current liabilities | | — |
| | 3 |
|
Commodity contracts | 2 | | Other non-current liabilities | | 5 |
| | 10 |
| 2 | | Other non-current liabilities | | 13 |
| | 1 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The fair values of commodity contracts, interest rate contracts and FX forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the reporting date. Interest rate contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the Company's contracts and credit risk of the counterparties. The fair value of FX forward contracts are valued using quoted forward FX prices at the reporting date. Therefore, the Company has categorized these contracts as Level 2.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
IMPACT OF ECONOMIC HEDGESDERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS
The following table presents the amount of (gains) losses recognized in the unaudited Condensed Consolidated Statements of Income related to derivative instruments not designated as hedging instruments under U.S. GAAP during the periods presented. Amounts include both realized and unrealized gains and losses.
| | | | Second Quarter | | First Six Months | | First Quarter |
(in millions) | Income Statement Location | | 2019 | | 2018 | | 2019 | | 2018 | Income Statement Location | | 2020 | | 2019 |
Interest rate contracts | Interest expense | | $ | 2 |
| | $ | (6 | ) | | $ | 4 |
| | $ | (30 | ) | Interest expense | | $ | 4 |
| | $ | 2 |
|
FX contracts | Cost of sales | | 1 |
| | — |
| | 3 |
| | — |
| Cost of sales | | (23 | ) | | 2 |
|
FX contracts | Other expense (income), net | | — |
| | (7 | ) | | 6 |
| | (13 | ) | Other expense, net | | (17 | ) | | 6 |
|
Commodity contracts | Cost of sales | | (3 | ) | | 3 |
| | 12 |
| | 5 |
| Cost of sales | | 17 |
| | 15 |
|
Commodity contracts | SG&A expenses | | 2 |
| | — |
| | (12 | ) | | — |
| SG&A expenses | | 45 |
| | (14 | ) |
Total | | $ | 2 |
| | $ | (10 | ) | | $ | 13 |
| | $ | (38 | ) | | $ | 26 |
| | $ | 11 |
|
The Company has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically, the Company has not experienced material credit losses as a result of counterparty nonperformance. The Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines and monitors the market position of the programs upon execution of a hedging transaction and at least on a quarterly basis.
9. Earnings Per Share8. Leases
Basic earnings per share ("EPS") is computed by dividing net income byThe Company leases certain facilities and machinery and equipment, including fleet. These leases expire at various dates through 2044. Some lease agreements contain standard renewal provisions that allow the weighted average number of common shares outstanding forCompany to renew the period. Diluted EPS reflectslease at rates equivalent to fair market value at the assumed conversion of all dilutive securities.
As a resultend of the DPS Merger, all historical per share datalease term. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants, except for leases of certain manufacturing properties that contain a residual value guarantee at the end of the term. KDP has lease agreements with lease and number of shares and numbers of equity awards were retroactively adjusted. non-lease components, which are generally accounted for as a single lease component.
The following table presents the Company's basic and diluted EPS and shares outstanding:components of lease cost:
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
(in millions, except per share data) | 2019 | | 2018 | | 2019 | | 2018 |
Basic EPS: | | | | | | | |
Net income attributable to KDP | $ | 314 |
| | $ | 83 |
| | $ | 544 |
| | $ | 171 |
|
Weighted average common shares outstanding | 1,406.7 |
| | 790.5 |
| | 1,406.5 |
| | 790.5 |
|
Earnings per common share — basic | $ | 0.22 |
| | $ | 0.10 |
| | $ | 0.39 |
| | $ | 0.21 |
|
Diluted EPS: | | | | | | | |
Net income attributable to KDP | $ | 314 |
| | $ | 83 |
| | $ | 544 |
| | $ | 171 |
|
Impact of dilutive securities in Maple Parent Corporation | — |
| | 2 |
| | — |
| | 3 |
|
Total | $ | 314 |
| | $ | 81 |
| | $ | 544 |
| | $ | 168 |
|
Weighted average common shares outstanding | 1,406.7 |
| | 790.5 |
| | 1,406.5 |
| | 790.5 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 0.5 |
| | — |
| | 0.7 |
| | — |
|
RSUs | 12.0 |
| | — |
| | 11.3 |
| | — |
|
Weighted average common shares outstanding and common stock equivalents | 1,419.2 |
| | 790.5 |
| | 1,418.5 |
| | 790.5 |
|
Earnings per common share — diluted | $ | 0.22 |
| | $ | 0.10 |
| | $ | 0.38 |
| | $ | 0.21 |
|
| | | | | | | |
Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation | 0.1 |
| | — |
| | 0.1 |
| | — |
|
|
| | | | | | | |
| First Quarter |
(in millions) | 2020 | | 2019 |
Operating lease cost | $ | 28 |
| | $ | 20 |
|
Finance lease cost | | | |
Amortization of right-of-use assets | 11 |
| | 10 |
|
Interest on lease liabilities | 4 |
| | 4 |
|
Variable lease cost(1) | 6 |
| | 6 |
|
Short-term lease cost | — |
| | 1 |
|
Sublease income | (1 | ) | | — |
|
Total lease cost | $ | 48 |
| | $ | 41 |
|
| |
(1) | Variable lease cost primarily consists of common area maintenance costs, property taxes, and adjustments for inflation. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The following table presents supplemental cash flow information about the Company's leases:
|
| | | | | | | |
| First Quarter |
(in millions) | 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 26 |
| | $ | 18 |
|
Operating cash flows from finance leases | 4 |
| | 4 |
|
Financing cash flows from finance leases | 13 |
| | 10 |
|
The following table presents information about the Company's weighted average discount rate and remaining lease term:
|
| | | | | |
| March 31, 2020 | | December 31, 2019 |
Weighted average discount rate | | | |
Operating leases | 4.7 | % | | 4.6 | % |
Finance leases | 5.0 | % | | 5.4 | % |
Weighted average remaining lease term | | | |
Operating leases | 11 years |
| | 8 years |
|
Finance leases | 12 years |
| | 12 years |
|
Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows:
|
| | | | | | | |
(in millions) | Operating Leases | | Finance Leases |
Remainder of 2020 | $ | 60 |
| | $ | 41 |
|
2021 | 85 |
| | 44 |
|
2022 | 74 |
| | 39 |
|
2023 | 66 |
| | 38 |
|
2024 | 64 |
| | 36 |
|
2025 | 57 |
| | 32 |
|
Thereafter | 326 |
| | 165 |
|
Total future minimum lease payments | 732 |
| | 395 |
|
Less: imputed interest | (157 | ) | | (89 | ) |
Present value of minimum lease payments | $ | 575 |
| | $ | 306 |
|
SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED
As of March 31, 2020, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $610 million. These leases are expected to commence between the second quarter of 2020 and second quarter of 2021, with initial lease terms ranging from 7 years to 20 years.
ASSET SALE-LEASEBACK TRANSACTIONS
On January 6, 2020, the Company closed an asset sale-leaseback transaction on two manufacturing properties as the buyer obtained control. The Company received proceeds of approximately $150 million, net of selling costs for the properties, which had a carrying value of $131 million, and resulted in an approximately $19 million gain on the sale transaction. The initial term of the leaseback is expected to end during 2034 and has two 10-year renewal options. The renewal options are not reasonably assured as (i) the Company's position that the dynamic environment in which it operates precludes the Company's ability to be reasonably certain of exercising the renewal options in the distant future and (ii) the options are contingent as the Company must remain investment grade and a change-in-control has not occurred as of the end of the lease term. The leaseback has a residual value guarantee; however, the Company concluded it was not probable that the Company will owe an amount at the end of the lease term and will record the lease obligation excluding the residual value guarantee.
On January 10, 2020, the Company closed the asset sale-leaseback transaction on two distribution properties as the buyer obtained control. The Company received proceeds of approximately $50 million, net of selling costs for the properties, which had a carrying value of $27 million, and resulted in an approximately $23 million gain on the sale transaction. The term of the leaseback is expected to end in 2025 and has two three-year renewals.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
9. Earnings Per Share
The following table presents the Company's basic and diluted EPS and shares outstanding:
|
| | | | | | | |
| First Quarter |
(in millions, except per share data) | 2020 | | 2019 |
Basic EPS: | | | |
Net income | $ | 156 |
| | $ | 230 |
|
Weighted average common shares outstanding | 1,407.0 |
| | 1,406.3 |
|
Earnings per common share — basic | $ | 0.11 |
| | $ | 0.16 |
|
Diluted EPS: | | | |
Net income | $ | 156 |
| | $ | 230 |
|
Weighted average common shares outstanding | 1,407.0 |
| | 1,406.3 |
|
Effect of dilutive securities: | | | |
Stock options | 0.4 |
| | 0.8 |
|
RSUs | 12.7 |
| | 10.6 |
|
Weighted average common shares outstanding and common stock equivalents | 1,420.1 |
| | 1,417.7 |
|
Earnings per common share — diluted | $ | 0.11 |
| | $ | 0.16 |
|
| | | |
Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation | 0.3 |
| | — |
|
10. Stock-Based Compensation
Stock-based compensation expense is primarily recorded in SG&A expenses in the unaudited Condensed Consolidated Statements of Income. The components of stock-based compensation expense are presented below:
| | | Second Quarter | | First Six Months | First Quarter |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Total stock-based compensation expense | $ | 20 |
| | $ | 9 |
| | $ | 34 |
| | $ | 20 |
| $ | 19 |
| | $ | 14 |
|
Income tax benefit recognized in the Statements of Income | (4 | ) | | (2 | ) | | (7 | ) | | (5 | ) | (4 | ) | | (3 | ) |
Stock-based compensation expense, net of tax | $ | 16 |
| | $ | 7 |
| | $ | 27 |
| | $ | 15 |
| $ | 15 |
| | $ | 11 |
|
RESTRICTED STOCK UNITS
The table below summarizes RSU activity:
| | | RSUs | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in millions) | RSUs | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in millions) |
Outstanding as of December 31, 2018 | 18,625,898 |
| | $ | 15.68 |
| | 3.5 | | $ | 478 |
| |
Outstanding as of December 31, 2019 | | 21,492,786 |
| | $ | 18.14 |
| | 2.6 | | $ | 622 |
|
Granted | 5,200,620 |
| | 26.25 |
| | | 5,597,154 |
| | 22.99 |
| | |
Vested and released | (4,368 | ) | | 24.20 |
| | — |
| (25,082 | ) | | 24.80 |
| | 1 |
|
Forfeited | (1,136,796 | ) | | 19.07 |
| | | (390,712 | ) | | 21.63 |
| | |
Outstanding as of June 30, 2019 | 22,685,354 |
| | $ | 17.93 |
| | 3.0 | | $ | 656 |
| |
Outstanding as of March 31, 2020 | | 26,674,146 |
| | $ | 19.10 |
| | 2.6 | | $ | 647 |
|
As of June 30, 2019,March 31, 2020, there was $297$351 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.93.97 years.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
11. Accumulated Other Comprehensive Income (Loss)
The following table provides a summary of changes in Accumulated Other Comprehensive Income (Loss),AOCI, net of taxes:
|
| | | | | | | | | | | |
(in millions) | Foreign Currency Translation Adjustments | | Pension and PRMB Liabilities | | Accumulated Other Comprehensive Income (Loss) |
Balance as of April 1, 2019 | $ | (33 | ) | | $ | (4 | ) | | $ | (37 | ) |
Other comprehensive income | 88 |
| | — |
| | 88 |
|
Balance as of June 30, 2019 | $ | 55 |
| | $ | (4 | ) | | $ | 51 |
|
| | | | | |
Balance as of January 1, 2019 | $ | (126 | ) | | $ | (4 | ) | | $ | (130 | ) |
Other comprehensive income | 181 |
| | — |
| | 181 |
|
Balance as of June 30, 2019 | $ | 55 |
| | $ | (4 | ) | | $ | 51 |
|
| | | | | |
Balance as of April 1, 2018 | $ | 75 |
| | $ | — |
| | $ | 75 |
|
Other comprehensive loss | (16 | ) | | — |
| | (16 | ) |
Balance as of June 30, 2018 | $ | 59 |
| | $ | — |
| | $ | 59 |
|
| | | | | |
Balance as of January 1, 2018 | $ | 99 |
| | $ | — |
| | $ | 99 |
|
Other comprehensive loss | (40 | ) | | — |
| | (40 | ) |
Balance as of June 30, 2018 | $ | 59 |
| | $ | — |
| | $ | 59 |
|
|
| | | | | | | | | | | |
(in millions) | Foreign Currency Translation Adjustments | | Pension and PRMB Liabilities | | Accumulated Other Comprehensive Income (Loss) |
Balance as of January 1, 2020 | $ | 104 |
| | $ | — |
| | $ | 104 |
|
Other comprehensive loss | (583 | ) | | (1 | ) | | (584 | ) |
Balance as of March 31, 2020 | $ | (479 | ) | | $ | (1 | ) | | $ | (480 | ) |
| | | | | |
Balance as of January 1, 2019 | $ | (126 | ) | | $ | (4 | ) | | $ | (130 | ) |
Other comprehensive income | 93 |
| | — |
| | 93 |
|
Balance as of March 31, 2019 | $ | (33 | ) | | $ | (4 | ) | | $ | (37 | ) |
12. Supplemental Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the unaudited Condensed Consolidated Balance Sheets to the total of the same amounts shown in the unaudited Condensed Consolidated Statements of Cash Flows:
|
| | | | | | | |
(in millions) | March 31, 2020 | December 31, 2019 |
Cash and cash equivalents | $ | 197 |
| | $ | 75 |
|
Restricted cash and restricted cash equivalents(1) | 26 |
| | 26 |
|
Non-current restricted cash and restricted cash equivalents included in Other non-current assets | — |
| | 10 |
|
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows | $ | 223 |
| | $ | 111 |
|
| |
(1) | Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the Core Acquisition, Bai Acquisition and Big Red Acquisition. Amounts held in escrow are expected to be released within one year. |
The carrying value of cash, cash equivalents, restricted cash and restricted cash equivalents is valued as of the balance sheet date equating fair value and classified as Level 1.
The following table provides supplemental cash flow disclosures:
|
| | | | | | | |
| First Quarter |
(in millions) | 2020 | | 2019 |
Supplemental cash flow disclosures of non-cash investing activities: | | | |
Measurement period adjustment of Core purchase price | $ | — |
| | $ | (11 | ) |
Capital expenditures included in accounts payable and accrued expenses | 177 |
| | 154 |
|
Supplemental cash flow disclosures of non-cash financing activities: | | | |
Dividends declared but not yet paid | 211 |
| | 211 |
|
Finance lease additions | 10 |
| | 7 |
|
Supplemental cash flow disclosures: | | | |
Cash paid for interest(1) | — |
| | 64 |
|
Cash paid for income taxes | 81 |
| | 25 |
|
| |
(1) | Cash paid for interest includes amounts paid and received related to the Company's interest rate swap contracts and the termination of such contracts. Refer to Note 7 for additional information. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
13. Trade Accounts Receivable, Net
Trade accounts receivable are recorded at the invoiced amount and do not bear interest.
The Company is exposed to potential credit risks associated with its accounts receivable, as it generally does not require collateral on its accounts receivable. The Company determines the required allowance for expected credit losses using information such as its customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions such as the impacts of COVID-19 in the first quarter of 2020. Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies or expectations of any such events in a future period when reasonable and supportable. Historical information is utilized beyond reasonable and supportable forecast periods. Amounts are charged against the allowance when it is determined that expected credit losses may occur.
Activity in the allowance for expected credit loss accounts during the Periods was as follows:
|
| | | |
(in millions) | Allowance for Expected Credit Loss |
Balance as of January 1, 2019 | $ | 8 |
|
Charges to bad debt expense | 2 |
|
Write-offs and adjustments | (1 | ) |
Balance as of December 31, 2019 | $ | 9 |
|
Charges to bad debt expense | 10 |
|
Write-offs and adjustments | — |
|
Balance as of March 31, 2020 | $ | 19 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
12.14. Other Financial Information
The tables below provide selected financial information from the unaudited Condensed Consolidated Balance Sheets:
| | | June 30, | | December 31, | March 31, | | December 31, |
(in millions) | 2019 | | 2018 | 2020 | | 2019 |
Trade accounts receivable, net: | | | | |
Trade and other accounts receivable | | $ | 1,056 |
| | $ | 1,124 |
|
Allowance for expected credit losses | | (19 | ) | | (9 | ) |
Total trade accounts receivable, net | | $ | 1,037 |
| | $ | 1,115 |
|
Inventories: | | | | | | |
Raw materials | $ | 207 |
| | $ | 204 |
| $ | 215 |
| | $ | 215 |
|
Work in process | 8 |
| | 7 |
| |
WIP | | 6 |
| | 8 |
|
Finished goods | 471 |
| | 415 |
| 478 |
| | 447 |
|
Total inventories | $ | 686 |
| | $ | 626 |
| |
Total | | 699 |
| | 670 |
|
Allowance for excess and obsolete inventories | | (17 | ) | | (16 | ) |
Total Inventories | | $ | 682 |
| | $ | 654 |
|
Prepaid expenses and other current assets: | | | | | | |
Other receivables | $ | 49 |
| | $ | 51 |
| $ | 53 |
| | $ | 65 |
|
Customer incentive programs | 80 |
| | 12 |
| 78 |
| | 12 |
|
Derivative instruments | 10 |
| | 9 |
| 26 |
| | 31 |
|
Prepaid marketing | 43 |
| | 29 |
| 30 |
| | 17 |
|
Spare parts | 45 |
| | 43 |
| 50 |
| | 49 |
|
Assets held for sale | 7 |
| | 8 |
| |
Assets held for sale(1) | | 3 |
| | 165 |
|
Income tax receivable | 13 |
| | 22 |
| 7 |
| | 4 |
|
Other | 70 |
| | 80 |
| 88 |
| | 60 |
|
Total prepaid expenses and other current assets | $ | 317 |
| | $ | 254 |
| $ | 335 |
| | $ | 403 |
|
Other non-current assets: | | | | | | |
Customer incentive programs | $ | 29 |
| | $ | 34 |
| $ | 77 |
| | $ | 33 |
|
Marketable securities - trading(1) | 40 |
| | 44 |
| |
Operating lease right-of-use assets(2) | 355 |
| | — |
| |
Marketable securities - trading(2) | | 31 |
| | 40 |
|
Operating lease right-of-use assets | | 576 |
| | 497 |
|
Derivative instruments | 35 |
| | 95 |
| 20 |
| | 19 |
|
Equity securities without readily determinable fair values | 1 |
| | 1 |
| 1 |
| | 1 |
|
Non-current restricted cash and restricted cash equivalents | 10 |
| | 10 |
| — |
| | 10 |
|
Related party notes receivable(3) | 32 |
| | 17 |
| 1 |
| | 50 |
|
Other | 70 |
| | 58 |
| 105 |
| | 98 |
|
Total other non-current assets | $ | 572 |
| | $ | 259 |
| $ | 811 |
| | $ | 748 |
|
| |
(1) | The decrease was due to the assets included in sale-leaseback transactions that closed during the period. Refer to Note 8 for additional information about the transactions. Remainder of amounts were comprised of property, plant and equipment expected to be sold within the next twelve months. |
| |
(2) | Fair values of marketable securities are determined using quoted market prices from daily exchange traded markets, based on the closing price as of the balance sheet date, and are classified as Level 1. The fair value of marketable securities was $40$31 million and $44$40 million as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. |
| |
(2) | Refer to Note 3 for additional information.
|
| |
(3) | Refer to Note 154 for additional information. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
| | | June 30, | | December 31, | March 31, | | December 31, |
(in millions) | 2019 | | 2018 | 2020 | | 2019 |
Accrued expenses: | | | | | | |
Customer rebates & incentives | $ | 374 |
| | $ | 342 |
| $ | 304 |
| | $ | 362 |
|
Accrued compensation | 148 |
| | 214 |
| 130 |
| | 183 |
|
Insurance reserve | 39 |
| | 37 |
| 36 |
| | 39 |
|
Accrued interest | 53 |
| | 77 |
| 164 |
| | 54 |
|
Accrued professional fees | 29 |
| | 113 |
| 37 |
| | 31 |
|
Other accrued expenses | 226 |
| | 229 |
| 289 |
| | 270 |
|
Total accrued expenses | $ | 869 |
| | $ | 1,012 |
| $ | 960 |
| | $ | 939 |
|
Other current liabilities: | | | | | | |
Dividends payable | $ | 212 |
| | $ | 209 |
| $ | 211 |
| | $ | 212 |
|
Income taxes payable | 110 |
| | 60 |
| 46 |
| | 75 |
|
Operating lease liability(1) | 61 |
| | — |
| 73 |
| | 69 |
|
Finance lease liability(2) | 37 |
| | 26 |
| 42 |
| | 41 |
|
Derivative instruments | 29 |
| | 34 |
| 39 |
| | 12 |
|
Holdback liabilities | 42 |
| | 44 |
| 25 |
| | 25 |
|
Other | 25 |
| | 33 |
| 9 |
| | 11 |
|
Total other current liabilities | $ | 516 |
| | $ | 406 |
| $ | 445 |
| | $ | 445 |
|
Other non-current liabilities: | | | | | | |
Pension and post-retirement liability | $ | 29 |
| | $ | 30 |
| $ | 27 |
| | $ | 29 |
|
Insurance reserves | 61 |
| | 57 |
| 69 |
| | 66 |
|
Operating lease liability(1) | 290 |
| | — |
| 501 |
| | 427 |
|
Finance lease liability(2) | 253 |
| | 305 |
| 264 |
| | 269 |
|
Derivative instruments | 5 |
| | 16 |
| 16 |
| | 4 |
|
Deferred compensation liability | 40 |
| | 44 |
| 31 |
| | 40 |
|
Other | 93 |
| | 107 |
| 89 |
| | 95 |
|
Total other non-current liabilities | $ | 771 |
| | $ | 559 |
| $ | 997 |
| | $ | 930 |
|
| |
(1) | Refer to Note 3 for additional information.
|
| |
(2) | Amounts as of December 31, 2018 include capital leases and financing obligations reported under ASC 840. Refer to Notes 1 and 3 for additional information. |
ACCOUNTS PAYABLE
KDP entered into an agreement with a third party administrator to allow participating suppliers to track payment obligationspayments from KDP, and if voluntarily elected by the supplier, sell payment obligations from KDP to financial institutions. Suppliers can sell one or more of KDP's payment obligations at their sole discretion and the rights and obligations of KDP to its suppliers are not impacted. KDP has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. KDP's obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted. As of June 30, 2019March 31, 2020 and December 31, 2018, $2,0962019, $2,322 million and $1,676$2,097 million, respectively, of KDP's outstanding payment obligations are payablewere voluntarily elected by the supplier and sold to suppliers who utilize this third party service administrator.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
13. Supplemental Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the unaudited Condensed Consolidated Balance Sheets to the total of the same amounts shown in the unaudited Condensed Consolidated Statements of Cash Flows:
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | June 30, 2019 | | December 31, 2018 |
(in millions) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Cash and cash equivalents | 1 | | $ | 106 |
| | $ | 106 |
| | $ | 83 |
| | $ | 83 |
|
Restricted cash and restricted cash equivalents(1) | 1 | | 44 |
| | 44 |
| | 46 |
| | 46 |
|
Non-current restricted cash and restricted cash equivalents included in Other non-current assets | 1 | | 10 |
| | 10 |
| | 10 |
| | 10 |
|
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows | | | $ | 160 |
| | $ | 160 |
| | $ | 139 |
| | $ | 139 |
|
| |
(1) | Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the Big Red Acquisition and the Core Acquisition. |
The following table provides supplemental cash flow disclosures:
|
| | | | | | | |
| First Six Months |
(in millions) | 2019 | | 2018 |
Supplemental cash flow disclosures of non-cash investing activities: | | | |
Measurement period adjustment of Core purchase price | $ | (11 | ) | | $ | — |
|
Capital expenditures included in accounts payable and accrued expenses | 205 |
| | 39 |
|
Purchases of intangibles | 2 |
| | — |
|
Supplemental cash flow disclosures of non-cash financing activities: | | | |
Dividends declared but not yet paid | 212 |
| | — |
|
Finance lease additions | 30 |
| | — |
|
Supplemental cash flow disclosures: | | | |
Cash paid for interest | 272 |
| | 47 |
|
Cash paid for related party interest | — |
| | 51 |
|
Cash paid for income taxes | 142 |
| | 71 |
|
financial institutions.14.15. Commitments and Contingencies
LEGAL MATTERS
The Company is involved from time to time in various claims, proceedings, and litigation, including those described below. We establishlitigation. The Company establishes reserves for specific legal proceedings when we determinethe Company determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. ManagementThe Company has also identified certain other legal matters where we believethe Company believes an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made.
Proposition 65 Litigation
On May 9, 2011, an organization named Council for Education and Research on Toxics ("CERT") filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against Keurig. The lawsuit is Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182. CERT alleges that Keurig, in addition to nearly one hundred other defendants who manufacture, package, distribute, or sell coffee, failed to warn persons in California that Keurig's coffee products (the "Products") expose persons to the chemical acrylamide in violation of California's Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code section 25249.5, et seq. ("Proposition 65"). CERT seeks equitable relief, including providing warnings to consumers, as well as civil penalties in the amount of the statutory maximum of $2,500 per day per violation of Proposition 65. CERT asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
Keurig, as part of a joint defense group organized to defend against the lawsuit, disputes the claims of the Plaintiff. Acrylamide is not added to coffee, but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. Keurig has asserted multiple affirmative defenses. The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees beginning on October 15, 2018, however on October 12, 2018, the California Court of Appeal granted the defendants' request for a stay of the third phase trial.
The Court of Appeal’s stay order was prompted by a notice published on June 15, 2018 by California’s Office of Environmental Health Hazard Assessment (“OEHHA”) proposing a new Proposition 65 regulation clarifying that cancer warnings are not required for Proposition 65 chemicals, such as acrylamide, that are present in coffee as a result of roasting coffee beans. After two rounds of public comments, the regulation was finalized, adopted and approved by the Office of Administrative Law on June 3, 2019. It will take effect on October 1, 2019. The Court of Appeal has lifted its 2018 stay order. Further litigation is anticipated based on CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims.
At this stage of the proceedings, prior to a trial on remedies issues, Keurig is unable to reasonably estimate the potential loss or effect on Keurig or its operations that could be associated with the lawsuit. The trial court has discretion to impose zero penalties against Keurig or to impose significant statutory penalties. Significant labeling or warning requirements that could potentially be imposed by the trial court may increase Keurig's costs and adversely affect sales of coffee products. We can provide no assurances as to the outcome of any litigation.
15.16. Related Parties
IDENTIFICATION OF RELATED PARTIES
The Company is indirectly controlled by a single stockholder, JAB, Holding Company S.a.r.l ("JAB"), a privately held investor group. JAB has ownership control over certain investments that create the following related party transaction types:
Coffee Transactions include transactions with Peet's Coffee, ("Peet's"), Caribou Coffee, ("Caribou"), Panera Bread ("Panera"), Einstein Bros Bagels ("Einstein Bros") and Krispy Kreme Doughnuts ("Krispy Kreme").Doughnuts. The Company manufactures portion packs containing a selection of coffee and tea varieties under Peet’s Coffee brands for sale in the U.S. and Canada. As part of this agreement, Peet’s Coffee issues purchase orders to the Company for portion packs to be supplied to Peet’s Coffee and sold in select channels. In turn, the Company places purchase orders for Peet’s Coffee raw materials to manufacture portion packs for sale by the Company in select channels. The Company licenses the Caribou Coffee, Panera Bread and Krispy Kreme Doughnuts trademarks for use in the Keurig system in the Company owned channels.
Additionally, the Company manufactures and distributes Peet's RTD Coffee in the U.S. and pays Peet's Coffee a royalty for use of the brand name.
Restaurant Transactions include transactions with Caribou Coffee, Panera Peet's, Caribou,Bread, Einstein Bros Bagels and Krispy Kreme.Kreme Doughnuts. The Company sells various beverage concentrates and packaged beverages to these companies.
The Company also has rights in certain territories to bottle and/or distribute various brands that the Company does not own. The Company holds investments in certain brand ownership companies. Refer to Note 24 for additional information about the Company's investments in unconsolidated affiliates. The Company purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S. Additionally, any transactions with significant partners in these investments, such as Anheuser-Busch InBev ("ABI"),ABI, are also included in this line.considered related party transactions. ABI purchases Clamato from the Company and pays the Company a royalty for use of the brand name.
LINE OF CREDIT WITH BEDFORDThe Company and ABI executed a line17. Segments
As of credit agreement with Bedford on March 3, 2017, in conjunction with the creation of the joint venture ("Bedford Credit Agreement"), which was amended on December 7, 2018 to increase the line of credit (the credit agreement, as amended, the "Bedford Credit Agreement"). Under the Bedford Credit Agreement, the Company has committed to provide up to $51 million capacity with a fixed interest rate of 8.1% per annum. The Bedford Credit Agreement matures on March 3, 2024. The Company has outstanding receivable balances on the Bedford Credit Agreement of $32 million and $17 million as of June 30, 201931, 2020 and December 31, 2018, respectively.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
16. Segments
Following2019 and for the DPS Merger as described in Note 2,first quarter of 2020 and 2019, the Company revised its segmentCompany's operating structure to consistconsisted of the following four reportable segments as of June 30, 2019 and December 31, 2018, and for the second quarter and first six months of 2019, and recasted for the second quarter and the first six months of 2018:segments:
The Coffee Systems segment reflects sales in the U.S. and Canada of the manufacture and distribution of finished goods relating to the Company's coffee system, K-Cup pods and brewers.
The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third-party brands, through both the Direct Store DeliveryDSD system and the Warehouse DirectWD system.
The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third-party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands.
The Latin America Beverages segment reflects sales in Mexico, the Caribbean, and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.
Segment results are based on management reports. Net sales and income from operations are the significant financial measures used to assess the operating performance of the Company's operating segments. Intersegment sales are recorded at cost and are eliminated in the unaudited Condensed Consolidated Statements of Income. “Unallocated corporate costs” are excluded from the Company's measurement of segment performance and include unrealized commodity derivative gains and losses, and certain general corporate expenses.
Information about the Company's operations by reportable segment is as follows:
|
| | | | | | | | | | | | | | | |
| Second Quarter | | First Six Months |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Segment Results – Net sales | | | | | | | |
Coffee Systems | $ | 990 |
| | $ | 949 |
| | $ | 1,958 |
| | $ | 1,897 |
|
Packaged Beverages | 1,311 |
| | — |
| | 2,427 |
| | — |
|
Beverage Concentrates | 370 |
| | — |
| | 674 |
| | — |
|
Latin America Beverages | 141 |
| | — |
| | 257 |
| | — |
|
Net sales | $ | 2,812 |
| | $ | 949 |
| | $ | 5,316 |
| | $ | 1,897 |
|
| | | Second Quarter | | First Six Months | First Quarter |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Segment Results – Income from operations | | | | | | | | |
Segment Results – Net sales | | | | |
Coffee Systems | $ | 287 |
| | $ | 274 |
| | $ | 580 |
| | $ | 531 |
| $ | 973 |
| | $ | 968 |
|
Packaged Beverages | 186 |
| | — |
| | 335 |
| | — |
| 1,217 |
| | 1,116 |
|
Beverage Concentrates | 244 |
| | — |
| | 445 |
| | — |
| 306 |
| | 304 |
|
Latin America Beverages | 26 |
| | — |
| | 37 |
| | — |
| 117 |
| | 116 |
|
Total income from operations - segments | 743 |
| | 274 |
| | 1,397 |
| | 531 |
| |
Unallocated corporate costs | 156 |
| | 107 |
| | 312 |
| | 186 |
| |
Income from operations | $ | 587 |
| | $ | 167 |
| | $ | 1,085 |
| | $ | 345 |
| |
Net sales | | $ | 2,613 |
| | $ | 2,504 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
| | | | | | | | |
| | First Quarter |
(in millions) | | 2020 | | 2019 |
Segment Results – Income from operations | | | | |
Coffee Systems | | $ | 272 |
| | $ | 293 |
|
Packaged Beverages | | 189 |
| | 149 |
|
Beverage Concentrates | | 197 |
| | 201 |
|
Latin America Beverages | | 27 |
| | 11 |
|
Unallocated corporate costs | | (219 | ) | | (156 | ) |
Income from operations | | $ | 466 |
| | $ | 498 |
|
17.
18. Revenue Recognition
The Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include CSDs, NCBs,CSD, NCB, K-Cup pods and appliances, occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. Sales taxes and other similar taxes are excluded from revenue. Costs associated with shipping and handling activities, such as merchandising, are included in SG&A expenses as revenue is recognized.
The following table disaggregates the Company's revenue by portfolio for the secondfirst quarter of 2020 and first six months of 2019 and 2018:2019:
| | (in millions) | Coffee Systems | | Packaged Beverages | | Beverage Concentrates | | Latin America Beverages | | Total | Coffee Systems | | Packaged Beverages | | Beverage Concentrates | | Latin America Beverages | | Total |
For the second quarter of 2019: | | | | | | | | | | |
For the first quarter of 2020: | | | | | | | | | | |
CSD(1) | $ | — |
| | $ | 541 |
| | $ | 362 |
| | $ | 102 |
| | $ | 1,005 |
| $ | — |
| | $ | 563 |
| | $ | 302 |
| | $ | 82 |
| | $ | 947 |
|
NCB(1) | — |
| | 662 |
| | 3 |
| | 38 |
| | 703 |
| — |
| | 562 |
| | 2 |
| | 35 |
| | 599 |
|
Pods(2) | 783 |
| | — |
| | — |
| | — |
| | 783 |
| |
K-Cup pods(2) | | 791 |
| | — |
| | — |
| | — |
| | 791 |
|
Appliances | 154 |
| | — |
| | — |
| | — |
| | 154 |
| 127 |
| | — |
| | — |
| | — |
| | 127 |
|
Other | 53 |
| | 108 |
| | 5 |
| | 1 |
| | 167 |
| 55 |
| | 92 |
| | 2 |
| | — |
| | 149 |
|
Net sales | $ | 990 |
| | $ | 1,311 |
| | $ | 370 |
| | $ | 141 |
| | $ | 2,812 |
| $ | 973 |
| | $ | 1,217 |
| | $ | 306 |
| | $ | 117 |
| | $ | 2,613 |
|
| | | | | | | | | | | | | | | | | | |
For the first six months of 2019: | | | | | | | | | | |
For the first quarter of 2019: | | | | | | | | | | |
CSD(1) | $ | — |
| | $ | 1,063 |
| | $ | 660 |
| | $ | 182 |
| | $ | 1,905 |
| $ | — |
| | $ | 522 |
| | $ | 298 |
| | $ | 80 |
| | $ | 900 |
|
NCB(1) | — |
| | 1,163 |
| | 5 |
| | 74 |
| | 1,242 |
| — |
| | 501 |
| | 2 |
| | 36 |
| | 539 |
|
Pods(2) | 1,576 |
| | — |
| | — |
| | — |
| | 1,576 |
| |
K-Cup pods(2) | | 793 |
| | — |
| | — |
| | — |
| | 793 |
|
Appliances | 277 |
| | — |
| | — |
| | — |
| | 277 |
| 123 |
| | — |
| | — |
| | — |
| | 123 |
|
Other | 105 |
| | 201 |
| | 9 |
| | 1 |
| | 316 |
| 52 |
| | 93 |
| | 4 |
| | — |
| | 149 |
|
Net sales | $ | 1,958 |
| | $ | 2,427 |
| | $ | 674 |
| | $ | 257 |
| | $ | 5,316 |
| $ | 968 |
| | $ | 1,116 |
| | $ | 304 |
| | $ | 116 |
| | $ | 2,504 |
|
| | | | | | | | | | |
For the second quarter of 2018: | | | | | | | | | | |
CSD(1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
NCB(1) | — |
| | — |
| | — |
| | — |
| | — |
| |
Pods(2) | 763 |
| | — |
| | — |
| | — |
| | 763 |
| |
Appliances | 131 |
| | — |
| | — |
| | — |
| | 131 |
| |
Other | 55 |
| | — |
| | — |
| | — |
| | 55 |
| |
Net sales | $ | 949 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 949 |
| |
| | | | | | | | | | |
For the first six months of 2018: | | | | | | | | | | |
CSD(1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
NCB(1) | — |
| | — |
| | — |
| | — |
| | — |
| |
Pods(2) | 1,557 |
| | — |
| | — |
| | — |
| | 1,557 |
| |
Appliances | 232 |
| | — |
| | — |
| | — |
| | 232 |
| |
Other | 108 |
| | — |
| | — |
| | — |
| | 108 |
| |
Net sales | $ | 1,897 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,897 |
| |
(1) Represents net sales of owned and Allied Brands within our portfolio.
| |
(2) | Represents net sales from owned brands, partner brands and private label owners. Net sales for partner brands and private label owners are contractual and long term in nature. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
18. Guarantor and Non-Guarantor Financial Information19. Subsequent Events
The Notes are fully and unconditionally guaranteed by certain direct and indirect subsidiaries ofSENIOR UNSECURED NOTES
On April 13, 2020, the Company (the "Guarantors"), as defined incompleted the indentures governingissuance of $1,500 million aggregate principal amount of senior unsecured notes consisting of $750 million aggregate principal amount of 3.20% senior unsecured notes due May 1, 2030 and $750 million aggregate principal amount of 3.80% senior unsecured notes due May 1, 2050. The discount associated with the Notes.2030 Notes and 2050 Notes was approximately $6 million. The Guarantors are 100% owned either directly or indirectly bynet proceeds from the Company and jointly and severally guarantee, subjectissuance were used to the release provisions described below, the Company's obligationsrepay approximately $1,000 million of outstanding borrowings under the Notes. NoneKDP Revolver and approximately $481 million of the Company's subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries held by Maple 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 other indebtedness of the Company, the Company's exercise of its legal defeasance option with respect to the Notes and the discharge of the Company's obligations under the applicable indenture. The DPS Merger was accounted for under the acquisition method of accounting, using pushdown accounting for the purposes of presenting the following guarantor and non-guarantor financial information.
The second quarter and first six months of 2018 are not presented herein, as amounts reported prior to the DPS Merger are that of Maple, and would therefore be entirely reported within the Non-Guarantors column. Refer to the Condensed Consolidated Statements of Income, Statements of Comprehensive Income, and Statements of Cash Flows for the amounts which would be presented as Non-Guarantors for these historical periods.
The following schedules present the financial information for Keurig Dr Pepper Inc. (the "Parent"), Guarantors and Non-Guarantors. The consolidating schedules are provided in accordance with the reporting requirements of Rule 3-10 under SEC Regulation S-X for guarantor subsidiaries.
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statements of Income |
| For the Second Quarter of 2019 |
(in millions) | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Total |
Net sales | $ | — |
| | $ | 1,660 |
| | $ | 1,207 |
| | $ | (55 | ) | | $ | 2,812 |
|
Cost of sales | — |
| | 661 |
| | 580 |
| | (55 | ) | | 1,186 |
|
Gross profit | — |
| | 999 |
| | 627 |
| | — |
| | 1,626 |
|
Selling, general and administrative expenses | 1 |
| | 668 |
| | 359 |
| | — |
| | 1,028 |
|
Other operating expense, net | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Income from operations | (1 | ) | | 331 |
| | 257 |
| | — |
| | 587 |
|
Interest expense | 198 |
| | 3 |
| | 28 |
| | (59 | ) | | 170 |
|
Interest expense - related party | — |
| | — |
| | — |
| | — |
| | — |
|
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | — |
| | — |
|
Other expense (income), net | (239 | ) | | 192 |
| | (11 | ) | | 59 |
| | 1 |
|
Income before provision for income taxes | 40 |
| | 136 |
| | 240 |
| | — |
| | 416 |
|
Provision for income taxes | (5 | ) | | 42 |
| | 65 |
| | — |
| | 102 |
|
Income before equity in earnings of consolidated subsidiaries | 45 |
| | 94 |
| | 175 |
| | — |
| | 314 |
|
Equity in earnings of consolidated subsidiaries | 269 |
| | 14 |
| | — |
| | (283 | ) | | — |
|
Net income | $ | 314 |
| | $ | 108 |
| | $ | 175 |
| | $ | (283 | ) | | $ | 314 |
|
commercial paper notes.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
BORROWING ARRANGEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statements of Income |
| For the First Six Months of 2019 |
(in millions) | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Total |
Net sales | $ | — |
| | $ | 3,070 |
| | $ | 2,345 |
| | $ | (99 | ) | | $ | 5,316 |
|
Cost of sales | — |
| | 1,232 |
| | 1,159 |
| | (99 | ) | | 2,292 |
|
Gross profit | — |
| | 1,838 |
| | 1,186 |
| | — |
| | 3,024 |
|
Selling, general and administrative expenses | 5 |
| | 1,230 |
| | 704 |
| | — |
| | 1,939 |
|
Other operating expense, net | — |
| | (10 | ) | | 10 |
| | — |
| | — |
|
Income from operations | (5 | ) | | 618 |
| | 472 |
| | — |
| | 1,085 |
|
Interest expense | 398 |
| | 7 |
| | 57 |
| | (123 | ) | | 339 |
|
Interest expense - related party | — |
| | — |
| | — |
| | — |
| | — |
|
Loss on early extinguishment of debt | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Other (income) expense, net | (251 | ) | | 147 |
| | (13 | ) | | 123 |
| | 6 |
|
Income before provision for income taxes | (161 | ) | | 464 |
| | 428 |
| | — |
| | 731 |
|
Provision for income taxes | (54 | ) | | 126 |
| | 115 |
| | — |
| | 187 |
|
Income before equity in earnings of consolidated subsidiaries | (107 | ) | | 338 |
| | 313 |
| | — |
| | 544 |
|
Equity in earnings of consolidated subsidiaries | 651 |
| | 14 |
| | — |
| | (665 | ) | | — |
|
Net income | $ | 544 |
| | $ | 352 |
| | $ | 313 |
| | $ | (665 | ) | | $ | 544 |
|
On April 14, 2020, the Company terminated the 2019 364-Day Credit Agreement and replaced it with the 2020 364-Day Credit Agreement in order to increase the commitment from $750 million to $1,500 million. The 2020 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes.
The interest rate applicable to borrowings under the 2020 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 2.250% to 2.750% or a base rate plus a margin of 1.250% to 1.750%, depending on the rating of certain index debt of the Company. The 2020 364-Day Credit Agreement will mature on April 13, 2021.
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statements of Comprehensive Income |
| For the Second Quarter of 2019 |
(in millions) | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Total |
Comprehensive income | $ | 402 |
| | $ | 178 |
| | $ | 264 |
| | $ | (442 | ) | | $ | 402 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statements of Comprehensive Income |
| For the First Six Months of 2019 |
(in millions) | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Total |
Comprehensive income | $ | 725 |
| | $ | 497 |
| | $ | 495 |
| | $ | (992 | ) | | $ | 725 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Balance Sheets |
| As of June 30, 2019 |
(in millions) | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Total |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 11 |
| | $ | 95 |
| | $ | — |
| | $ | 106 |
|
Restricted cash and restricted cash equivalents | 40 |
| | 2 |
| | 2 |
| | — |
| | 44 |
|
Trade accounts receivable, net | — |
| | 642 |
| | 426 |
| | — |
| | 1,068 |
|
Related party receivable | 135 |
| | 74 |
| | 64 |
| | (273 | ) | | — |
|
Inventories | — |
| | 250 |
| | 436 |
| | — |
| | 686 |
|
Prepaid expenses and other current assets | 613 |
| | 199 |
| | 115 |
| | (610 | ) | | 317 |
|
Total current assets | 788 |
| | 1,178 |
| | 1,138 |
| | (883 | ) | | 2,221 |
|
Property, plant and equipment, net | — |
| | 1,297 |
| | 993 |
| | — |
| | 2,290 |
|
Investments in consolidated subsidiaries | 41,003 |
| | 4,971 |
| | — |
| | (45,974 | ) | | — |
|
Investments in unconsolidated affiliates | — |
| | 63 |
| | 107 |
| | — |
| | 170 |
|
Goodwill | — |
| | 8,239 |
| | 11,800 |
| | — |
| | 20,039 |
|
Other intangible assets, net | — |
| | 16,857 |
| | 7,371 |
| | — |
| | 24,228 |
|
Long-term receivable, related parties | 5,066 |
| | 8,623 |
| | — |
| | (13,689 | ) | | — |
|
Other non-current assets | 61 |
| | 248 |
| | 263 |
| | — |
| | 572 |
|
Deferred tax assets | — |
| | — |
| | 27 |
| | — |
| | 27 |
|
Total assets | $ | 46,918 |
| | $ | 41,476 |
| | $ | 21,699 |
| | $ | (60,546 | ) | | $ | 49,547 |
|
| | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | — |
| | $ | 990 |
| | $ | 1,919 |
| | $ | — |
| | $ | 2,909 |
|
Accrued expenses | 53 |
| | 596 |
| | 220 |
| | — |
| | 869 |
|
Structured payables | — |
| | 47 |
| | 548 |
| | — |
| | 595 |
|
Related party payable | 74 |
| | 95 |
| | 104 |
| | (273 | ) | | — |
|
Short-term borrowings and current portion of long-term obligations | 1,806 |
| | — |
| | — |
| | — |
| | 1,806 |
|
Other current liabilities | 269 |
| | 679 |
| | 178 |
| | (610 | ) | | 516 |
|
Total current liabilities | 2,202 |
| | 2,407 |
| | 2,969 |
| | (883 | ) | | 6,695 |
|
Long-term obligations to third parties | 13,164 |
| | — |
| | — |
| | — |
| | 13,164 |
|
Long-term obligations to related parties | 8,589 |
| | 3,440 |
| | 1,660 |
| | (13,689 | ) | | — |
|
Deferred tax liabilities | 40 |
| | 4,107 |
| | 1,887 |
| | — |
| | 6,034 |
|
Other non-current liabilities | 40 |
| | 495 |
| | 236 |
| | — |
| | 771 |
|
Total liabilities | 24,035 |
| | 10,449 |
| | 6,752 |
| | (14,572 | ) | | 26,664 |
|
Total stockholders' equity | 22,883 |
| | 31,027 |
| | 14,947 |
| | (45,974 | ) | | 22,883 |
|
Total liabilities and stockholders' equity | $ | 46,918 |
| | $ | 41,476 |
| | $ | 21,699 |
| | $ | (60,546 | ) | | $ | 49,547 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Balance Sheets |
| As of December 31, 2018 |
(in millions) | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Total |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 18 |
| | $ | 65 |
| | $ | — |
| | $ | 83 |
|
Restricted cash and restricted cash equivalents | 42 |
| | 3 |
| | 1 |
| | — |
| | 46 |
|
Trade accounts receivable, net | — |
| | 596 |
| | 554 |
| | — |
| | 1,150 |
|
Related party receivable | 189 |
| | 71 |
| | 76 |
| | (336 | ) | | — |
|
Inventories | — |
| | 226 |
| | 400 |
| | — |
| | 626 |
|
Prepaid expenses and other current assets | 569 |
| | 110 |
| | 132 |
| | (557 | ) | | 254 |
|
Total current assets | 800 |
| | 1,024 |
| | 1,228 |
| | (893 | ) | | 2,159 |
|
Property, plant and equipment, net | — |
| | 1,351 |
| | 959 |
| | — |
| | 2,310 |
|
Investments in consolidated subsidiaries | 40,119 |
| | 4,882 |
| | — |
| | (45,001 | ) | | — |
|
Investments in unconsolidated affiliates | — |
| | 63 |
| | 123 |
| | — |
| | 186 |
|
Goodwill | 50 |
| | 8,371 |
| | 11,590 |
| | — |
| | 20,011 |
|
Other intangible assets, net | — |
| | 16,583 |
| | 7,384 |
| | — |
| | 23,967 |
|
Long-term receivable, related parties | 5,503 |
| | 7,827 |
| | — |
| | (13,330 | ) | | — |
|
Other non-current assets | 64 |
| | 41 |
| | 154 |
| | — |
| | 259 |
|
Deferred tax assets | — |
| | — |
| | 26 |
| | — |
| | 26 |
|
Total assets | $ | 46,536 |
| | $ | 40,142 |
| | $ | 21,464 |
| | $ | (59,224 | ) | | $ | 48,918 |
|
| | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | — |
| | $ | 497 |
| | $ | 1,803 |
| | $ | — |
| | $ | 2,300 |
|
Accrued expenses | 78 |
| | 610 |
| | 324 |
| | — |
| | 1,012 |
|
Structured payables | — |
| | 47 |
| | 479 |
| | — |
| | 526 |
|
Related party payable | 65 |
| | 106 |
| | 165 |
| | (336 | ) | | — |
|
Short-term borrowings and current portion of long-term obligations | 1,458 |
| | — |
| | — |
| | — |
| | 1,458 |
|
Other current liabilities | 278 |
| | 626 |
| | 59 |
| | (557 | ) | | 406 |
|
Total current liabilities | 1,879 |
| | 1,886 |
| | 2,830 |
| | (893 | ) | | 5,702 |
|
Long-term obligations to third parties | 14,201 |
| | — |
| | — |
| | — |
| | 14,201 |
|
Long-term obligations to related parties | 7,827 |
| | 3,369 |
| | 2,134 |
| | (13,330 | ) | | — |
|
Deferred tax liabilities | 46 |
| | 4,075 |
| | 1,802 |
| | — |
| | 5,923 |
|
Other non-current liabilities | 50 |
| | 337 |
| | 172 |
| | — |
| | 559 |
|
Total liabilities | 24,003 |
| | 9,667 |
| | 6,938 |
| | (14,223 | ) | | 26,385 |
|
Total stockholders' equity | 22,533 |
| | 30,475 |
| | 14,526 |
| | (45,001 | ) | | 22,533 |
|
Total liabilities and stockholders' equity | $ | 46,536 |
| | $ | 40,142 |
| | $ | 21,464 |
| | $ | (59,224 | ) | | $ | 48,918 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
| | | | | | | | | | | | | | | | | | | |
| Condensed Consolidating Statements of Cash Flows |
| For the First Six Months of 2019 |
(in millions) | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Total |
Operating activities: | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | (178 | ) | | $ | 812 |
| | $ | 581 |
| | $ | (12 | ) | | $ | 1,203 |
|
Investing activities: | | | | | | | | | |
Acquisitions of businesses | — |
| | (3 | ) | | (5 | ) | | — |
| | (8 | ) |
Collections on (issuances of) related party notes receivable | 535 |
| | (789 | ) | | (14 | ) | | 254 |
| | (14 | ) |
Investments in unconsolidated affiliates | — |
| | (11 | ) | | — |
| | — |
| | (11 | ) |
Purchases of property, plant and equipment | — |
| | (44 | ) | | (74 | ) | | — |
| | (118 | ) |
Proceeds from sales of property, plant and equipment | — |
| | 10 |
| | 9 |
| | — |
| | 19 |
|
Purchases of intangibles | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
Return of capital from investments in consolidated subsidiaries | — |
| | 32 |
| | — |
| | (32 | ) | | — |
|
Other, net | 10 |
| | — |
| | 12 |
| | — |
| | 22 |
|
Net cash provided by (used in) investing activities | 545 |
| | (809 | ) | | (72 | ) | | 222 |
| | (114 | ) |
Financing activities: | | | | | | | | | |
Proceeds from (payments of) related party notes | 763 |
| | — |
| | (509 | ) | | (254 | ) | | — |
|
Proceeds from term loan | 2,000 |
| | — |
| | — |
| | — |
| | 2,000 |
|
Net issuance of commercial paper | 381 |
| | — |
| | — |
| | — |
| | 381 |
|
Proceeds from structured payables | — |
| | — |
| | 78 |
| | — |
| | 78 |
|
Payments on structured payables | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) |
Payments on senior unsecured notes | (250 | ) | | — |
| | — |
| | — |
| | (250 | ) |
Repayment of term loan | (2,848 | ) | | — |
| | — |
| | — |
| | (2,848 | ) |
Payments on finance leases | — |
| | (11 | ) | | (8 | ) | | — |
| | (19 | ) |
Cash dividends paid | (423 | ) | | — |
| | (44 | ) | | 44 |
| | (423 | ) |
Other, net | 8 |
| | — |
| | 2 |
| | — |
| | 10 |
|
Net cash used in financing activities | (369 | ) | | (11 | ) | | (490 | ) | | (210 | ) | | (1,080 | ) |
Cash and cash equivalents — net change from: | |
| | |
| | |
| | |
| | |
|
Operating, investing and financing activities | (2 | ) | | (8 | ) | | 19 |
| | — |
| | 9 |
|
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 42 |
| | 31 |
| | 66 |
| | — |
| | 139 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 40 |
| | $ | 23 |
| | $ | 97 |
| | $ | — |
| | $ | 160 |
|
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 Form 10-K, as filed on February 28, 2019.27, 2020.
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 Securities Exchange Act, of 1934, as amended (the "Exchange Act"), including, in particular, statements about anticipated benefits and expenses of the DPS Merger and other transactions, including estimated synergies, deleveraging and associated cash management, and cost savings, the impact of COVID-19, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters 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 the words "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend" or the negative of these terms or similar expressions 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 on Form 10-K forand our subsequent filings with the year ended December 31, 2018 (the "Annual Report").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.
DR PEPPER SNAPPLE GROUP, INC. MERGER
On January 29, 2018, Dr Pepper Snapple Group, Inc. ("DPS") entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among DPS, Maple Parent Holdings Corp. (“Maple”) and Salt Merger Sub, Inc. (“Merger Sub”), whereby Merger Sub would be merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS (the “DPS Merger”). The DPS Merger was consummated on July 9, 2018 (the "Merger Date"), at which time DPS changed its name to "Keurig Dr Pepper Inc.".
Maple owns Keurig, a leader in specialty coffee and innovative single serve brewing systems. The combined businesses created Keurig Dr Pepper Inc. ("KDP"), a new beverage company of scale with a portfolio of iconic consumer brands and expanded distribution capability to reach virtually every point-of-sale in North America.
See Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information related to the DPS Merger.
OVERVIEW
KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including water (enhanced and flavored), ready-to-drink teastea and coffee, juices,juice, juice drinks, water and mixers and specialty coffee, and is a leading producer of innovative single-servesingle serve brewing systems. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountain and The Original Donut Shop. KDP has 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. KDP offers more than 125 owned, licensed, partner and partnerallied brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S., according to IRi, 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 system and our WD delivery system. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, pure-play e-commerce retailers, and office superstores; 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.
The beverage market is subject to some seasonal variations. Our cold beverage sales are generally higher during the warmer months, while hot beverage sales are generally higher during the cooler months. Overall beverage sales can be influenced by the timing of holidays and weather fluctuations. Sales of brewing systems and related accessories are generally higher during the second half of the year due to the holiday shopping season.
COFFEE SYSTEMS
Our Coffee Systems segment is primarily a producer of innovative single-servesingle serve brewing systems and specialty coffee in the U.S. and Canada. The multi-brandOur brewing system issystems are aimed at changing the way consumers prepare and enjoy coffee and other beverages, both at home and away from home in places such as offices, restaurants, cafeterias, convenience stores and hotels. We develop and sell a variety of Keurig brewers, brewer accessories and inother coffee-related equipment. In addition to coffee, we produce and sell a variety of other specialty beverages in K-Cup pods (including hot and iced teas, hot cocoa and other beverages) for use with Keurig brewing systems. We also develop and sell brewer accessories, including pod storage racks, baskets, brewer carrying cases and other coffee-related equipment and accessories. We also offer traditional whole bean and ground coffee in other package types, including bags, fractional packages and cans.
Our Coffee Systems segment offersmanufactures over 75% of the pods primarily in the single-serve K-Cup pod format.format in the U.S. We manufacture and sell 100% of the K-Cup pods of our own brands, such as Green Mountain Coffee Roasters, The Original Donut Shop, Van Houtte, Laughing Man, REVV, and REVV.Van Houtte. We have licensing and manufacturing agreements with our partner brands, to manufacture approximately 80% of the K-Cup pods in the U.S. and Canada, including brands such as Starbucks, Peet's, Dunkin' Donuts, Folgers, Newman’s Own Organics, McCafé, Peet's Coffee, Caribou Coffee, Eight O’Clock, Folgers, Maxwell House, Newman’s Own Organics and Tim Hortons, and private label arrangements. Our Coffee Systems segment also has agreements for manufacturing, distributing, and selling K-Cup pods for tea under brands such as Celestial Seasonings, Lipton and Tazo in addition to K-Cup pods of our own brand, Snapple. We also produce and sell K-Cup pods for cocoa, including through a licensing agreement for the Swiss Miss brand, and hot apple cider.
Our Coffee Systems segment manufactures its K-Cup pods in facilities in North America that include specialty designed proprietary high-speed packaging lines using freshly roasted and ground coffee as well as tea, cocoa and other products. We offer high-quality coffee including certified single-origin, organic, flavored, limited edition and proprietary blends. We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences. We engineer and design allmost of our single-servesingle serve brewing systems, where we then utilize third-party contract manufacturers located in various countries in Asia for brewer appliance manufacturing. We distribute our Coffee Systems products using third-party distributors, retail partners and retail partners.through e-commerce, including our website at www.keurig.com.
PACKAGED BEVERAGES
Our Packaged Beverages segment is principally a brand ownership, manufacturing and distribution business. In this segment, we primarily manufacture and distribute packaged beverages of our brands. Additionally, in order to maximize the size and scale of our manufacturing and distribution operations, we also distribute packaged beverages for our Allied Brandsallied brands and manufacture packaged beverages for certain private label beveragesother third parties in the U.S. and Canada.
Our larger NCB brands in this segment include Snapple, Mott's, Bai, Clamato, Hawaiian Punch, Mott's, Clamato, Bai,Core, Yoo-Hoo, Deja Blue, Core, ReaLemon, Mistic, Vita Coco coconut water, andevian water, Mr and Mrs T mixers.mixers, and Forto Coffee. Our larger CSD brands in this segment include Dr Pepper, 7UP, Canada Dry, 7UP, A&W, Sunkist soda, Squirt, Big Red, RC Cola, Big Red,Vernors and Vernors.A Shoc.
Approximately 90%95% of our 2019 Packaged Beverages net sales come from the manufacturing and distribution of our own brands and the contract manufacturing of certain private label and emerging brand beverages. The remaining portion of our 2019 Packaged Beverages net sales came from the distribution of our partnerallied brands such as Vita Coco coconut water, AriZona tea,evian water, Neuro drinks, High Brew evian,RTD Coffee, Forto Coffee shots, A Shoc energy drinks, Peet's RTD Coffee and Forto Coffee shots. Although the majority of our Packaged Beverages net sales relate to our brands, we alsoRuna energy drinks. We provide a route-to-market for these third party brand owners seeking effective distribution for their new and emerging brands. These brands give us exposure in certain markets to fast growing segments of the beverage industry with minimal capital investment.
Our Packaged Beverages products are manufactured in multiple facilities across the U.S. and are sold or distributed to retailers and their warehouses by our own distribution network or by third party distributors.
We sell our Packaged Beverages products through our DSD and our WD systems, both of which include sales to all major retail channels, including supermarkets, fountains, mass merchandisers, club stores, e-commerce, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.
BEVERAGE CONCENTRATES
Our Beverage Concentrates segment is principally a brand ownership business where we manufacture and sell beverage concentrates in the U.S. and Canada. Most of the brands in this segment are CSD brands. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, Sun Drop, Sunkist soda, 7UP, A&W, Sun Drop,7UP, Squirt, Big Red, RC Cola and the concentrate form of Hawaiian Punch. Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri.
Beverage concentrates are shipped to third party bottlers, as well as to our own manufacturing systems, who combine them with carbonation, water, sweeteners and other ingredients, package the combined product in aluminum cans, PET containers and glass bottles, and aluminum cans, and sell them as a finished beverage to retailers. Beverage concentrates are also manufactured into syrup, which is shipped to fountain customers, such as fast food restaurants, who mix the syrup with water and carbonation to create a finished beverage at the point of sale to consumers. Dr Pepper represents most of our fountain channel volume.
Our Beverage Concentrates brands are sold by our bottlers through all major retail channels including supermarkets, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.
LATIN AMERICA BEVERAGES
Our Latin America Beverages segment is a brand ownership, manufacturing and distribution business, with operations in Mexico representing approximately 90% of segmentthe segment's 2019 net sales. This segment participates mainly in the carbonated mineral water, flavored CSD, bottled water and vegetable juice, categories, with particular strength in carbonated mineral water, vegetable juice categories and grapefruit flavored CSDs. The largest brands include Peñafiel, Squirt, Clamato, Aguafiel Clamato and Crush.
In Mexico, we manufacture and distribute our products through our bottling operations and third party bottlers and distributors. We sell our finished beverages through all major Mexican retail channels, including small outlets, supermarkets, hypermarkets, convenience stores and on-premise channels. In the Caribbean, we distribute our products through third party bottlers and distributors. We have also begun to distribute certain products in other international jurisdictions through various third party bottlers and distributors.
VOLUME
In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, K-Cup pods or brewers.
Beverage Concentrates Sales Volume
In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales. The unit of measurement for concentrate case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.
Concentrate case sales represent units of measurement for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases.
Packaged Beverages and Latin America Beverages Sales Volume
In our Packaged Beverages and Latin America Beverages segments, we measure volume as case sales to customers. A case sale represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case sales include both our owned brands and certain brands licensed to and/or distributed by us.
ApplianceCoffee Systems K-Cup Pod and PodAppliance Sales Volume
In our Coffee Systems segments, we measure our sales volume as the number of appliances and the number of individual K-Cup pods sold to our customers.
COMPARABLE RESULTS OF OPERATIONS
As a result of the DPS Merger, in order for management to discuss our results on a comparable basis, we prepared unaudited pro forma condensed combined financial information for the second quarter and first six months of 2018 to illustrate the estimated effects of the DPS Merger, which was consummated on July 9, 2018, based on the historical results of operations of DPS and Maple. See Supplemental Unaudited Pro Forma Condensed Combined Financial Information section at the end of Management's Discussion and Analysis for further information on the assumptions used in the preparation of the financial information.
Furthermore, managementManagement 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 2019 and on a pro forma basis for 2018 for certain items affecting comparability. See Non-GAAP Financial Measures for further information on the certain items affecting comparability used in the preparation of the financial information. These items are referred to within the Adjusted Results of Operations section, within Management's Discussion and Analysis discussion as Adjusted net sales, Adjusted pro forma net sales, Adjusted income from operations, Adjusted pro forma income from operations, Adjusted interest expense, Adjusted pro forma interest expense, Adjusted provision for income taxes, Adjusted pro forma provision for income taxes, Adjusted net income Adjusted pro forma net income, Adjusted diluted EPS and Adjusted pro forma diluted EPS.
EXECUTIVE SUMMARY
Financial Overview
•The following table detailsNet income decreased $74 million to $156 million for the first quarter of 2020 as compared to $230 million in the prior year period, driven primarily by a non-cash impairment charge of $86 million associated with our net income, diluted EPS, Bedford investment.
Adjusted net income
and Adjusted diluted EPS for second quarter of 2019 and 2018: |
| | | | | | | | | | | | | | |
| Second Quarter | | Dollar | | Percent |
(in millions, except per share data) | 2019 | | 2018 | | Change | | Change |
Net income attributable to KDP | $ | 314 |
| | $ | 83 |
| | $ | 231 |
| | 278.3 | % |
Diluted EPS | 0.22 |
| | 0.10 |
| | 0.12 |
| | 120.0 |
|
Adjusted net income(1) | 423 |
| | 356 |
| | 67 |
| | 18.8 |
|
Adjusted diluted EPS(1) | 0.30 |
| | 0.26 |
| | 0.04 |
| | 15.4 |
|
| |
(1) | Adjusted net income and Adjusted diluted EPS are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Net income attributableincreased 12.7% to KDP increased $231 million to $314$408 million for the secondfirst quarter of 20192020 as compared to Adjusted net income of $362 million in the prior year period, driven primarily by productivity and merger synergies and strong volume/mix growth, which reflected particular strength in the Packaged Beverages segment, which included a benefit from the impact of COVID-19 late in the DPS Merger. quarter, partially offset by a slowdown in the Beverages Concentrates and Coffee Systems segments, both of which experienced a modest unfavorable impact from COVID-19 late in the quarter.
Diluted EPS increased 120.0%decreased 31.3% to $0.22$0.11 per diluted share as compared to $0.10$0.16 in the prior year.year period.
Adjusted net income advanced 18.8% to $423 million for the second quarter of 2019 as compared to Adjusted pro forma net income of $356 million in the prior period. This performance was driven by growth in Adjusted income from operations, primarily attributable to net productivity and merger synergies partially offset by inflation on input costs and logistics, and lower Adjusted interest expense primarily due to realized gains associated with the termination of certain interest rate swaps and lower indebtedness. Adjusted diluted EPS increased 15.4%16.0% to $0.30$0.29 per diluted share as compared to Adjusted pro forma diluted EPS of $0.26$0.25 per diluted share in the prior year.year period.
During the first six monthsquarter of 2019,2020, we made net repayments of approximately $717$42 million related to our commercial paper notes, KDP Revolver, 2019 Notes,KDP Term Loan and our term loans2020 Notes. Additionally, we repaid $107 million and Commercial Paper.added $44 million of structured payables during the first quarter of 2020.
On May 29,In April 2020, we completed a strategic refinancing that extended our debt maturities and enhanced our liquidity profile, including a $1.5 billion senior unsecured notes issuance and the refinancing and upsizing of our 2019 364-Day Credit Agreement. The proactive refinancing, which did not change our total debt balance or deleveraging commitments, increased our excess liquidity to a level that we entered intobelieve will exceed our liquidity needs, even in the event of a new 364-day credit agreement which provides a commitment for unsecured financing of up to $750 million.
Recent Developments
Our Board of Directors declared a quarterly dividend of $0.15 per share on May 3, 2019, which was paid on July 19, 2019 to shareholders of record on July 5, 2019.protracted downturn.
RESULTS OF OPERATIONS
We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees.
References in the financial tables to percentage changes that are not meaningful are denoted by "NM.""NM".
SecondFirst Quarter of 20192020 Compared to the SecondFirst Quarter of 20182019
Consolidated Operations
The following table sets forth our unaudited condensed consolidated results of operations for the secondfirst quarter of 20192020 and 2018:2019:
| | | Second Quarter | | | | | First Quarter | | Dollar | | Percentage |
| 2019 | | 2018 | | Dollar | | Percentage | |
($ in millions,except per share amounts) | Dollars | | Percent | | Dollars | | Percent | | Change | | Change | |
($ in millions, except per share amounts) | | 2020 | | 2019 | | Change | | Change |
Net sales | $ | 2,812 |
| | 100.0 | % | | $ | 949 |
| | 100.0 | % | | $ | 1,863 |
| | 196 | % | $ | 2,613 |
| | $ | 2,504 |
| | $ | 109 |
| | 4.4 | % |
Cost of sales | 1,186 |
| | 42.2 |
| | 458 |
| | 48.3 |
| | 728 |
| | 159 |
| 1,161 |
| | 1,106 |
| | 55 |
| | 5.0 |
|
Gross profit | 1,626 |
| | 57.8 |
| | 491 |
| | 51.7 |
| | 1,135 |
| | 231 |
| 1,452 |
| | 1,398 |
| | 54 |
| | 3.9 |
|
Selling, general and administrative expenses | 1,028 |
| | 36.6 |
| | 321 |
| | 33.8 |
| | 707 |
| | 220 |
| 1,028 |
| | 911 |
| | 117 |
| | 12.8 |
|
Other operating expense, net | 11 |
| | 0.4 |
| | 3 |
| | 0.3 |
| | 8 |
| | 267 |
| |
Other operating income, net | | (42 | ) | | (11 | ) | | (31 | ) | | NM |
|
Income from operations | 587 |
| | 20.9 |
| | 167 |
| | 17.6 |
| | 420 |
| | 251 |
| 466 |
| | 498 |
| | (32 | ) | | (6.4 | ) |
Interest expense | 170 |
| | 6.0 |
| | 51 |
| | 5.4 |
| | 119 |
| | 233 |
| 153 |
| | 169 |
| | (16 | ) | | (9.5 | ) |
Interest expense - related party | — |
| | — |
| | 26 |
| | 2.7 |
| | (26 | ) | | NM |
| |
Other expense (income), net | 1 |
| | — |
| | (8 | ) | | (0.8 | ) | | 9 |
| | NM |
| |
Loss on early extinguishment of debt | | 2 |
| | 9 |
| | (7 | ) | | (77.8 | ) |
Impairment on investment and note receivable | | 86 |
| | — |
| | 86 |
| | NM |
|
Other expense, net | | 20 |
| | 5 |
| | 15 |
| | NM |
|
Income before provision for income taxes | 416 |
| | 14.8 |
| | 98 |
| | 10.3 |
| | 318 |
| | 324 |
| 205 |
| | 315 |
| | (110 | ) | | (34.9 | ) |
Provision for income taxes | 102 |
| | 3.6 |
| | 13 |
| | 1.4 |
| | 89 |
| | 685 |
| 49 |
| | 85 |
| | (36 | ) | | (42.4 | ) |
Net income | 314 |
| | 11.2 |
| | 85 |
| | 9.0 |
| | 229 |
| | 269 |
| $ | 156 |
| | $ | 230 |
| | (74 | ) | | (32.2 | ) |
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards | — |
| | — |
| | 2 |
| | 0.2 |
| | (2 | ) | | NM |
| |
Net income attributable to KDP | $ | 314 |
| | 11.2 | % | | $ | 83 |
| | 8.7 | % | | $ | 231 |
| | 278 |
| |
| | | | | | | | | | | | | | | | | | |
Earnings per common share: | | | | | |
| | | | | | | | | | | | | |
Basic | $ | 0.22 |
| | | | $ | 0.10 |
| | | | 0.12 |
| | 120.0 | % | $ | 0.11 |
| | $ | 0.16 |
| | $ | (0.05 | ) | | (31.3 | )% |
Diluted | 0.22 |
| | | | 0.10 |
| | | | 0.12 |
| | 120.0 | % | 0.11 |
| | 0.16 |
| | (0.05 | ) | | (31.3 | ) |
Weighted average common shares outstanding: | | | | | | | | | | | | |
Basic | 1,406.7 |
| | | | 790.5 |
| | | | | | | |
Diluted | 1,419.2 |
| | | | 790.5 |
| | | | | | | |
| | | | | | | | | | | | | | | | | | |
Gross margin | | 55.6 | % | | 55.8 | % | |
|
| | (20 bps) |
|
Operating margin | | 17.8 | % | | 19.9 | % | |
|
| | (210 bps) |
|
Effective tax rate | 24.5 | % | | NM |
| | 13.3 | % | | NM |
| | NM |
| | NM |
| 23.9 | % | | 27.0 | % | | | | (310 bps) |
|
Sales volume.The following table sets forth changes in sales volume for the first quarter of 2020 compared to the prior year period:
|
| | | |
| | Increase / (Decrease) |
K-Cup pod volume | | 5.6 | % |
Brewer volume | | (2.4 | ) |
CSD sales volume | | 0.3 |
|
NCB sales volume | | 5.5 |
|
Net Sales. Net sales increased $1,863$109 million, or 4.4%, to $2,613 million for the secondfirst quarter of 20192020 compared withto $2,504 million in the secondprior year period. This performance reflected higher volume/mix of 5.0% driven by strong volume/mix growth, which reflected particular strength in the Packaged Beverage segment, which included a benefit from the impact of COVID-19 late in the quarter, partially offset by a slowdown in the Beverages Concentrates and Coffee Systems segments, both of 2018.which experienced a modest unfavorable impact from COVID-19 late in the quarter. The primary drivervolume/mix growth was partially offset by lower net price realization of 0.5% and unfavorable foreign currency translation, which also impacted the increase in net sales was the $1,822 million of sales acquired as a result of the DPS Merger.period by 0.1%.
Gross Profit. Gross profit increased $1,135$54 million, or 3.9%, to $1,452 million for the secondfirst quarter of 20192020 compared withto $1,398 million in the secondprior year period. This performance primarily reflected the impact of higher volume/mix and productivity and merger synergies, partially offset by tariffs, unfavorable net price realization and inflation in input costs, led by packaging. Gross margin decreased 20 bps to 55.6% in the first quarter of 2018. Gross margin of 57.8% for the second quarter of 2019 was significantly improved compared to the 51.7% gross margin for the second quarter of 2018. The primary driver of the change in gross profit was incremental gross profit we acquired as a result of the consummation of the DPS Merger.2020.
Selling, General and Administrative Expenses.Selling, general and administrative ("SG&A")&A expenses increased $707$117 million, or 12.8%, to $1,028 million for the secondfirst quarter of 20192020 compared to $911 million in the prior year period. The increase was driven by the unfavorable change in commodity mark-to-market impacts, expenses associated with the second quarter of 2018. The primary driver of the increase in SG&A expenses was the impact of the DPS Merger, which includes acquiredproductivity and integration projects, higher operating costs associated with the integration of DPSincreased shipment volume and Keurig.
Income from Operations.Income from operations increased $420 million to $587 million for the second quarter of 2019 due to thean increase in gross profitother operating costs. These increases were partially offset by an increase in SG&A expenses, driven by the DPS Merger.
Interest Expense.Interest expense increased $119 million for the second quarter of 2019 compared with the second quarter of 2018 due primarily to the assumption of the existing senior unsecured notesstrong productivity and increased borrowings as a result of the DPS Merger, which was partially offset by the impact of the net repayments related to our 2019 Notes, our term loans and Commercial Paper.merger synergies.
Other Operating Income, net. Other operating income, net increased $31 million to $42 million for the first quarter of 2020 compared to $11 million in the prior year period due to the network optimization program gain of $42 million on the asset sale-leaseback of four facilities in the current year versus a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period.
Income from Operations. Income from operations decreased $32 million, or 6.4%, to $466 million for the first quarter of 2020 compared to $498 million in the prior year period due to the increase in SG&A expenses partially offset by an increase in gross profit and other operating income, net. Operating margin declined 210 bps to 17.8% in the first quarter of 2020 as compared to the prior year period.
Interest Expense - Related Party.Expense. Interest expense - related party decreased $26$16 million, or 9.5%, to $153 million for the secondfirst quarter of 20192020 compared withto $169 million for the second quarter of 2018 as aprior year period. This change was primarily the result of the capitalizationbenefit of lower indebtedness due to continued deleveraging.
Impairment on Investment and Note Receivable. Impairment on investment and note receivable reflected a non-cash impairment charge of $86 million for the related party term loans into additional paid in capital during the thirdfirst quarter of 2018.2020 associated with our Bedford investment. Refer to Note 4 for additional information regarding the impairment charge.
Other Expense, net.Other expense, net increased $15 million to $20 million for the first quarter of 2020 compared to $5 million in the prior year period primarily driven by losses related to our deferred compensation plan in the current year versus gains recorded in the prior year period. The deferred compensation plan activity is fully offset by the same amount in SG&A expenses.
Effective Tax Rate. The effective tax rates for the secondfirst quarter of 2020 and 2019 were 23.9% and 2018 were 24.5% and 13.3%27.0%, respectively. For the secondfirst quarter of 2019,2020, the provision for income taxes was higherlower than the second quarter of 2018prior year period primarily due to the benefit received from the one time transitionrevaluation of the Company's deferred tax relatedliabilities and the decrease of income tax reserves due to the TCJAlapse in statute of limitations.
Net Income. Net income decreased $74 million to $156 million for the first quarter of 2020 as compared to $230 million in the second quarterprior year period. This performance was primarily driven by a non-cash impairment charge of 2018. See Note 6 of$86 million associated with our Bedford investment.
Diluted EPS. Diluted EPS decreased 31.3% to $0.11 per diluted share as compared to $0.16 in the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.prior year period.
Adjusted Results of Operations
The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the secondfirst quarter of 20192020 and 2018:2019:
|
| | | | | | | | | | | | | | |
| Second Quarter | | Dollar | | Percent |
(in millions, except per share amounts) | 2019 | | 2018 | | Change | | Change |
Adjusted net sales(1) | $ | 2,812 |
| | $ | 2,822 |
| | $ | (10 | ) | | (0.4 | )% |
Adjusted income from operations(1) | 702 |
| | 640 |
| | 62 |
| | 9.7 |
|
Adjusted interest expense(1) | 138 |
| | 175 |
| | (37 | ) | | (21.1 | ) |
Adjusted provision for income taxes(1) | 142 |
| | 115 |
| | 27 |
| | 23.5 |
|
Adjusted net income(1) | 423 |
| | 356 |
| | 67 |
| | 18.8 |
|
Adjusted diluted EPS(1) | 0.30 |
| | 0.26 |
| | 0.04 |
| | 15.4 |
|
| | | | | | | |
Adjusted diluted weighted average shares(1) | 1,419.2 |
| | 1,386.5 |
| | | | |
Adjusted operating margin(1) | 25.0 | % | | 22.7 | % | | | | 230 bps |
|
Adjusted effective tax rate(1) | 25.1 | % | | 24.4 | % | | | | |
| |
(1) | These adjusted measures are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of this term and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Adjusted Net Sales. Adjusted net sales decreased $10 million, or 0.4%, to $2,812 million for the second quarter of 2019 as compared to Adjusted pro forma net sales of $2,822 million for the second quarter of 2018. This performance reflected strong underlying net sales growth of 2.6%, driven by higher volume/mix of 2.1% and net price realization of 0.5%, as well as a 0.2% benefit from the shift of Easter into the second quarter of 2019. More than offsetting these positive drivers was the expected unfavorable impacts of 3.0% related to changes in our Allied Brands portfolio, as well as unfavorable foreign currency translation of 0.2%. |
| | | | | | | | | | | | | | |
| First Quarter | | Dollar | | Percent |
(in millions, except per share amounts) | 2020 | | 2019 | | Change | | Change |
Adjusted income from operations | $ | 684 |
| | $ | 621 |
| | $ | 63 |
| | 10.1 |
|
Adjusted interest expense | 120 |
| | 124 |
| | (4 | ) | | (3.2 | ) |
Adjusted provision for income taxes | 136 |
| | 128 |
| | 8 |
| | 6.3 |
|
Adjusted net income | 408 |
| | 362 |
| | 46 |
| | 12.7 |
|
Adjusted diluted EPS | 0.29 |
| | 0.25 |
| | 0.04 |
| | 16.0 |
|
| | | | | | | |
Adjusted operating margin | 26.2 | % | | 24.8 | % | | | | 140 bps |
|
Adjusted effective tax rate | 25.0 | % | | 26.1 | % | | | | (110 bps) |
|
Adjusted Income from Operations. Adjusted income from operations increased $62$63 million, or 9.7%10.1%, to $702$684 million for the first quarter of 2020 compared to Adjusted pro forma income from operations of $640$621 million in the second quarter of 2018. This strong growth was despite comparison to the prior year quarter that included a $16 million gain on the acquisition of Big Red and a $5 million one-time reimbursement from a resin supplier, which reduced the year-over-year growth rate by more than three percentage points.period. Driving thethis performance in the quarter were strong productivity and merger synergies, both of which benefittedimpacted both SG&A and cost of sales, andthe strong growth in underlying net sales partially offset byand a network optimization program gain of $42 million on the asset-sale leaseback of four facilities. Partially offsetting these positive drivers were inflation in input costs, led by packaging, and logistics.logistics, higher operating costs associated with the increased shipment volume, tariffs and the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period. Adjusted operating margin grew 230140 bps to 25.0%26.2% in the secondfirst quarter of 2019.2020.
Adjusted Interest Expense. Adjusted interest expense decreased $37$4 million, or 21.1%3.2%, to $138$120 million for the secondfirst quarter of 20192020 compared to Adjusted pro forma interest expense of $175$124 million in the prior year.year period. This change was primarily the result of the benefit of lower indebtedness due to continued deleveraging realized gains associated withand the termination$20 million benefit of certainunwinding several interest rate swaps and realized gains on existingswap contracts. Partially offsetting these factors was a $27 million benefit of unwinding several interest rate swaps.swap contracts in the prior year period.
Adjusted Effective Tax Rate. The Adjusted effective tax rate increased 0.7 pointsdecreased 110 bps to 25.1%25.0% for the secondfirst quarter of 20192020, compared to the Adjusted pro forma effective tax rate of 24.4%26.1% in the prior year.year period. This increasedecrease in our Adjustedadjusted effective tax rate was primarily due to the lossbenefit received from the revaluation of the Company's deferred tax benefits associated withliabilities and the U.S. domestic manufacturing deductiondecrease of income tax reserves due to the lapse in 2019.statute of limitations during the first quarter of 2020.
Adjusted Net Income.Adjusted net income increased 12.7% to $408 million for the first quarter of 2020 as compared to Adjusted net income of $362 million in the prior year period. This performance was driven primarily by strong growth in Adjusted income from operations, a lower Adjusted effective tax rate and lower Adjusted interest expense. Results of Operations by Segment
The following tables set forth net sales and income from operations for our segments for the secondfirst quarter of 20192020 and 2018,2019, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:
| | | Second Quarter | | | | | |
(in millions) | 2019 | | 2018 | First Quarter |
Segment Results — Net sales | | | | 2020 | | 2019 |
Coffee Systems | $ | 990 |
| | $ | 949 |
| $ | 973 |
| | $ | 968 |
|
Packaged Beverages | 1,311 |
| | — |
| 1,217 |
| | 1,116 |
|
Beverage Concentrates | 370 |
| | — |
| 306 |
| | 304 |
|
Latin America Beverages | 141 |
| | — |
| 117 |
| | 116 |
|
Net sales | $ | 2,812 |
| | $ | 949 |
| $ | 2,613 |
| | $ | 2,504 |
|
| | | | | | |
| Second Quarter | First Quarter |
(in millions) | 2019 | | 2018 | 2020 | | 2019 |
Segment Results — Income from Operations | | | | | | |
Coffee Systems | $ | 287 |
| | $ | 274 |
| $ | 272 |
| | $ | 293 |
|
Packaged Beverages | 186 |
| | — |
| 189 |
| | 149 |
|
Beverage Concentrates | 244 |
| | — |
| 197 |
| | 201 |
|
Latin America Beverages | 26 |
| | — |
| 27 |
| | 11 |
|
Total income from operations | 743 |
| | 274 |
| |
Unallocated corporate costs | 156 |
| | 107 |
| (219 | ) | | (156 | ) |
Income from operations | $ | 587 |
| | $ | 167 |
| $ | 466 |
| | $ | 498 |
|
COFFEE SYSTEMS
The following table details our Coffee Systems segment's net sales, income from operations, operating margin, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the secondfirst quarter of 20192020 and 2018:2019:
| | | Second Quarter | | Dollar | | Percent | First Quarter | | Dollar | | Percent |
(in millions) | 2019 | | 2018 | | Change | | Change | 2020 | | 2019 | | Change | | Change |
Net sales | $ | 990 |
| | $ | 949 |
| | $ | 41 |
| | 4.3 | % | $ | 973 |
| | $ | 968 |
| | $ | 5 |
| | 0.5 | % |
Income from operations | 287 |
| | 274 |
| | 13 |
| | 4.7 |
| 272 |
| | 293 |
| | (21 | ) | | (7.2 | ) |
Operating margin | 29.0 | % | | 28.9 | % | | | | 10 bps |
| 28.0 | % | | 30.3 | % | | | | (230 bps) |
|
Adjusted income from operations(1) | 331 |
| | 306 |
| | 25 |
| | 8.2 |
| 347 |
| | 335 |
| | 12 |
| | 3.6 |
|
Adjusted operating margin(1) | 33.4 | % | | 32.2 | % | | | | 120 bps |
| 35.7 | % | | 34.6 | % | | | | 110 bps |
|
| |
(1) | Adjusted income from operations is a non-GAAP financial measure. For the second quarter of 2018, this financial measure was prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Sales Volume. The volume/mixvolume growth in the first quarter of 2020 compared to the prior year period for the Coffee Systems segment was driven by a 12.8% increase inreflected strong K-Cup pod volume growth of 5.6% despite a significant decline late in the quarter in the away-from-home coffee business due to both office closures and hospitality slowdown caused by COVID-19. Brewer volume declined 2.4% in the quarter, reflecting comparison to the double-digit growth recorded in the prior year period, as well as the expected shift of brewer shipments from the first quarter to later in the year as a 19.4% increase in brewer volume, partially offset by unfavorable pod sales mix, primarily reflectingresult of the timing impact of volume growth of branded partnersCOVID-19 on brewer supply from certain regions in the second quarter of 2019.
Net Sales. Net sales increased 4.3% to $990 million for the second quarter of 2019 compared to net sales of $949 million in the second quarter of 2018 due to volume/mix growth of 8.3%, partially offset by lower net price realization of 3.5% and unfavorable foreign currency translation of 0.5%.
Income from Operations.Income from operations increased $13 million, or 4.7%, to $287 million for the second quarter of 2019, compared with the second quarter of 2018, primarily reflecting the benefits of productivity, net sales growth and lower administrative expenses. Partially offsetting these growth drivers were expenses associated with our productivity projects and inflation in input costs, led by packaging and logistics. Operating margin grew 10 basis points ("bps") to 29.0% for the second quarter of 2019.Asia.
Net Sales. Net sales increased $5 million, or 0.5%, to $973 million for the first quarter of 2020 compared to $968 million for the prior year period due to volume/mix growth of 3.7%, driven by the increase in K-Cup pod volume and partially offset by unfavorable pod sales mix. This growth was partially offset by lower net price realization of 3.3%. Favorable foreign currency translation also impacted the period by 0.1%.
Income from Operations.Income from operations decreased $21 million, or 7.2%, to $272 million for the first quarter of 2020, compared to $293 million in the prior year period, driven by expenses associated with productivity projects and strategic pricing. These impacts were partially offset by strong productivity and merger synergies, which impacted both SG&A and cost of sales, a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility and strong growth in K-Cup pod volume. Operating margin declined 230 bps to 28.0% during the first quarter of 2020.
Adjusted Income from Operations. Adjusted income from operations increased $25$12 million, or 8.2%3.6%, to $331$347 million for the secondfirst quarter of 2019,2020, compared with Adjusted pro forma income from operationsto $335 million in the prior year period, driven by continued productivity and merger synergies, which impacted both SG&A and cost of $306sales, a network optimization program gain of $16 million for the second quarteron an asset sale-leaseback of 2018, primarily reflecting the benefits of productivitya manufacturing facility and strong growth in K-Cup pod sales, partially offset by inflationvolume. Partially offsetting these factors was strategic pricing, tariffs and an increase in packaging and logistics.other operating costs. Adjusted operating margin grew 120110 bps versus the year ago period to 33.4%35.7%.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales, income from operations, Adjusted net sales,operating margin, Adjusted income from operations and Adjusted operating margin for the secondfirst quarter of 20192020 and 2018:2019:
| | | Second Quarter | | Dollar | | Percent | First Quarter | | Dollar | | Percent |
(in millions) | 2019 | | 2018 | | Change | | Change | 2020 | | 2019 | | Change | | Change |
Net sales | $ | 1,311 |
| | $ | — |
| | $ | 1,311 |
| | NM | $ | 1,217 |
| | $ | 1,116 |
| | $ | 101 |
| | 9.1 | % |
Income from operations | 186 |
| | — |
| | 186 |
| | NM | 189 |
| | 149 |
| | 40 |
| | 26.8 |
|
Adjusted net sales(1) | 1,311 |
| | 1,378 |
| | (67 | ) | | (4.9 | )% | |
Operating margin | | 15.5 | % | | 13.4 | % | |
|
| | 210 bps |
|
Adjusted income from operations(1) | 190 |
| | 161 |
| | 29 |
| | 18.0 |
| 203 |
| | 160 |
| | 43 |
| | 26.9 |
|
Adjusted operating margin(1) | 14.5 | % | | 11.7 | % | | | | 280 bps |
| 16.7 | % | | 14.3 | % | | | | 240 bps |
|
| |
(1) | Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Sales Volume. Sales volume for the secondfirst quarter of 2019 were wholly incremental as a result of2020 compared to the DPS Merger.
Adjusted Sales Volume. Adjusted sales volume for the second quarter of 2019 declined 4.6%prior year period increased 7.0% due to the net unfavorable impact of changes in our Allied Brands portfoliohigher water sales, led by evian and lowerCore Hydration, higher CSD volume, and growth in Mott's. The increase in volume in the quarter was partially offsetdriven by growth of Core Hydration and higher volume from contract manufacturing.heightened consumer demand due to stock-up behavior late in the quarter related to COVID-19.
Net Sales. Net sales of $1,311increased $101 million, or 9.1%, to $1,217 million for the secondfirst quarter of 2019 were wholly incremental2020 compared to $1,116 million for the prior year period, driven by higher volume/mix of 8.7%, in part as a result of the DPS Merger.
Adjusted Net Sales. Adjusted net sales decreased 4.9% to $1,311 million, compared with Adjusted pro forma net sales of $1,378 million in the second quarter of 2018, reflecting underlying net sales growth of 1.0%, driven byCOVID-19 impact, and higher net price realization of 2.0% from pricing actions taken late in 2018 partially offset by lower volume/mix of 1.0%, as well as a 0.5% benefit from the shift of Easter into the second quarter of 2019. More than offsetting these growth drivers was the expected unfavorable impacts of 6.3% from changes in the Allied Brands portfolio, as well as unfavorable foreign currency translation of 0.1%0.4%.
Income from Operations. Income from operations was $186increased $40 million, or 26.8%, to $189 million for the secondfirst quarter of 2019, which were wholly incremental as a result of2020 compared to $149 million for the DPS Merger, asprior year period, reflecting strong net sales growth, continued productivity and merger synergies and a network optimization program gain of $26 million on the asset sale-leaseback of three facilities. These growth drivers were reducedpartially offset by cost of saleshigher operating costs associated with the surge in consumer demand late in the quarter, inflation in input costs, primarily in packaging, and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of people costs, marketing investmentslabor and logistics, expense.the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period and an increase in other operating costs. Operating margin grew 210 bps versus the prior year period to 15.5%.
Adjusted Income from Operations. Adjusted income from operations increased $29$43 million, or 18.0%26.9%, to $190$203 million for the secondfirst quarter of 2019,2020 compared with Adjusted pro forma income from operations of $161to $160 million for the second quarterprior year period, largely driven by strong volume/mix, partially driven by increased shipment volume as a result of 2018, largely reflecting strongCOVID-19. Other favorable drivers included productivity and merger synergies as well as timingand a network optimization program gain of marketing investments.$26 million on the asset sale-leaseback of three facilities. These drivers were partially offset by higher operating costs associated with the surge in consumer demand late in the quarter, inflation particularlyin input costs, primarily in packaging, and labor and logistics, the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing inputcontract in the prior year period and an increase in other operating costs. Adjusted operating margin grew 280240 bps versus the year ago period to 14.5%16.7%.
BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales, income from operations, Adjusted net sales,operating margin, Adjusted income from operations and Adjusted operating margin for the secondfirst quarter of 20192020 and 2018:2019:
|
| | | | | | | | | | | | | | |
| Second Quarter | | Dollar | | Percent |
(in millions) | 2019 | | 2018 | | Change | | Change |
Net sales | $ | 370 |
| | $ | — |
| | $ | 370 |
| | NM |
Income from operations | 244 |
| | — |
| | 244 |
| | NM |
Adjusted net sales(1) | 370 |
| | 359 |
| | 11 |
| | 3.1 | % |
Adjusted income from operations(1) | 246 |
| | 236 |
| | 10 |
| | 4.2 |
|
Adjusted operating margin(1) | 66.5 | % | | 65.7 | % | | | | 80 bps |
|
| |
(1) | Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
|
| | | | | | | | | | | | | | |
| First Quarter | | Dollar | | Percent |
(in millions) | 2020 | | 2019 | | Change | | Change |
Net sales | $ | 306 |
| | $ | 304 |
| | $ | 2 |
| | 0.7 | % |
Income from operations | 197 |
| | 201 |
| | (4 | ) | | (2.0 | ) |
Operating margin | 64.4 | % | | 66.1 | % | | | | (170 bps) |
|
Adjusted income from operations | 197 |
| | 201 |
| | (4 | ) | | (2.0 | ) |
Adjusted operating margin | 64.4 | % | | 66.1 | % | | | | (170 bps) |
|
Sales volume.Volume. Sales volume for the secondfirst quarter of 2019 were wholly incremental2020 as a resultcompared to the prior year period declined 2.4% reflecting an immediate impact of COVID-19 on the DPS Merger.
Adjusted sales volume. Adjusted salesfountain foodservice business late in the quarter, partially offset by growth in the concentrate shipment volume for the second quarter of 2019 declined 1.0% due to CSD category volume declines.retail product.
Net Sales. Net sales were $370increased $2 million, or 0.7%, to $306 million for the secondfirst quarter of 2019, which were wholly incremental as a result of2020 compared to $304 million in the DPS Merger.
Adjusted Net Sales. Adjusted net sales increased 3.1% to $370 million for the second quarter of 2019, compared with Adjusted pro forma net sales of $359 million for the second quarter of 2018,prior year period, driven by net price realization of 4.4%2.4%, partially offset by lowerunfavorable volume/mix of 1.1% and unfavorable foreign currency translation1.7% reflecting a significant channel shift away from on-premise business, which is shipped directly, as demand dropped off quickly late in the quarter due to COVID-19, partially offset by a slower build of 0.2%.the at-home business, as inventories in our partner bottling network were worked down.
Income from Operations. Income from operations was $244decreased $4 million, or 2.0%, to $197 million for the secondfirst quarter of 2019, which was wholly incremental as a result of2020 compared to $201 million in the DPS Merger, as net sales were reduced by SG&A expenses and cost of sales. SG&A expenses were primarily comprised of marketing investments and people costs. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs.
Adjusted Income from Operations. Adjusted income from operations increased $10 million, or 4.2%, to $246 million for the second quarter of 2019 compared with Adjusted pro forma income from operations of $236 million for the second quarter of 2018.prior year period. This performance reflected the benefit of the net sales growth, in Adjusted net sales. Adjusted operatingwhich was more than offset by increased marketing investment. Operating margin grew 80declined 170 bps versus the year ago period to 66.5%64.4%.
Adjusted Income from Operations.Income from operations decreased $4 million, or 2.0%, to $197 million for the first quarter of 2020 compared to $201 million in the prior year period. This performance reflected the benefit of the net sales growth, which was more than offset by increased marketing investment. Operating margin declined 170 bps versus the year ago period to 64.4%.
LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales, income from operations, Adjusted net sales,operating margin, Adjusted income from operations and Adjusted operating margin for the secondfirst quarter of 20192020 and 2018:2019:
| | | Second Quarter | | Dollar | | Percent | First Quarter | | Dollar | | Percent |
(in millions) | 2019 | | 2018 | | Change | | Change | 2020 | | 2019 | | Change | | Change |
Net sales | $ | 141 |
| | $ | — |
| | $ | 141 |
| | NM | $ | 117 |
| | $ | 116 |
| | $ | 1 |
| | 0.9 | % |
Income from operations | 26 |
| | — |
| | 26 |
| | NM | 27 |
| | 11 |
| | 16 |
| | 145.5 |
|
Adjusted net sales(1) | 141 |
| | 136 |
| | 5 |
| | 3.7 | % | |
Operating margin | | 23.1 | % | | 9.5 | % | | | | 1,360 bps |
|
Adjusted income from operations(1) | 20 |
| | 26 |
| | (6 | ) | | (23.1 | )% | 27 |
| | 12 |
| | 15 |
| | 125.0 |
|
Adjusted operating margin(1) | 14.2 | % | | 19.1 | % | | | | (490) bps |
| 23.1 | % | | 10.3 | % | | | | 1,280 bps |
|
| |
(1) | Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Sales Volume. Sales volume for the secondfirst quarter of 2019 were wholly incremental2020 as a result of the DPS Merger.
Adjusted Sales Volume. Adjusted sales volume for the second quarter of 2019 declined 3.7% duecompared to the exit of our Aguafiel bulk water business of 4.7% and an increase of 1.0% in the balance of the portfolio.prior year period increased 1.5%, driven by Squirt.
Net Sales. Net sales were $141increased $1 million, or 0.9%, to $117 million for the secondfirst quarter of 2019, which were wholly incremental as a result of2020 compared to $116 million in the DPS Merger.
Adjusted Net Sales. Adjusted net sales increased 3.7% to $141 million for the second quarter of 2019, compared with Adjusted pro forma net sales of $136 million for the second quarter of 2018,prior year period, driven by higher net price realization of 3.8% from pricing actions taken in 2018 and favorable foreign currency translation of 1.3%5.9%, partially offset by unfavorable volume/mix of 1.4%0.7%. Unfavorable foreign currency translation also impacted the period by 4.3%.
Income from Operations.Income from operations was $26increased $16 million, or 145.5%, to $27 million for the secondfirst quarter of 2019, which was wholly incremental as2020 compared to $11 million in the prior year period, driven by a result of the DPS Merger, as net sales were reduced by cost of sales and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of logistics expense, people costs and marketing investments.
Adjusted Income from Operations. Adjusted income from operations decreased $6 million, or 23.1%, to $20 million for the second quarter of 2019, compared with Adjusted pro forma income from operations of $26 million for the second quarter of 2018. This performance reflected the benefit offavorable F/X transaction impact, net sales growth and productivity, whichcontinued productivity. These benefits were more thanpartially offset by inflation in logistics and input costs, as well as the comparison to a $5 million benefit in the second quarter of 2018 related to a previous reimbursement by a resin supplier. Adjusted operatingmanufacturing and logistics. Operating margin declined 490increased 1,360 bps versus the year ago period to 14.2%23.1%.
Adjusted Income from Operations.Adjusted income from operations increased $15 million, or 125.0%, to $27 million in the first quarter of 2020 compared to $12 million in the prior year period. This performance reflected a favorable F/X transaction impact, net sales growth and continued productivity, which was partially offset by inflation on input costs, manufacturing, and logistics. Adjusted operating margin grew 1,280 bps versus the year ago period to 23.1%.
UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS
First Six MonthsWe believe the North American beverage market is influenced by certain key trends and uncertainties. Some of 2019 Comparedthese items, such as the recent outbreak of COVID-19, increased health consciousness and changes in consumer preferences and economic factors, have previously created and may continue in the future to First Six Monthscreate category headwinds for a number of 2018our products. Refer to Item 1A, "Risk Factors", of our Annual Report and this Quarterly Report on Form 10-Q, combined with the Uncertainties and Trends Affecting Liquidity
Consolidated Operations section below, for more information about risks and uncertainties facing us.
The following table sets forthimpacts and volatility of COVID-19 are expected to be significant in 2020, and the timing and pacing of re-opening the economy and ultimately transitioning into what is likely to be a new normal are highly uncertain. Nevertheless, given our unaudited condensedbroad portfolio and unmatched distribution network that spans seven distinct routes to market, we are reaffirming our guidance for 2020.
Specifically, for the full-year 2020, we expect constant currency net sales growth in the range of 3% to 4%, with performance likely at the low end of the range. We expect full-year 2020 Adjusted diluted EPS growth in the range of 13% to 15%, or $1.38 to $1.40 per diluted share, given the significant visibility and control we maintain over our cost structure, including aggressive cost management, productivity programs and merger synergies. As such, we continue to expect our management leverage ratio in the range of 3.5x to 3.8x at year end 2020 and our management leverage ratio to be below 3.0x in two to three years from the July 2018 merger closing.
COVID-19 Pandemic Disclosures
Our priorities during the COVID-19 pandemic are protecting the health and safety of our employees, maximizing the availability of our products for our consumers and Fueling the Frontline to provide our products to first responders who are fighting the COVID-19 pandemic. Because we sell products that are essential to the daily lives of consumers, the COVID-19 pandemic has not had a material net impact to our consolidated operating results of operations for the first six monthsquarter of 20192020. However, the pandemic is having offsetting impacts within our business. For example, we experienced a significant increase in demand and 2018:
|
| | | | | | | | | | | | | | | | | | | | |
| First Six Months | | | | |
| 2019 | | 2018 | | Dollar | | Percentage |
($ in millions, except per share amounts) | Dollars | | Percent | | Dollars | | Percent | | Change | | Change |
Net sales | $ | 5,316 |
| | 100.0 | % | | $ | 1,897 |
| | 100.0 | % | | $ | 3,419 |
| | 180.2 | % |
Cost of sales | 2,292 |
| | 43.1 |
| | 925 |
| | 48.8 |
| | 1,367 |
| | 147.8 |
|
Gross profit | 3,024 |
| | 56.9 |
| | 972 |
| | 51.2 |
| | 2,052 |
| | 211.0 |
|
Selling, general and administrative expenses | 1,939 |
| | 36.5 |
| | 621 |
| | 32.7 |
| | 1,318 |
| | 212.0 |
|
Other operating expense, net | — |
| | — |
| | 6 |
| | 0.3 |
| | (6 | ) | | NM |
|
Income from operations | 1,085 |
| | 20.4 |
| | 345 |
| | 18.2 |
| | 740 |
| | 214.0 |
|
Interest expense | 339 |
| | 6.4 |
| | 49 |
| | 2.6 |
| | 290 |
| | NM |
|
Interest expense - related party | — |
| | — |
| | 51 |
| | 5.5 |
| | (51 | ) | | NM |
|
Loss on early extinguishment of debt | 9 |
| | 0.2 |
| | 2 |
| | 0.1 |
| | 7 |
| | NM |
|
Other expense (income), net | 6 |
| | 0.1 |
| | 5 |
| | 0.3 |
| | 1 |
| | NM |
|
Income before provision for income taxes | 731 |
| | 13.8 |
| | 238 |
| | 12.5 |
| | 493 |
| | 207.0 |
|
Provision for income taxes | 187 |
| | 3.5 |
| | 64 |
| | 3.4 |
| | 123 |
| | 192.0 |
|
Net income | 544 |
| | 10.2 |
| | 174 |
| | 9.2 |
| | 370 |
| | 213.0 |
|
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards | — |
| | — |
| | 3 |
| | 0.2 |
| | (3 | ) | | NM |
|
Net income attributable to KDP | $ | 544 |
| | 10.2 | % | | $ | 171 |
| | 9.0 | % | | 373 |
| | 218.0 |
|
| | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | |
Basic | $ | 0.39 |
| | | | $ | 0.21 |
| | | | $ | 0.18 |
| | 86.0 | % |
Diluted | 0.38 |
| | | | 0.21 |
| | | | 0.17 |
| | 81.0 |
|
Weighted average common shares outstanding: | | | | | | | | | | | |
Basic | 1,406.5 |
| | | | 790.5 |
| | | | | | |
Diluted | 1,418.5 |
| | | | 790.5 |
| | | | | | |
| | | | | | | | | | | |
Effective tax rate | 25.6 |
| | | | 26.9 |
| | | | | | |
Net Sales.Net sales increased $3,419 million, or approximately 180%, forconsumption of our products in our at-home business caused in part by changing consumer habits and pantry stocking in response to COVID-19, contributing to increases in net sales. At the first six monthssame time, we experienced declines in our away-from-home business due to office closures and the slowdown of 2019 compared withhospitality and fountain foodservice. In the first six months of 2018. The primary factorfuture, the economic effects of the increasepandemic, including higher levels of unemployment, lower wages or a recessionary environment, may cause reduced demand for our products. It could also lead to volatility in demand due to government actions, such as shelter-in-place notices, which impact consumers’ movements and access to our products.
While we believe that there will continue to be strong long-term demand for our products, the timing and extent of economic recovery, and the uncertainties in short-term demand trends, make it difficult to predict the overall effects of the pandemic on our business. We expect that there will be heightened volatility in net sales wasduring and subsequent to the $3,358 millionduration of sales acquiredthe pandemic that may impact interim periods.
Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our critical frontline employees and our supply chain. As food and agriculture is deemed part of the critical infrastructure by the Department of Homeland Security, our frontline employees have been identified as critical workers in maintaining the U.S. food and beverage supply. As a result, we have strived to follow recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our manufacturing and distribution facilities, which also includes additional incentive pay programs and benefits. We intend to continue to work with government authorities and implement our employee safety measures; however, disruptions to our supply chain, measures taken to protect employees or other local effects of the pandemic could impact our operations. For our corporate employees, participating in a remote work environment is familiar to us as we work in a multi-location environment, and we do not believe that the remote work environment has had any significant impact on our internal controls over financial reporting.
The pandemic has not materially impacted our liquidity position. We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets enabled by our debt ratings. Refer to Uncertainties and Trends Affecting Liquidity and Capital Resources for more information.
We do not believe our operating and intangible assets are impaired as a result of the DPS Merger.COVID-19.
Gross Profit.Gross profit increased $2,052 million for the first six monthsFor additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of 2019 compared with the first six months of 2018. Gross margin of 56.9% for the first six months of 2019 significantly improved from the 51.2% gross margin for the first six months of 2018. The primary driver of the change was the incremental gross profit we acquired as a result of the consummation of the DPS Merger.
Selling, General and Administrative Expenses.SG&A expenses increased $1,318 million for the first six months of 2019 compared with the first six months of 2018. The primary driver of the increase in SG&A expenses was the impact of the DPS Merger, which includes acquired operating costs and restructuring expenses associated with the integration of DPS and Keurig.
Income from Operations. Income from operations increased $740 million to $1,085 million for the first six months of 2019 due to the increase in gross profit partially offset by an increase in SG&A expenses, driven by the DPS Merger.
Interest Expense.Interest expense increased $290 million for the first six months of 2019 compared with the first six months of 2018 due primarily to the increased borrowings and assumption of the existing senior unsecured notes as a result of the DPS Merger and the impact of our interest rate derivative instruments, which was partially offset by the impact of the net repayments related to our 2019 Notes, our term loans and Commercial Paper.
Interest Expense - Related Party.Interest expense - related party decreased $51 million for the first six months of 2019 compared with the first six months of 2018 as a result of the capitalization of the related party term loans into additional paid in capital during the DPS Merger.
Effective Tax Rate.The effective tax rates for the first six months of 2019 and 2018 were 25.6% and 26.9%, respectively. The decrease in our effective tax rate was primarily due to a reduction in the U.S. federal tax rate from 24.5% to 21.0% and exclusion of DPS Merger related non-deductible transaction costs offset by the elimination of the domestic manufacturing deduction. Refer to Note 6 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.
Adjusted Results of Operations
The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the first six months of 2019 and 2018:
|
| | | | | | | | | | | | | | |
| For the First Six Months | | Dollar | | Percent |
(in millions, except per share amounts) | 2019 | | 2018 | | Change | | Change |
Adjusted net sales(1) | $ | 5,316 |
| | $ | 5,355 |
| | $ | (39 | ) | | (0.7 | )% |
Adjusted income from operations(1) | 1,323 |
| | 1,202 |
| | 121 |
| | 10.1 |
|
Adjusted interest expense(1) | 262 |
| | 341 |
| | (79 | ) | | (23.2 | ) |
Adjusted provision for income taxes(1) | 270 |
| | 218 |
| | 52 |
| | 23.9 |
|
Adjusted net income(1) | 785 |
| | 612 |
| | 173 |
| | 28.3 |
|
Adjusted diluted EPS(1) | 0.55 |
| | 0.44 |
| | 0.11 |
| | 25.0 |
|
| | | | | | | |
Adjusted diluted weighted average shares(1) | 1,418.5 |
| | 1,386.5 |
| | | | |
Adjusted operating margin(1) | 24.9 | % | | 22.4 | % | | | | 250 bps |
|
Adjusted effective tax rate(1) | 25.6 | % | | 26.3 | % | | | | |
| |
(1) | These adjusted measures are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of this term and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Adjusted Net Sales. Adjusted net sales decreased $39 million, or 0.7%, to $5,316 million for the first six months of 2019 as compared to Adjusted pro forma net sales of $5,355 million for the first six months of 2018. This performance reflected strong underlying net sales growth of 2.4%, driven by higher volume/mix of 1.6% and net price realization of 0.8%, more than offset by the expected unfavorable impacts related to changes in our Allied Brands portfolio of 2.8%. Unfavorable foreign currency translation also impacted the period by 0.3%.
Adjusted Income from Operations. Adjusted income from operations increased $121 million, or 10.1%, to $1,323 million compared to Adjusted pro forma income from operations of $1,202 million in the prior year. This performance primarily reflected strong productivity and merger synergies, both of which benefitted SG&A and cost of sales, as well as favorable timing in marketing spending. Partially offsetting these growth drivers were inflation in input costs, led by packaging, and logistics, and the comparison to a $16 million gain in the prior year from the remeasurement of our equity investment in Big Red and a $5 million one-time reimbursement from a resin supplier. Adjusted operating margin grew 250 bps to 24.9% in the first six months of 2019.
Adjusted Interest Expense.Adjusted interest expense decreased $79 million, or 23.2%, to $262 million for the first six months of 2019 compared to Adjusted pro forma interest expense of $341 million in the prior year. This change was primarily the result of the benefit of lower indebtedness due to continued deleveraging, realized gains associated with the termination of certain interest rate swaps and the benefit of lower interest rates as a result of our existing interest rate swaps.
Adjusted Effective Tax Rate.The Adjusted effective tax rate decreased 0.7 points to 25.6% for the first six months of 2019 compared to Adjusted pro forma effective tax rate of 26.3% in the prior year. This improvement in our Adjusted effective tax rate was primarily due to a reduction in the U.S. federal tax rate from 24.5% to 21.0%, partially offset by the loss of tax benefits associated with the U.S. domestic manufacturing deduction in 2019.
Results of Operations by Segment
The following tables set forth net sales and income from operations for our segments for the first six months of 2019 and 2018, 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 Six Months |
Segment Results — Net sales | 2019 | | 2018 |
Coffee Systems | $ | 1,958 |
| | $ | 1,897 |
|
Packaged Beverages | 2,427 |
| | — |
|
Beverage Concentrates | 674 |
| | — |
|
Latin America Beverages | 257 |
| | — |
|
Net sales | $ | 5,316 |
| | $ | 1,897 |
|
| | | |
| First Six Months |
(in millions) | 2019 | | 2018 |
Segment Results — Income from Operations | | | |
Coffee Systems | $ | 580 |
| | $ | 531 |
|
Packaged Beverages | 335 |
| | — |
|
Beverage Concentrates | 445 |
| | — |
|
Latin America Beverages | 37 |
| | — |
|
Total income from operations | 1,397 |
| | 531 |
|
Unallocated corporate costs | 312 |
| | 186 |
|
Income from operations | $ | 1,085 |
| | $ | 345 |
|
COFFEE SYSTEMS
The following table details our Coffee Systems segment's net sales, income from operations, operating margin, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the first six months of 2019 and 2018:
|
| | | | | | | | | | | | | | |
| For the First Six Months | | Dollar | | Percent |
(in millions) | 2019 | | 2018 | | Change | | Change |
Net sales | $ | 1,958 |
| | $ | 1,897 |
| | $ | 61 |
| | 3.2 | % |
Income from operations | 580 |
| | 531 |
| | 49 |
| | 9.2 |
|
Operating margin | 29.6 | % | | 28.0 | % | | | | 160 bps |
|
Adjusted net sales(1) | 1,958 |
| | 1,901 |
| | 57 |
| | 3.0 |
|
Adjusted income from operations(1) | 666 |
| | 618 |
| | 48 |
| | 7.8 |
|
Adjusted operating margin(1) | 34.0 | % | | 32.5 | % | | | | 150 bps |
|
| |
(1) | Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Sales Volume. The volume/mix growth for the Coffee Systems segment reflected a 9.8% increase in K-Cup pod volume and a 16.4% increase in brewer volume, partially offset by unfavorable pod sales mix, primarily reflecting the impact of volume growth of branded partners and private label in the first six months of 2019.
Net Sales. Net sales increased 3.2% to $1,958 million for the first six months of 2019 compared to the first six months of 2018 due to volume/mix growth of 6.7%, partially offset by lower net price realization of 2.9%, reflecting the continued moderation in strategic pod pricing investments and unfavorable foreign currency translation of 0.6%.
Adjusted Net Sales. Adjusted net sales increased 3.0% to $1,958 million for the first six months of 2019 compared to the first six months of 2018 due to volume/mix growth of 6.7%, partially offset by lower net price realization of 3.1%, reflecting the continued moderation in strategic pod pricing investments and unfavorable foreign currency translation of 0.6%.
Income from Operations.Income from operations increased $49 million for the first six months of 2019, compared with the first six months of 2018, primarily reflecting the benefits of productivity, partially offset by inflation in input costs, led by packaging and logistics. Operating margin grew 160 bps to 29.6%.
Adjusted Income from Operations.Adjusted income from operations increased $48 million, or 7.8%, to $666 million for the first six months of 2019, compared with Adjusted pro forma income from operations of $618 million for the first six months of 2018, primarily reflecting the benefits of productivity, partially offset by inflation in input costs, led by packaging, and logistics. Adjusted operating margin grew 150 bps versus the year ago period to 34.0%.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales, income from operations, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the first six months of 2019 and 2018:
|
| | | | | | | | | | | | | | |
| For the First Six Months | | Dollar | | Percent |
(in millions) | 2019 | | 2018 | | Change | | Change |
Net sales | $ | 2,427 |
| | $ | — |
| | $ | 2,427 |
| | NM |
Income from operations | 335 |
| | — |
| | 335 |
| | NM |
Adjusted net sales(1) | 2,427 |
| | 2,556 |
| | (129 | ) | | (5.0 | )% |
Adjusted income from operations(1) | 350 |
| | 321 |
| | 29 |
| | 9.0 |
|
Adjusted operating margin(1) | 14.4 | % | | 12.6 | % | | | | 180 bps |
|
| |
(1) | Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Sales Volume. Sales volume for the first six months of 2019 were wholly incremental as a result of the DPS Merger.
Adjusted Sales Volume. Adjusted sales volume for the first six months of 2019 declined 4.7% due to the net unfavorable impact of 3.6% related to changes in our Allied Brands portfolio and lower CSD volume, partially offset by growth of Core Hydration and higher volume from contract manufacturing.
Net Sales.Net sales were $2,427 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger.
Adjusted Net Sales. Adjusted net sales decreased 5.0% to $2,427 million for the first six months of 2019 compared with Adjusted pro forma net sales of $2,556 million for the first six months of 2018, reflecting underlying net sales growth of 1.3%, driven by higher net price realization of 2.1% from pricing actions taken late in 2018 partially offset by lower volume/mix of 0.8%. More than offsetting the underlying net sales growth were the expected unfavorable impacts of 5.9% from changes in the Allied Brands portfolio, 0.3% from one less shipping day in the first quarter of 2019 and unfavorable foreign currency translation of 0.1%.
Income from Operations.Income from operations was $335 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger, as net sales were reduced by cost of sales and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of employee salaries, marketing investments and logistics expense.
Adjusted Income from Operations.Adjusted income from operations increased $29 million, or 9.0%, to $350 million for the first six months of 2019 compared with Adjusted pro forma income from operations of $321 million for the first six months of 2018, largely reflecting strong productivity and merger synergies and timing of marketing investments. These drivers were partially offset by inflation on input costs, led by packaging, and logistics. Adjusted operating margin grew 180 bps versus the year ago period to 14.4%.
BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales, income from operations, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the first six months of 2019 and 2018:
|
| | | | | | | | | | | | | | |
| For the First Six Months | | Dollar | | Percent |
(in millions) | 2019 | | 2018 | | Change | | Change |
Net sales | $ | 674 |
| | $ | — |
| | $ | 674 |
| | NM |
Income from operations | 445 |
| | — |
| | 445 |
| | NM |
Adjusted net sales(1) | 674 |
| | 649 |
| | 25 |
| | 3.9 | % |
Adjusted income from operations(1) | 447 |
| | 415 |
| | 32 |
| | 7.7 |
|
Adjusted operating margin(1) | 66.3 | % | | 63.9 | % | | | | 240 bps |
|
| |
(1) | Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Sales Volume. Sales volume for the first six months of 2019 were wholly incremental as a result of the DPS Merger.
Adjusted Sales Volume. Adjusted sales volume for the first six months of 2019 declined 1.7% due to CSD category volume declines.
Net Sales.Net sales were $674 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger.
Adjusted Net Sales. Adjusted net sales increased 3.9% to $674 million for the first six months of 2019 compared with Adjusted pro forma net sales of $649 million for the first six months of 2018, driven by net price realization of 5.6%, partially offset by lower volume/mix of 1.5% and unfavorable foreign currency translation of 0.2%.
Income from Operations.Income from operations was $445 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger, as net sales were reduced by SG&A expenses and cost of sales. SG&A expenses were primarily comprised of marketing investments and employee salaries. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs.
Adjusted Income from Operations.Adjusted income from operations increased $32 million, or 7.7%, to $447 million for the first six months of 2019 compared with Adjusted pro forma income from operations of $415 million for the first six months of 2018. This performance reflected the growth in Adjusted net sales as well as timing of marketing investments. Adjusted operating margin grew 240 bps versus the year ago period to 66.3%.
LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales, income from operations, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the first six months of 2019 and 2018:
|
| | | | | | | | | | | | | | |
| For the First Six Months | | Dollar | | Percent |
(in millions) | 2019 | | 2018 | | Change | | Change |
Net sales | $ | 257 |
| | $ | — |
| | $ | 257 |
| | NM |
Income from operations | 37 |
| | — |
| | 37 |
| | NM |
Adjusted net sales(1) | 257 |
| | 249 |
| | 8 |
| | 3.2 | % |
Adjusted income from operations(1) | 32 |
| | 38 |
| | (6 | ) | | (15.8 | ) |
Adjusted operating margin(1) | 12.5 | % | | 15.3 | % | | | | (280 bps) |
|
| |
(1) | Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.
|
Sales Volume. Sales volume for the first six months of 2019 were wholly incremental as a result of the DPS Merger.
Adjusted Sales Volume. Adjusted sales volume for the first six months of 2019 declined 5.0% due to the exit of our Aguafiel bulk water business of 4.6% and a decline of 0.4% in the balance of the portfolio.
Net Sales. Net sales were $257 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger.
Adjusted Net Sales. Adjusted net sales increased 3.2% to $257 million for the first six months of 2019 compared with Adjusted pro forma net sales of $249 million for the first six months of 2018, driven by higher net price realization of 4.0% from pricing actions taken in 2018, partially offset by unfavorable volume/mix of 0.4% and unfavorable foreign currency translation of 0.4%.
Income from Operations. Income from operations was $37 million for the first six months of 2019, which was wholly incremental as a result of the DPS Merger, as net sales were reduced by cost of sales and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of logistics expense, employee salaries and marketing investments.
Adjusted Income from Operations.Adjusted income from operations decreased $6 million, or 15.8%, to $32 million in the first six months of 2019 compared with Adjusted pro forma income from operations of $38 million in the first six months of 2018. This performance reflected the benefit of net sales growth, which were more than offset by inflation on input costs, logistics and energy, a comparison to a $5 million benefit in the second quarter of 2018 related to a previous reimbursement by a resin supplier and unfavorable foreign currency impacts. Adjusted operating margin declined 280 bps versus the year ago period to 12.5%.
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 our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
LIQUIDITY AND CAPITAL RESOURCES
TrendsOverview and Uncertainties Affecting LiquidityOur Financing Arrangements
CustomerOur financial condition and consumer demandliquidity remain strong. Net cash provided by operations was $414 million for the first quarter of 2020 compared to $591 million for the prior year period. Although there is uncertainty related to the anticipated impact of the recent COVID-19 pandemic on our products may be impacted byfuture results, we believe we are uniquely positioned, with our broad portfolio and unmatched distribution network, to successfully navigate through this pandemic and the recent steps we have taken to strengthen our balance sheet leave us well positioned to manage our business as the crisis continues to unfold. We continue to manage all risk factors discussed under "Risk Factors" in Part 1, Item 1Aaspects of our Annual Report on Form 10-K forbusiness, including, but not limited to, monitoring the year ended December 31, 2018, that could have a material effect on production, delivery and consumptionfinancial health of our products in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume. Similarly, disruptions in financial and credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. These disruptions couldother third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth.
Our principal sources of liquidity are our existing cash and cash equivalents, as well as cash generated from operations and borrowing capacity currently available under our existing KDP Revolver and 2019 364-Day Credit Agreement. Additionally, we 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.
We believe that the following events, trends and uncertainties may also impact liquidity:
our intention to drive significant cash flow generation to enable rapid deleveraging within two to three years from the DPS Merger;
our ability toan uncommitted commercial paper program where we can issue unsecured commercial paper notes ("Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of $2,400 million;
our ability to access our other financing arrangements, including the KDP Revolver and 364-Day Credit Agreement, which have availability of $3,150 million as of June 30, 2019;
our continued integration of DPS;
our continued capital expenditures;
our continued payment of dividends;
seasonality of our operating cash flows, which could impact short-term liquidity;
fluctuations in our tax obligations;
future equity investments; and
future mergers or acquisitions of brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.
Financing Arrangements
basis. Refer to Note 72 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of these financing arrangements.
During March 2020, as a result of market stress and a dislocation in the commercial paper market driven by the COVID-19 pandemic, we chose to repay $1,000 million of commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver. In April 2020, we took steps to further strengthen our balance sheet by increasing excess liquidity in order to better position us to navigate the uncertainty of the COVID-19 pandemic. On April 13, 2020, we issued $1,500 million of senior unsecured notes and used the net proceeds from these senior unsecured notes to repay $1,000 million on our KDP Revolver and $481 million towards commercial paper notes, effectively refinancing short-term borrowings with efficient long-term bonds to free up excess short-term liquidity. On April 14, 2020, we terminated the 2019 364-Day Credit Agreement and replaced it with the new 2020 364-Day Credit Agreement and increased total commitments under the facility from $750 million to $1,500 million. As a result of these two actions, we have increased our liquidity to a level that we believe enables us to more than meet our commitments, even in a prolonged economic downturn, as we continue to exercise financial discipline to ensure our long-term financial health. Refer to Note 19 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of these new financing arrangements.
As of March 31, 2020, we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.
LiquidityCash Flows
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.
The following table summarizes our cash activity for the first six monthsquarter of 20192020 and 2018:2019:
| | | First Six Months | First Quarter |
(in millions) | 2019 | | 2018 | 2020 | | 2019 |
Net cash provided by operating activities | $ | 1,203 |
| | $ | 578 |
| $ | 414 |
| | $ | 591 |
|
Net cash used in investing activities | (114 | ) | | (80 | ) | |
Net cash (used in) provided by financing activities | (1,080 | ) | | 7,690 |
| |
Net cash provided by (used in) investing activities | | 34 |
| | (45 | ) |
Net cash used in financing activities | | (328 | ) | | (556 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities increased $625decreased $177 million for the first six monthsquarter of 2019,2020, as compared to the first six monthsquarter of 2018, primarily due to additional cash flows from operations generated as a result of the DPS Merger. The increase in net cash provided by operating activities was2019, driven by the decline in working capital primarily driven by the payment and deferral of customer incentives, offset by the slight increase in net income adjusted for non-cash items, the deferralitems.
During the first six months of 2019, the Company deferred estimated tax payments of $150 million, which were paid in July and August 2019, as compared to the deferral of estimated tax payments of $36 million during the first six months of 2018.
Cash Conversion Cycle
Our cash conversion cycle is defined as days inventory outstanding ("DIO")DIO and days sales outstanding ("DSO")DSO less days of payables outstanding ("DPO").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 |
Our cash conversion cycle declined 4212 days to approximately (36)(47) days as of June 30, 2019March 31, 2020 as compared to (78)(35) days in the prior year period. The change was primarily driven by a reductionincrease of 648 days in our DPO as the DPS operations had significantly shorter terms than the legacy KGM business.business, which have been steadily increasing as we continue to focus on our accounts payable program. DIO improved 25 days as a result of the DPS Merger.and DSO waswere relatively consistent as compared to the prior year period.
|
| | | | | | |
| | March 31, |
| | 2020 | | 2019 |
DIO | | 52 |
| | 53 |
|
DSO | | 34 |
| | 37 |
|
DPO | | 133 |
| | 125 |
|
Cash conversion cycle | | (47 | ) | | (35 | ) |
In future periods, DPO willis expected to continue to have a positive impact on our cash conversion cycle as a result of our supplier terms initiative, which has set our customary terms as we integrate our legacy businesses.
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 entered into an agreement with a third party administrator 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. As of June 30, 2019March 31, 2020 and December 31, 2018, $2,0962019, $2,322 million and $1,676$2,097 million, respectively, of our outstanding payment obligations are payable to suppliers who utilize this third party service administrator.
A significant downgrade in our credit ratings could limit a financial institution's willingness to participate inwere voluntarily elected by the accounts payable program. In addition, a significant downgrade in our credit ratings could also reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from ussupplier and sold to financial institutions. The amounts settled through the program and paid to the financial institutions were $557 million and $352 million for the first quarter of 2020 and 2019, respectively.
NET CASH USED INPROVIDED BY (USED IN) INVESTING ACTIVITIES
Cash provided by investing activities for the first quarter of 2020 consisted primarily of proceeds of $201 million from sales of property, plant and equipment, primarily driven by our asset sale-leaseback transactions, partially offset by purchases of property, plant and equipment of $151 million.
Cash used in investing activities for the first six monthsquarter of 2019 and 2018 consisted primarily of purchases of property, plant and equipment of $118 million and $44 million, respectively.$62 million.
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Cash used in financing activities for the first six monthsquarter of 2020 consisted primarily of the net repayment of $387 million for commercial paper notes, which was primarily a result of the decision to repay $1,000 million of commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver. Additionally we made voluntary and mandatory repayments on the term loan facility of $405 million, repayment of the 2020 Notes of $250 million, dividend payments of $212 million and net payments on structured payables of $63 million.
Net cash used in financing activities for the first quarter of 2019 consisted primarily of the voluntary and mandatory repayments on the term loan facility of $848$758 million, repayment of the 2019 Notes of $250 million and dividend payments of $423$211 million. These cash outflows from financing activities were partially offset by net issuance of commercial paper notes of $381$594 million and net proceeds from structured payables of $69 million.
Net cash provided by financing activities for the first six months of 2018 consisted primarily of proceeds from senior unsecured notes of $8,000 million obtained in anticipation of funding the DPS Merger, partially offset by repayments on the term loan facility of $254 million, payments on deferred financing fees of $35 million and dividend payments of $23 million.
Uncertainties and Trends Affecting Liquidity
Disruptions in financial and credit markets, including those caused by the COVID-19 pandemic, 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 all risk factors discussed under "Risk Factors" in Part 1, Item 1A of our Annual Report and subsequent filings with the SEC, that could have a material effect on production, delivery and consumption of our products in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume.
We believe that the following events, trends and uncertainties may also impact liquidity:
Our ability to access our committed financing arrangements, including our KDP Revolver and our 2020 364-Day Credit Agreement, which have availability of $3,900 million as of April 30, 2020;
Our ability to issue unsecured uncommitted commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $2,400 million;
Our intention to drive significant cash flow generation to enable rapid deleveraging within three years from the DPS Merger;
| |
• | A significant downgrade in our credit ratingscould limit a financial institution's willingness to participate in our accounts payable program and reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions, which could impact our accounts payable program; |
Our continued integration of DPS;
Our continued capital expenditures;
Our continued payment of dividends;
Seasonality of our operating cash flows, which could impact short-term liquidity;
Fluctuations in our tax obligations;
Future equity investments; and
Future mergers or acquisitions of brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.
Debt Ratings
As of June 30, 2019,March 31, 2020, our credit ratings were as follows:
|
| | | | |
Rating Agency | Long-Term Debt Rating | Commercial Paper Rating | Outlook | Date of Last Change |
Moody's | Baa2 | P-2 | Negative | May 11, 2018 |
S&P | BBB | A-2 | Stable | May 14, 2018 |
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.
Capital Expenditures
Capital expenditures were $118$151 million and $44$62 million for the first six monthsquarter of 20192020 and 2018,2019, respectively.
Capital expenditures for the first six monthsquarter of 20192020 primarily related to machinery andmanufacturing equipment, our continued investment in the build-out of our new Spartanburg facility information technology infrastructure,and Allentown facility, the purchase of real estate in Ireland and logistics equipment and replacement of existing cold drink equipment. Capital expenditures included in accounts payable and accrued expenses was $205were $177 million for the first six monthsquarter of 2019,2020, which primarily related to our continued investment in the build-out of our new Allentown manufacturing facility and Spartanburg manufacturing facility.
Capital expenditures for the first six monthsquarter of 2018 was2019 primarily related to portion pack manufacturing,machinery and equipment, logistics equipment, information technology infrastructure and the land for our new Spartanburg facility.replacement of existing cold drink equipment.
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents increased $21$112 million from December 31, 20182019 to June 30, 2019March 31, 2020 due to the Company's focus on utilizing cash for debt repayment.preserving liquidity rather than making voluntary prepayments on our term loan.
Our cash balances are used to fund working capital requirements, scheduled debt and interest payments, capital expenditures, income tax obligations, dividend payments and business combinations. Cash generated by our foreign operations is generally repatriated to the U.S. periodically as working capital funding requirements in those jurisdictions allow. Foreign cash balances were $59$110 million and $70 million as of both June 30, 2019March 31, 2020 and December 31, 2018.2019, respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.
Contractual Commitments and Obligations
We enter into various contractual obligations that impact, or could impact, our liquidity. Based on our current and anticipated level of operations, we believe that our proceeds from operating cash flows combined with cash on hand and amounts available under our financing arrangements will be sufficient to meet our anticipated obligations.
The following table summarizes our contractual obligations and contingencies, as of June 30, 2019,March 31, 2020, that have significantly changed from the amounts disclosed in our Annual Report:
| | | Payments Due in Year | Payments Due in Year |
(in millions) | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | After 2023 | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
Long-term obligations(1) | $ | 13,710 |
| | $ | 50 |
| | $ | 350 |
| | $ | 2,350 |
| | $ | 350 |
| | $ | 3,885 |
| | $ | 6,725 |
| $ | 12,700 |
| | $ | 75 |
| | $ | 2,350 |
| | $ | 350 |
| | $ | 3,200 |
| | $ | — |
| | $ | 6,725 |
|
Interest payments | 5,013 |
| | 263 |
| | 515 |
| | 481 |
| | 434 |
| | 354 |
| | 2,966 |
| 4,687 |
| | 481 |
| | 457 |
| | 410 |
| | 353 |
| | 295 |
| | 2,691 |
|
Finance leases(2) | 312 |
| | 25 |
| | 48 |
| | 41 |
| | 36 |
| | 32 |
| | 130 |
| |
Operating leases(3) | 406 |
| | 36 |
| | 69 |
| | 56 |
| | 45 |
| | 36 |
| | 164 |
| |
Purchase obligations(4) | 2,695 |
| | 943 |
| | 709 |
| | 261 |
| | 249 |
| | 373 |
| | 160 |
| |
Operating leases(2) | | 732 |
| | 60 |
| | 85 |
| | 74 |
| | 66 |
| | 64 |
| | 383 |
|
Purchase obligations(3) | | 1,531 |
| | 1,001 |
| | 158 |
| | 111 |
| | 93 |
| | 84 |
| | 84 |
|
| |
(1) | Amounts represent payments for the senior unsecured notes issued by us and the term loan credit agreement. Refer to Note 72 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information. |
| |
(2) | Amounts represent minimum rental commitments under our contractual payment obligations for our lease arrangements classified as financenon-cancelable operating leases. These amounts exclude renewal options, which were not yet executed but were included in the lease term to determine finance lease obligation as the lease imposes a penalty on us in such amount that the renewal appeared reasonably assured at lease inception. Amounts exclude leases not yet commenced in accordance with ASC 842. Refer to Note 38 for additional information. |
| |
(3) | Amounts represent minimum contractual rental commitments under our non-cancelable operating leases. Amounts exclude leases not yet commenced in accordance with ASC 842. Amounts previously recorded as financing obligations were reclassified within operating leases as a result of the adoption of ASC 842. Refer to Note 3 for additional information. |
| |
(4) | Amounts represent payments under agreements to purchase goods or services that are legally binding and that specify all significant terms, including capital obligations and long-term contractual obligations. |
Through June 30, 2019,March 31, 2020, there have been no other material changes to the amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
OFF-BALANCE SHEET ARRANGEMENTS
There are no material changes in off-balance sheet arrangements from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 of the Notes to our Unaudited Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP.GAAP.
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINEDGUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information is presentedNotes 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 illustrate the estimated effectsrelease provisions described below, our obligations under the Notes. None of our subsidiaries organized outside of the DPS MergerU.S., immaterial subsidiaries used for the second quarter of 2018, which was consummated on July 9, 2018, based on the historical results of operations of DPS and Maple. See Notes 1 and 2charitable purposes, any of the Notes to our unaudited condensed consolidated financial statements for additional information on the DPS Merger.
The following unaudited pro forma condensed combined statement of income for the the second quarter of 2018 is based on the historical financial statements ofsubsidiaries held by Maple and DPS after giving effectprior to the DPS Merger related equity investments, andor any of the assumptions and adjustments described in the accompanying notes to this unaudited pro forma condensed combined statement of income. The Maple statement of income information for the the second quarter of 2018 was derived from the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. The DPS statement of income information for the second quarter of 2018 was derived from its unaudited condensed consolidated financial statements included in our Form 10-Q dated August 8, 2018. The unaudited pro forma condensed combined statement of income is presented as ifsubsidiaries acquired after the DPS Merger had been consummated on December 31, 2016,(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 combine the historical resultsdischarge of Maple and DPS.our obligations under the applicable indenture.
The unaudited pro forma condensedfollowing schedules present the financial information for (i) the Parent and the Guarantors on a combined statements of income set forth below primarily give effectbasis after intercompany eliminations, (ii) the Non-Guarantors and (iii) the eliminations necessary to the following assumptions and adjustments:
•Application of the acquisition method of accounting;
•arrive at our consolidated results. The issuance of Maple common stock to JAB in connection with the equity investments;
•The conversion of Maple Parent Corporation into KDP sharesconsolidating schedules are provided in accordance with the Merger Agreement;
•The pre-closing Maple share conversion;
•The exchangereporting requirements of one share of KDP common stock for each share of DPS common stock;
•The change in year-end for Maple; and
•The alignment of accounting policies.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized fair values at the Merger Date for the allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed.
The unaudited pro forma condensed combined financial information has been prepared in accordance with SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results. In addition, the accompanying unaudited pro forma condensed combined statements of income do not reflect any anticipated synergies, operating efficiencies, cost savings or any integration costs that may result from the DPS Merger.
The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma condensed combined statements of income to give effect to unaudited pro forma events that are (1) directly attributable to the DPS Merger, (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of KDP. As a result,Rule 13-01 under SEC Regulation S-X Article 11, certain expenses such as transaction costs and costs associated with the impact of the step-up of inventory are eliminated from pro forma results in all periods presented. In contrast, under the U.S. GAAP presentation in Note 2, Acquisitions and Investments in Unconsolidated Affiliates, these expenses are required to be included in the pro forma results for the year ended December 31, 2017. See Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.
As a result of the measurement period adjustments for the DPS Merger, we have finalized the accompanying unaudited pro forma condensed combined statements of income during the second quarter of 2019. Changes to the presentation for the year ended December 31, 2018 were not significant.
The unaudited pro forma condensed combined financial information, including the related notes, should be read in conjunction with the historical consolidated financial statementsissuer and related notes of DPS, and with our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
KEURIG DR PEPPER INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Second Quarter of 2018
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
(in millions, except per share data) | Reported KDP(1) | | DPS Second Quarter of 2018(2) | | Reclassifications | | Pro Forma Adjustments(3) | | Pro Forma Combined |
Net sales | $ | 949 |
| | $ | 1,886 |
| | $ | — |
| | $ | (13 | ) | | $ | 2,822 |
|
Cost of sales | 458 |
| | 790 |
| | — |
| | (15 | ) | | 1,233 |
|
Gross profit | 491 |
| | 1,096 |
| | — |
| | 2 |
| | 1,589 |
|
Selling, general and administrative expenses | 321 |
| | 721 |
| | 28 |
| | (50 | ) | | 1,020 |
|
Depreciation and amortization | — |
| | 28 |
| | (28 | ) | | — |
| | — |
|
Other operating income (loss), net | 3 |
| | (15 | ) | | — |
| | 1 |
| | (11 | ) |
Income from operations | 167 |
| | 362 |
| | — |
| | 51 |
| | 580 |
|
Interest expense | 51 |
| | 43 |
| | — |
| | 76 |
| | 170 |
|
Interest expense - related party | 26 |
| | — |
| | — |
| | (26 | ) | | — |
|
Other income, net | (8 | ) | | (2 | ) | | 3 |
| | (1 | ) | | (8 | ) |
Income before provision for income taxes | 98 |
| | 321 |
| | (3 | ) | | 2 |
| | 418 |
|
Provision for income taxes | 13 |
| | 83 |
| | — |
| | (1 | ) | | 95 |
|
Income before equity in loss of unconsolidated affiliates | 85 |
| | 238 |
| | (3 | ) | | 3 |
| | 323 |
|
Equity in loss of unconsolidated affiliates, net of tax | — |
| | (3 | ) | | 3 |
| | — |
| | — |
|
Net income | 85 |
| | 235 |
| | — |
| | 3 |
| | 323 |
|
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards | 2 |
| | — |
| | — |
| | (2 | ) | | — |
|
Net income attributable to KDP | $ | 83 |
| | $ | 235 |
| | $ | — |
| | $ | 5 |
| | $ | 323 |
|
Earnings per common share: | | | | | | | | | |
Basic | $ | 0.10 |
| | $ | 1.30 |
| | | | | | $ | 0.23 |
|
Diluted | 0.10 |
| | 1.30 |
| | | | | | $ | 0.23 |
|
Weighted average common shares outstanding: | | | | | | | | | |
Basic | 790.5 |
| | 180.2 |
| | | | 415.8 |
| | 1,386.5 |
|
Diluted | 790.5 |
| | 181.1 |
| | | | 414.9 |
| | 1,386.5 |
|
| |
(1) | Refer to the Statements of Income.
|
| |
(2) | Refers to DPS's activity during the the second quarter of 2018. Refer to our Quarterly Report on Form 10-Q as filed on August 8, 2018. |
| |
(3) | Refer to Summary of Pro Forma Adjustments.
|
guarantor subsidiaries.
KEURIG DR PEPPER INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the First Six MonthsThe summarized consolidating results of 2018
(Unaudited)operations were as follows:
|
| | | | | | | | | | | | | | | | | | | |
(in millions, except per share data) | Reported KDP(1) | | DPS First Six Months of 2018(2) | | Reclassifications(3) | | Pro Forma Adjustments(3) | | Pro Forma Combined |
Net sales | $ | 1,897 |
| | $ | 3,480 |
| | $ | — |
| | $ | (26 | ) | | $ | 5,351 |
|
Cost of sales | 925 |
| | 1,471 |
| | — |
| | (28 | ) | | 2,368 |
|
Gross profit | 972 |
| | 2,009 |
| | — |
| | 2 |
| | 2,983 |
|
Selling, general and administrative expenses | 621 |
| | 1,347 |
| | 55 |
| | (99 | ) | | 1,924 |
|
Depreciation and amortization | — |
| | 55 |
| | (55 | ) | | — |
| | — |
|
Other operating income (expense), net | 6 |
| | (14 | ) | | — |
| | 3 |
| | (5 | ) |
Income from operations | 345 |
| | 621 |
| | — |
| | 98 |
| | 1,064 |
|
Interest expense | 49 |
| | 84 |
| | — |
| | 182 |
| | 315 |
|
Interest expense - related party | 51 |
| | — |
| | — |
| | (51 | ) | | — |
|
Interest income | — |
| | (1 | ) | | 1 |
| | — |
| | — |
|
Loss on early extinguishment of debt | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Other expense (income), net | 5 |
| | (2 | ) | | 8 |
| | 14 |
| | 25 |
|
Income before provision for income taxes | 238 |
| | 540 |
| | (9 | ) | | (47 | ) | | 722 |
|
Provision for income taxes | 64 |
| | 137 |
| | — |
| | (13 | ) | | 188 |
|
Income before equity in loss of unconsolidated affiliates | 174 |
| | 403 |
| | (9 | ) | | (34 | ) | | 534 |
|
Equity in loss of unconsolidated affiliates, net of tax | — |
| | (9 | ) | | 9 |
| | — |
| | — |
|
Net income | 174 |
| | 394 |
| | — |
| | (34 | ) | | 534 |
|
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards | 3 |
| | — |
| | — |
| | (3 | ) | | — |
|
Net income attributable to KDP | $ | 171 |
| | $ | 394 |
| | $ | — |
| | $ | (31 | ) | | $ | 534 |
|
Earnings per common share: | | | | | | | | | |
Basic | $ | 0.21 |
| | $ | 2.19 |
| | | | | | $ | 0.39 |
|
Diluted | 0.21 |
| | 2.17 |
| | | | | | 0.39 |
|
Weighted average common shares outstanding: | | | | | | | | | |
Basic | 790.5 |
| | 180.1 |
| | | | 415.9 |
| | 1,386.5 |
|
Diluted | 790.5 |
| | 181.0 |
| | | | 415.0 |
| | 1,386.5 |
|
|
| | | | | | | | | | | | | | | |
| For the First Quarter of 2020 |
(in millions) | Parent and Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net sales | $ | 1,523 |
| | $ | 1,122 |
| | $ | (32 | ) | | $ | 2,613 |
|
Gross profit | 891 |
| | 561 |
| | — |
| | 1,452 |
|
Income before equity in earnings of consolidated subsidiaries | 97 |
| | 108 |
| | — |
| | 205 |
|
Equity in earnings of subsidiaries, net of tax | 75 |
| | 81 |
| | — |
| | 156 |
|
Net income | $ | 156 |
| | $ | 81 |
| | $ | (81 | ) | | $ | 156 |
|
| |
(1) | Refer to the Statements of Income.
|
| |
(2) | Refers to DPS's activity during the the second quarter of 2018. Refer to our Quarterly Report on Form 10-Q as filed on August 8, 2018. |
| |
(3) | Refer to Summary of Pro Forma Adjustments.
|
The summarized consolidating balance sheets were as follows:
|
| | | | | | | | | | | | | | | |
| March 31, 2020 |
(in millions) | Parent and Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
ASSETS | | | | | | | |
Current assets | $ | 1,584 |
| | $ | 1,175 |
| | $ | (482 | ) | | $ | 2,277 |
|
Non-current assets | 28,059 |
| | 19,752 |
| | (1,245 | ) | | 46,566 |
|
Investments in Non-Guarantors | 14,824 |
| | — |
| | (14,824 | ) | | — |
|
Total assets | $ | 44,467 |
| | $ | 20,927 |
| | $ | (16,551 | ) | | $ | 48,843 |
|
| | | | | | | |
LIABILITIES AND EQUITY | | | | | | | |
Current liabilities | $ | 4,520 |
| | $ | 2,820 |
| | $ | (482 | ) | | $ | 6,858 |
|
Non-current liabilities | 17,307 |
| | 3,283 |
| | (1,245 | ) | | 19,345 |
|
Total liabilities | 21,827 |
| | 6,103 |
| | (1,727 | ) | | 26,203 |
|
Stockholders' equity | 22,640 |
| | 14,824 |
| | (14,824 | ) | | 22,640 |
|
Total liabilities and equity | $ | 44,467 |
| | $ | 20,927 |
| | $ | (16,551 | ) | | $ | 48,843 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2019 |
(in millions) | Parent and Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
ASSETS | | | | | | | |
Current assets | $ | 1,404 |
| | $ | 1,273 |
| | $ | (404 | ) | | $ | 2,273 |
|
Non-current assets | 28,180 |
| | 20,430 |
| | (1,365 | ) | | 47,245 |
|
Investments in Non-Guarantors | 15,321 |
| | — |
| | (15,321 | ) | | — |
|
Total assets | $ | 44,905 |
| | $ | 21,703 |
| | $ | (17,090 | ) | | $ | 49,518 |
|
| | | | | | | |
LIABILITIES AND EQUITY | | | | | | | |
Current liabilities | $ | 3,942 |
| | $ | 2,936 |
| | $ | (404 | ) | | $ | 6,474 |
|
Non-current liabilities | 17,707 |
| | 3,445 |
| | (1,365 | ) | | 19,787 |
|
Total liabilities | 21,649 |
| | 6,381 |
| | (1,769 | ) | | 26,261 |
|
Stockholders' equity | 23,256 |
| | 15,322 |
| | (15,321 | ) | | 23,257 |
|
Total liabilities and equity | $ | 44,905 |
| | $ | 21,703 |
| | $ | (17,090 | ) | | $ | 49,518 |
|
The tables above reflect $273 million and $241 million of current intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of March 31, 2020 and December 31, 2019, respectively. Additionally, the tables above reflect $22 million and $20 million of current intercompany payables due to the Non-Guarantors from the Parent and Guarantors within current assets held and used as of March 31, 2020 and December 31, 2019.
KEURIG DR PEPPER INC.
RECONCILIATION OF PRO FORMA SEGMENT INFORMATION
(Unaudited)
|
| | | | | | | | | | | | | | | |
(in millions) | Reported KDP(1) | | DPS Second Quarter of 2018(2) | | Pro Forma Adjustments(3) | | Pro Forma Combined |
For the Second Quarter of 2018 | | | | | | | |
Net Sales | | | | | | | |
Coffee Systems | $ | 949 |
| | $ | — |
| | $ | — |
| | $ | 949 |
|
Packaged Beverages | — |
| | 1,378 |
| | — |
| | 1,378 |
|
Beverage Concentrates | — |
| | 372 |
| | (13 | ) | | 359 |
|
Latin America Beverages | — |
| | 136 |
| | — |
| | 136 |
|
Total net sales | $ | 949 |
| | $ | 1,886 |
| | $ | (13 | ) | | $ | 2,822 |
|
| | | | | | | |
Income from Operations | | | | | | | |
Coffee Systems | $ | 274 |
| | $ | — |
| | $ | — |
| | $ | 274 |
|
Packaged Beverages | — |
| | 148 |
| | 11 |
| | 159 |
|
Beverage Concentrates | — |
| | 248 |
| | (13 | ) | | 235 |
|
Latin America Beverages | — |
| | 26 |
| | — |
| | 26 |
|
Unallocated corporate costs | (107 | ) | | (60 | ) | | 53 |
| | (114 | ) |
Total income from operations | $ | 167 |
| | $ | 362 |
| | $ | 51 |
| | $ | 580 |
|
|
| | | | | | | | | | | | | | | |
(in millions) | Reported KDP(1) | | DPS First Six Months of 2018(2) | | Pro Forma Adjustments(3) | | Pro Forma Combined |
For the First Six Months of 2018 | | | | | | | |
Net Sales | | | | | | | |
Coffee Systems | $ | 1,897 |
| | $ | — |
| | $ | — |
| | $ | 1,897 |
|
Packaged Beverages | — |
| | 2,556 |
| | — |
| | 2,556 |
|
Beverage Concentrates | — |
| | 675 |
| | (26 | ) | | 649 |
|
Latin America Beverages | — |
| | 249 |
| | — |
| | 249 |
|
Total net sales | $ | 1,897 |
| | $ | 3,480 |
| | $ | (26 | ) | | $ | 5,351 |
|
| | | | | | | |
Income from Operations | | | | | | | |
Coffee Systems | $ | 531 |
| | $ | — |
| | $ | (3 | ) | | $ | 528 |
|
Packaged Beverages | — |
| | 297 |
| | 20 |
| | 317 |
|
Beverage Concentrates | — |
| | 441 |
| | (27 | ) | | 414 |
|
Latin America Beverages | — |
| | 40 |
| | (2 | ) | | 38 |
|
Unallocated corporate costs | (186 | ) | | (157 | ) | | 110 |
| | (233 | ) |
Total income from operations | $ | 345 |
| | $ | 621 |
| | $ | 98 |
| | $ | 1,064 |
|
| |
(1) | Refer to the Statements of Income.
|
| |
(2) | Refers to DPS's activity during the second quarter and first six months of 2018. |
| |
(3) | Refer to Summary of Pro Forma Adjustments.
|
Summary of Pro Forma Adjustments
Pro forma adjustments included in the Pro Forma Condensed Combined Statements of Income for the second quarter and first six months of 2018 are as follows:
| |
a. | A decrease in Net sales to remove the historical deferred revenue associated with DPS' arrangements with PepsiCo, Inc. and The Coca-Cola Company, which were eliminated in the fair value adjustments for DPS as part of purchase price accounting in connection with the DPS Merger. |
| |
b. | An increase in Net sales to remove the historical amortization of certain capitalized upfront customer incentive program payments. These were eliminated in the fair value adjustments for DPS as these upfront payments were revalued within the customer relationship intangible assets recorded in purchase price accounting. |
| |
c. | Adjustment to remove the impact of the step-up of inventory recorded in purchase price accounting. |
| |
d. | Adjustments to SG&A expenses due to changes in amortization as a result of the fair value adjustments for DPS' intangible assets with definite lives as part of purchase price accounting. |
| |
e. | Adjustments to SG&A expenses due to changes in depreciation as a result of the fair value adjustments for DPS' property, plant and equipment as part of purchase price accounting. |
| |
f. | A decrease to SG&A expenses for both DPS and Maple to remove non-recurring transaction costs as a result of the DPS Merger. |
| |
g. | Removal of the Interest expense - related party caption for Maple, as the related party debt was capitalized into Additional paid-in capital immediately prior to the DPS Merger. |
| |
h. | Adjustments to Interest expense to remove the historical amortization of deferred debt issuance costs, discounts and premiums and to record incremental amortization as a result of the fair value adjustments for DPS' senior unsecured notes as part of purchase price accounting. |
| |
i. | Adjustments to Interest expense to record incremental interest expense and amortization of deferred debt issuance costs for borrowings related to the DPS Merger. |
| |
j. | Removal of the Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards caption as the Maple non-controlling interest was eliminated to reflect the capital structure of KDP. |
Summary of Reclassifications
Reclassifications included in the Pro Forma Condensed Combined Statements of Income for the second quarter and first six months of 2018 are as follows:
| |
a. | Foreign currency transaction gains and losses were reclassified from Cost of sales and SG&A expenses in the historical DPS Statements of Income to Other (income) expense, net. |
| |
b. | Depreciation and amortization expenses were reclassified from Depreciation and amortization in the historical DPS Statements of Income to SG&A expenses. |
| |
c. | Interest income was reclassified from Interest income in the historical DPS Statements of Income to Other (income) expense, net. |
NON-GAAP FINANCIAL MEASURES
To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented in this report selected unaudited pro forma combined financial information. We also present for the second quarter and first six months of 2019 (i) Adjusted net sales, (ii) Adjusted income from operations, (iii) Adjusted net income and (iv) Adjusted diluted EPS and for the first quarter of 20182020 and 2019 (i) Adjusted pro forma net sales, (ii) Adjusted pro forma income from operations, (iii)(ii) Adjusted pro forma net income and (iv)(iii) Adjusted pro forma diluted EPS, which are considered non-GAAP financial measures. This pro forma financial information andThe 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 adjusted measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, 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.
For the secondfirst quarter of 2020 and first six months of 2019, we define our Adjusted non-GAAP financial measures as certain financial statement captions and metrics adjusted for certain items affecting comparability, while for the second quarter and first six months of 2018, we define our Adjusted non-GAAP financial measures as certain pro forma financial statement captions and metrics adjusted for certain items affecting comparability. The items affecting comparability are defined below.
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 and do not have an offsetting risk reflected within the financial results; (ii) the amortization associated with definite-lived intangible assets; (iii) the amortization of the deferred financing costs associated with the DPS Merger and Maple's acquisition ofthe Keurig Green Mountain, Inc. in 2016 (the "Keurig Acquisition");Acquisition; (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 attributable to the matching awards made to employees who made an initial investment in the Keurig Green Mountain, Inc. Executive OwnershipEOP, the 2009 Incentive Plan or the Keurig Dr Pepper Omnibus2019 Incentive Plan of 2009;Plan; and (vi) other certain items that are excluded for comparison purposes to prior year periods.
Prior to the second quarter of 2019, we did not add back the amortization of the fair value adjustment of the senior unsecured debt recognized as a result of the purchase price allocation for the DPS Merger. As this item is similar to the amortization of intangibles, we changed our method of computing Adjusted Pro Forma (2018) and Adjusted GAAP (2019) results to exclude the amortization of the fair value adjustment of the senior unsecured notes in order to reflect how management views our business results on a consistent basis.
For the secondfirst quarter of 2020, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) transaction costs for significant business combinations (completed or abandoned) excluding the DPS Merger; (iv) costs related to significant nonroutine legal matters; (v) the loss on early extinguishment of debt related to the redemption of debt; (vi) incremental costs to our operations related to risks associated with the COVID-19 pandemic and (vii) impairment recognized on equity method investment with Bedford.
Incremental costs to our operations related to risks associated with the COVID-19 pandemic include incremental expenses 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. We believe removing these costs reflects how management views our business results on a consistent basis.
For the first six monthsquarter of 2019, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) transaction costs not associated withfor significant business combinations (completed or abandoned) excluding the DPS Merger; (iv) provision forcosts related to significant nonroutine legal settlements;matters; (v) the impact of the step-up of acquired inventory not associated with the DPS MergerMerger; (vi) the loss on early extinguishment of debt related to the redemption of debt and (vii) the loss related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment, as discussed in our Annual Report on Form 10-K.segment.
For the secondfirst quarter and first six months of 2018, the other certain items excluded for comparison purposes include (i) restructuring2020 and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) provisions for legal settlements; (iv) the loss on early extinguishment of debt related to the redemption of debt; and (v) tax reform associated with the TCJA.
For the second quarter and first six months of 2019, the supplemental financial data set forth below includes reconciliations of Adjusted net sales, Adjusted income from operations, Adjusted net income and Adjusted diluted EPS to the applicable financial measure presented in the unaudited condensed consolidated financial statement for the same period. For the second quarter and first six months of 2018, the supplemental financial data set forth below includes reconciliations of Adjusted pro forma net sales, Adjusted pro forma income from operations, Adjusted pro forma net income and Adjusted pro forma diluted EPS to the applicable financial measure presented in the unaudited pro forma condensed combined financial statements for the same period. For a reconciliation of the applicable financial measure presented in the unaudited pro forma condensed combined financial statement for the second quarter and first six months of 2018 to the applicable historical financial measure presented in accordance with U.S. GAAP, please see "Supplemental Unaudited Pro Forma Condensed Combined Financial Information" above.
KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
For the SecondFirst Quarter of 20192020
(Unaudited, in millions, except per share data)
| | | Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | Other operating expense, net | | Income from operations | | Operating margin | Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | Income from operations | | Operating margin |
Reported | $ | 1,186 |
| | $ | 1,626 |
| | 57.8 | % | | $ | 1,028 |
| | $ | 11 |
| | $ | 587 |
| | 20.9 | % | $ | 1,161 |
| | $ | 1,452 |
| | 55.6 | % | | $ | 1,028 |
| | $ | 466 |
| | 17.8 | % |
Items Affecting Comparability: | | | | | | | | | | | | | | | | | | | | | | | | |
Mark to market | 11 |
| | (11 | ) | | | | (3 | ) | | — |
| | (8 | ) | | | (15 | ) | | 15 |
| | | | (43 | ) | | 58 |
| | |
Amortization of intangibles | — |
| | — |
| | | | (32 | ) | | — |
| | 32 |
| | | — |
| | — |
| | | | (33 | ) | | 33 |
| | |
Stock compensation | — |
| | — |
| | | | (8 | ) | | — |
| | 8 |
| | | — |
| | — |
| | | | (7 | ) | | 7 |
| | |
Restructuring and integration costs | (1 | ) | | 1 |
| | | | (37 | ) | | — |
| | 38 |
| | | — |
| | — |
| | | | (52 | ) | | 52 |
| | |
Productivity | (1 | ) | | 1 |
| | | | (23 | ) | | (9 | ) | | 33 |
| | | (16 | ) | | 16 |
| | | | (38 | ) | | 54 |
| | |
Transaction costs | — |
| | — |
| | | | (1 | ) | | — |
| | 1 |
| | | |
Provision for settlements | — |
| | — |
| | | | (8 | ) | | — |
| | 8 |
| | | |
Malware Incident | — |
| | — |
| | | | (3 | ) | | — |
| | 3 |
| | | |
Nonroutine legal matters | | — |
| | — |
| | | | (9 | ) | | 9 |
| | |
COVID-19 | | (1 | ) | | 1 |
| | | | (4 | ) | | 5 |
| | |
Adjusted GAAP | $ | 1,195 |
| | $ | 1,617 |
| | 57.5 | % | | $ | 913 |
| | $ | 2 |
| | $ | 702 |
| | 25.0 | % | $ | 1,129 |
| | $ | 1,484 |
| | 56.8 | % | | $ | 842 |
| | $ | 684 |
| | 26.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | Other expense (income), net | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | Net income | | Weighted Average Diluted shares | | Diluted earnings per share |
Reported | $ | 170 |
| | $ | 1 |
| | $ | 416 |
| | $ | 102 |
| | 24.5 | % | | $ | 314 |
| | 1,419 | | $ | 0.22 |
|
Items Affecting Comparability: | | | | | | | | | | |
| | | | |
Mark to market | (16 | ) | | (2 | ) | | 10 |
| | 4 |
| | | | 6 |
| | | | — |
|
Amortization of intangibles | — |
| | — |
| | 32 |
| | 9 |
| | | | 23 |
| | | | 0.02 |
|
Amortization of deferred financing costs | (3 | ) | | — |
| | 3 |
| | 1 |
| | | | 2 |
| | | | — |
|
Amortization of fair value debt adjustment | (6 | ) | | — |
| | 6 |
| | 1 |
| | | | 5 |
| | | | — |
|
Stock compensation | — |
| | — |
| | 8 |
| | 2 |
| | | | 6 |
| | | | — |
|
Restructuring and integration costs | — |
| | — |
| | 38 |
| | 11 |
| | | | 27 |
| | | | 0.02 |
|
Productivity | — |
| | — |
| | 33 |
| | 7 |
| | | | 26 |
| | | | 0.02 |
|
Transaction costs | (7 | ) | | — |
| | 8 |
| | 2 |
| | | | 6 |
| | | | — |
|
Provision for settlements | — |
| | — |
| | 8 |
| | 2 |
| | | | 6 |
| | | | — |
|
Malware Incident | — |
| | — |
| | 3 |
| | 1 |
| | | | 2 |
| | | | — |
|
Adjusted GAAP | $ | 138 |
| | $ | (1 | ) | | $ | 565 |
| | $ | 142 |
| | 25.1 | % | | $ | 423 |
| | 1,419 |
| | $ | 0.30 |
|
Diluted earnings per common share may not foot due to rounding.
KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
For the Second Quarter of 2018
(Unaudited, in millions, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | |
| Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | Income from operations | | Operating margin |
Pro Forma | $ | 1,233 |
| | $ | 1,589 |
| | 56.3 | % | | $ | 1,020 |
| | $ | 580 |
| | 20.6 | % |
Items Affecting Comparability: | | | | | | | | | | | |
Mark to market | (2 | ) | | 2 |
| | | | 9 |
| | (7 | ) | | |
Amortization of intangibles | — |
| | — |
| | | | (31 | ) | | 31 |
| | |
Stock compensation | — |
| | — |
| | | | (6 | ) | | 6 |
| | |
Restructuring and integration costs | — |
| | — |
| | | | (33 | ) | | 33 |
| | |
Productivity | (2 | ) | | 2 |
| | | | 7 |
| | (5 | ) | | |
Provision for settlements | — |
| | — |
| | | | (2 | ) | | 2 |
| | |
Adjusted Pro Forma | $ | 1,229 |
| | $ | 1,593 |
| | 56.4 | % | | $ | 964 |
| | $ | 640 |
| | 22.7 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | Other expense (income), net | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | Net income | | Weighted Average Diluted shares | | Diluted earnings per share |
Pro Forma | $ | 170 |
| | $ | (8 | ) | | $ | 418 |
| | $ | 95 |
| | 22.7 | % | | $ | 323 |
| | 1,386.5 | | $ | 0.23 |
|
Items Affecting Comparability: | | | | | | | | | | |
| | | | |
Mark to market | 10 |
| | 2 |
| | (19 | ) | | (5 | ) | | | | (14 | ) | | | | (0.01 | ) |
Amortization of intangibles | — |
| | — |
| | 31 |
| | 8 |
| | | | 23 |
| | | | 0.02 |
|
Amortization of fair value debt adjustment | (5 | ) | | — |
| | 5 |
| | 1 |
| | | | 4 |
| | | | — |
|
Stock compensation | — |
| | — |
| | 6 |
| | — |
| | | | 6 |
| | | | — |
|
Restructuring and integration costs | — |
| | — |
| | 33 |
| | 6 |
| | | | 27 |
| | | | 0.02 |
|
Productivity | — |
| | — |
| | (5 | ) | | (1 | ) | | | | (4 | ) | | | | — |
|
Provision for settlements | — |
| | — |
| | 2 |
| | 1 |
| | | | 1 |
| | | | — |
|
Tax reform | — |
| | — |
| | — |
| | 10 |
| | | | (10 | ) | | | | (0.01 | ) |
Adjusted Pro Forma | $ | 175 |
| | $ | (6 | ) | | $ | 471 |
| | $ | 115 |
| | 24.4 | % | | $ | 356 |
| | 1,386.5 | | $ | 0.26 |
|
Numbers may not foot due to rounding.
KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
For the First Six Months of 2019
(Unaudited, in millions, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | Other operating expense, net | | Income from operations | | Operating margin |
Reported | $ | 2,292 |
| | $ | 3,024 |
| | 56.9 | % | | $ | 1,939 |
| | $ | — |
| | $ | 1,085 |
| | 20.4 | % |
Items Affecting Comparability: | | | | | | | | | | | | | |
Mark to market | (1 | ) | | 1 |
| | | | 9 |
| | — |
| | (8 | ) | | |
Amortization of intangibles | — |
| | — |
| | | | (63 | ) | | — |
| | 63 |
| | |
Stock compensation | — |
| | — |
| | | | (15 | ) | | — |
| | 15 |
| | |
Restructuring and integration costs | (2 | ) | | 2 |
| | | | (97 | ) | | — |
| | 99 |
| | |
Productivity | (4 | ) | | 4 |
| | | | (29 | ) | | (9 | ) | | 42 |
| | |
Transaction costs | — |
| | — |
| | | | (1 | ) | | — |
| | 1 |
| | |
Inventory Step-Up | (3 | ) | | 3 |
| | | | — |
| | — |
| | 3 |
| | |
Provision for settlements | — |
| | — |
| | | | (15 | ) | | — |
| | 15 |
| | |
Malware Incident | (2 | ) | | 2 |
| | | | (6 | ) | | — |
| | 8 |
| | |
Adjusted GAAP | $ | 2,280 |
| | $ | 3,036 |
| | 57.1 | % | | $ | 1,722 |
| | $ | (9 | ) | | $ | 1,323 |
| | 24.9 | % |
| | | Interest expense | | Loss on early extinguishment of debt | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | Net income | | Weighted Average Diluted shares | | Diluted earnings per share | Interest expense | | Loss on early extinguishment of debt | | Impairment on investment and note receivable | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | Net income | | Weighted Average Diluted shares | | Diluted earnings per share |
Reported | $ | 339 |
| | $ | 9 |
| | $ | 731 |
| | $ | 187 |
| | 25.6 | % | | $ | 544 |
| | 1,418.5 | | $ | 0.38 |
| $ | 153 |
| | $ | 2 |
| | $ | 86 |
| | $ | 205 |
| | $ | 49 |
| | 23.9 | % | | $ | 156 |
| | 1,420.1 | | $ | 0.11 |
|
Items Affecting Comparability: | | | | | — |
| | | | | | — |
| | | | | | | | | | | | | | |
| | |
Mark to market | (45 | ) | | — |
| | 37 |
| | 11 |
| | | | 26 |
| | 0.02 |
| (24 | ) | | — |
| | — |
| | 82 |
| | 21 |
| | | | 61 |
| | 0.04 |
|
Amortization of intangibles | — |
| | — |
| | 63 |
| | 17 |
| | | | 46 |
| | 0.03 |
| — |
| | — |
| | — |
| | 33 |
| | 9 |
| | | | 24 |
| | 0.02 |
|
Amortization of deferred financing costs | (7 | ) | | — |
| | 7 |
| | 2 |
| | | | 5 |
| | — |
| (3 | ) | | — |
| | — |
| | 3 |
| | 1 |
| | | | 2 |
| | — |
|
Amortization of fair value debt adjustment | (13 | ) | | — |
| | 13 |
| | 2 |
| | | | 11 |
| | 0.01 |
| (6 | ) | | — |
| | — |
| | 6 |
| | 2 |
| | | | 4 |
| | — |
|
Stock compensation | — |
| | — |
| | 15 |
| | 4 |
| | | | 11 |
| | 0.01 |
| — |
| | — |
| | — |
| | 7 |
| | 1 |
| | | | 6 |
| | — |
|
Restructuring and integration costs | — |
| | — |
| | 99 |
| | 26 |
| | | | 73 |
| | 0.05 |
| — |
| | — |
| | — |
| | 52 |
| | 14 |
| | | | 38 |
| | 0.03 |
|
Productivity | — |
| | — |
| | 42 |
| | 9 |
| | | | 33 |
| | 0.02 |
| — |
| | — |
| | — |
| | 54 |
| | 15 |
| | | | 39 |
| | 0.03 |
|
Transaction costs | (12 | ) | | — |
| | 13 |
| | 3 |
| | | | 10 |
| | 0.01 |
| |
Loss on early extinguishment of debt | — |
| | (9 | ) | | 9 |
| | 2 |
| | | | 7 |
| | — |
| — |
| | (2 | ) | | — |
| | 2 |
| | — |
| | | | 2 |
| | — |
|
Inventory Step-Up | — |
| | — |
| | 3 |
| | 1 |
| | | | 2 |
| | — |
| |
Provision for settlements | — |
| | — |
| | 15 |
| | 4 |
| | | | 11 |
| | 0.01 |
| |
Malware Incident | — |
| | — |
| | 8 |
| | 2 |
| | | | 6 |
| | — |
| |
Investment impairment | | — |
| | — |
| | (86 | ) | | 86 |
| | 21 |
| | | | 65 |
| | 0.05 |
|
Nonroutine legal matters | | — |
| | — |
| | — |
| | 9 |
| | 2 |
| | | | 7 |
| | — |
|
COVID-19 | | — |
| | — |
| | — |
| | 5 |
| | 1 |
| | | | 4 |
| | — |
|
Adjusted GAAP | $ | 262 |
| | $ | — |
| | $ | 1,055 |
| | $ | 270 |
| | 25.6 | % | | $ | 785 |
| | 1,418.5 | | $ | 0.55 |
| $ | 120 |
| | $ | — |
| | $ | — |
| | $ | 544 |
| | $ | 136 |
| | 25.0 | % | | $ | 408 |
| | 1,420.1 | | $ | 0.29 |
|
Diluted earnings per common share may not foot due to rounding.
KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
For the First Six MonthsQuarter of 20182019
(Unaudited, in millions, except per share data)
| | | Net sales | | Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | Other operating expense, net | | Income from operations | | Operating margin | Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | Income from operations | | Operating margin |
Pro Forma | $ | 5,351 |
| | $ | 2,368 |
| | $ | 2,983 |
| | 55.7 | % | | $ | 1,924 |
| | $ | (5 | ) | | $ | 1,064 |
| | 19.9 | % | |
Reported | | $ | 1,106 |
| | $ | 1,398 |
| | 55.8 | % | | $ | 911 |
| | $ | 498 |
| | 19.9 | % |
Items Affecting Comparability: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mark to market | — |
| | (16 | ) | | 16 |
| | | | 9 |
| | — |
| | 7 |
| | | (12 | ) | | 12 |
| | | | 12 |
| | — |
| | |
Amortization of intangibles | — |
| | — |
| | — |
| | | | (59 | ) | | — |
| | 59 |
| | | — |
| | — |
| | | | (31 | ) | | 31 |
| | |
Stock compensation | — |
| | — |
| | — |
| | | | (12 | ) | | — |
| | 12 |
| | | — |
| | — |
| | | | (7 | ) | | 7 |
| | |
Restructuring and integration costs | — |
| | — |
| | — |
| | | | (39 | ) | | — |
| | 39 |
| | | (1 | ) | | 1 |
| | | | (60 | ) | | 61 |
| | |
Productivity | — |
| | (6 | ) | | 6 |
| | | | (7 | ) | | (4 | ) | | 17 |
| | | (3 | ) | | 3 |
| | | | (6 | ) | | 9 |
| | |
Provision for settlements | 4 |
| | — |
| | 4 |
| | | | — |
| | — |
| | 4 |
| | | |
Adjusted Pro Forma | $ | 5,355 |
| | $ | 2,346 |
| | $ | 3,009 |
| | 56.2 | % | | $ | 1,816 |
| | $ | (9 | ) | | $ | 1,202 |
| | 22.4 | % | |
Nonroutine legal matters | | — |
| | — |
| | | | (7 | ) | | 7 |
| | |
Inventory step-up | | (3 | ) | | 3 |
| | | | — |
| | 3 |
| | |
Malware incident | | (2 | ) | | 2 |
| | | | (3 | ) | | 5 |
| | |
Adjusted GAAP | | $ | 1,085 |
| | $ | 1,419 |
| | 56.7 | % | | $ | 809 |
| | $ | 621 |
| | 24.8 | % |
| | | Interest expense | | Loss on early extinguishment of debt | | Other expense (income), net | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | Net income | | Weighted Average Diluted shares | | Diluted earnings per share | Interest expense | | Loss on early extinguishment of debt | | Other expense (income), net | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | Net income | | Weighted Average Diluted shares | | Diluted earnings per share |
Pro Forma | $ | 315 |
| | $ | 2 |
| | $ | 25 |
| | $ | 722 |
| | $ | 188 |
| | 26.0 | % | | $ | 534 |
| | 1,386.5 | | $ | 0.39 |
| |
Reported | | $ | 169 |
| | $ | 9 |
| | $ | 5 |
| | $ | 315 |
| | $ | 85 |
| | 27.0 | % | | $ | 230 |
| | 1,417.7 | | $ | 0.16 |
|
Items Affecting Comparability: | | | | | | | — |
| | | | | |
| | | | | | | | | | | | | | |
| | |
Mark to market | 37 |
| | — |
| | 6 |
| | (36 | ) | | (9 | ) | | | | (27 | ) | | (0.02 | ) | (29 | ) | | — |
| | 2 |
| | 27 |
| | 7 |
| | | | 20 |
| | 0.01 |
|
Amortization of intangibles | — |
| | — |
| | — |
| | 59 |
| | 15 |
| | | | 44 |
| | 0.03 |
| — |
| | — |
| | — |
| | 31 |
| | 8 |
| | | | 23 |
| | 0.02 |
|
Amortization of deferred financing costs | (1 | ) | | — |
| | — |
| | 1 |
| | 1 |
| | | | — |
| | — |
| (4 | ) | | — |
| | — |
| | 4 |
| | 1 |
| | | | 3 |
| | — |
|
Amortization of fair value debt adjustment | (10 | ) | | — |
| | — |
| | 10 |
| | 2 |
| | | | 8 |
| | 0.01 |
| (7 | ) | | — |
| | — |
| | 7 |
| | 1 |
| | | | 6 |
| | — |
|
Stock compensation | — |
| | — |
| | — |
| | 12 |
| | 2 |
| | | | 10 |
| | 0.01 |
| — |
| | — |
| | — |
| | 7 |
| | 2 |
| | | | 5 |
| | — |
|
Restructuring and integration costs | — |
| | — |
| | — |
| | 39 |
| | 6 |
| | | | 33 |
| | 0.02 |
| — |
| | — |
| | — |
| | 61 |
| | 15 |
| | | | 46 |
| | 0.03 |
|
Productivity | — |
| | — |
| | — |
| | 17 |
| | 5 |
| | | | 12 |
| | 0.01 |
| — |
| | — |
| | — |
| | 9 |
| | 2 |
| | | | 7 |
| | — |
|
Transaction costs | | (5 | ) | | — |
| | — |
| | 5 |
| | 1 |
| | | | 4 |
| | — |
|
Loss on early extinguishment of debt | — |
| | (2 | ) | | — |
| | 2 |
| | — |
| | | | 2 |
| | — |
| — |
| | (9 | ) | | — |
| | 9 |
| | 2 |
| | | | 7 |
| | — |
|
Provision for settlements | — |
| | — |
| | — |
| | 4 |
| | 1 |
| | | | 3 |
| | — |
| |
Tax reform | — |
| | — |
| | — |
| | — |
| | 7 |
| | | | (7 | ) | | (0.01 | ) | |
Adjusted Pro Forma | $ | 341 |
| | $ | — |
| | $ | 31 |
| | $ | 830 |
| | $ | 218 |
| | 26.3 | % | | $ | 612 |
| | 1,386.5 | | $ | 0.44 |
| |
Nonroutine legal matters | | — |
| | — |
| | — |
| | 7 |
| | 2 |
| | | | 5 |
| | — |
|
Inventory step-up | | — |
| | — |
| | — |
| | 3 |
| | 1 |
| | | | 2 |
| | — |
|
Malware incident | | — |
| | — |
| | — |
| | 5 |
| | 1 |
| | | | 4 |
| | — |
|
Adjusted GAAP | | $ | 124 |
| | $ | — |
| | $ | 7 |
| | $ | 490 |
| | $ | 128 |
| | 26.1 | % | | $ | 362 |
| | 1,417.7 | | $ | 0.25 |
|
NumbersDiluted earnings per common share may not foot due to rounding.
Keurig Dr Pepper Inc.
Reconciliation of Pro Forma Segment Information to Certain Non-GAAP Adjusted Pro Forma Segment Information
(Unaudited)
|
| | | | | | | | | | | |
(in millions) | Reported | | Items Affecting Comparability | | Adjusted GAAP |
For the second quarter of 2019: | | | | | |
Net Sales | | | | | |
Coffee Systems | $ | 990 |
| | $ | — |
| | $ | 990 |
|
Packaged Beverages | 1,311 |
| | — |
| | 1,311 |
|
Beverage Concentrates | 370 |
| | — |
| | 370 |
|
Latin America Beverages | 141 |
| | — |
| | 141 |
|
Total net sales | $ | 2,812 |
| | $ | — |
| | $ | 2,812 |
|
| | | | | |
Income from Operations | | | | | |
Coffee Systems | $ | 287 |
| | $ | 44 |
| | $ | 331 |
|
Packaged Beverages | 186 |
| | 4 |
| | 190 |
|
Beverage Concentrates | 244 |
| | 2 |
| | 246 |
|
Latin America Beverages | 26 |
| | (6 | ) | | 20 |
|
Unallocated corporate costs | (156 | ) | | 71 |
| | (85 | ) |
Total income from operations | $ | 587 |
| | $ | 115 |
| | $ | 702 |
|
|
| | | | | | | | | | | |
(in millions) | Pro Forma | | Items Affecting Comparability | | Adjusted Pro Forma |
For the second quarter of 2018: | | | | | |
Net Sales | | | | | |
Coffee Systems | $ | 949 |
| | $ | — |
| | $ | 949 |
|
Packaged Beverages | 1,378 |
| | — |
| | 1,378 |
|
Beverage Concentrates | 359 |
| | — |
| | 359 |
|
Latin America Beverages | 136 |
| | — |
| | 136 |
|
Total net sales | $ | 2,822 |
| | $ | — |
| | $ | 2,822 |
|
| | | | | |
Income from Operations | | | | | |
Coffee Systems | $ | 274 |
| | $ | 32 |
| | $ | 306 |
|
Packaged Beverages | 159 |
| | 2 |
| | 161 |
|
Beverage Concentrates | 235 |
| | 1 |
| | 236 |
|
Latin America Beverages | 26 |
| | — |
| | 26 |
|
Unallocated corporate costs | (114 | ) | | 25 |
| | (89 | ) |
Total income from operations | $ | 580 |
| | $ | 60 |
| | $ | 640 |
|
KEURIG DR PEPPER INC.
RECONCILIATION OF SEGMENT ITEMS TO CERTAIN NON-GAAP ADJUSTED SEGMENT ITEMS
(Unaudited)
| | (in millions) | Reported | | Items Affecting Comparability | | Adjusted GAAP | Reported | | Items Affecting Comparability | | Adjusted GAAP |
For the first six months of 2019: | | | | | | |
Net Sales | | | | | | |
Coffee Systems | $ | 1,958 |
| | $ | — |
| | $ | 1,958 |
| |
Packaged Beverages | 2,427 |
| | — |
| | 2,427 |
| |
Beverage Concentrates | 674 |
| | — |
| | 674 |
| |
Latin America Beverages | 257 |
| | — |
| | 257 |
| |
Total net sales | $ | 5,316 |
| | $ | — |
| | $ | 5,316 |
| |
| | | | | | |
For the first quarter of 2020: | | | | | | |
Income from Operations | | | | | | | | | | |
Coffee Systems | $ | 580 |
| | $ | 86 |
| | $ | 666 |
| $ | 272 |
| | $ | 75 |
| | $ | 347 |
|
Packaged Beverages | 335 |
| | 15 |
| | 350 |
| 189 |
| | 14 |
| | 203 |
|
Beverage Concentrates | 445 |
| | 2 |
| | 447 |
| 197 |
| | — |
| | 197 |
|
Latin America Beverages | 37 |
| | (5 | ) | | 32 |
| 27 |
| | — |
| | 27 |
|
Unallocated corporate costs | (312 | ) | | 140 |
| | (172 | ) | (219 | ) | | 129 |
| | (90 | ) |
Total income from operations | $ | 1,085 |
| | $ | 238 |
| | $ | 1,323 |
| $ | 466 |
| | $ | 218 |
| | $ | 684 |
|
| | (in millions) | Pro Forma | | Items Affecting Comparability | | Adjusted Pro Forma | Reported | | Items Affecting Comparability | | Adjusted GAAP |
For the first six months of 2018: | | | | | | |
Net Sales | | | | | | |
Coffee Systems | $ | 1,897 |
| | $ | 4 |
| | $ | 1,901 |
| |
Packaged Beverages | 2,556 |
| | — |
| | 2,556 |
| |
Beverage Concentrates | 649 |
| | — |
| | 649 |
| |
Latin America Beverages | 249 |
| | — |
| | 249 |
| |
Total net sales | $ | 5,351 |
| | $ | 4 |
| | $ | 5,355 |
| |
| | | | | | |
For the first quarter of 2019: | | | | | | |
Income from Operations | | | | | | | | | | |
Coffee Systems | $ | 528 |
| | $ | 90 |
| | $ | 618 |
| $ | 293 |
| | $ | 42 |
| | $ | 335 |
|
Packaged Beverages | 317 |
| | 4 |
| | 321 |
| 149 |
| | 11 |
| | 160 |
|
Beverage Concentrates | 414 |
| | 1 |
| | 415 |
| 201 |
| | — |
| | 201 |
|
Latin America Beverages | 38 |
| | — |
| | 38 |
| 11 |
| | 1 |
| | 12 |
|
Unallocated corporate costs | (233 | ) | | 43 |
| | (190 | ) | (156 | ) | | 69 |
| | (87 | ) |
Total income from operations | $ | 1,064 |
| | $ | 138 |
| | $ | 1,202 |
| $ | 498 |
| | $ | 123 |
| | $ | 621 |
|
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency exchange rates, interest rates and commodity prices. From time to time, we may enter into derivatives or other financial instruments to hedge or mitigate commercial risks. We do not enter into derivative instruments for speculation, investing or trading.
FOREIGN EXCHANGE RISK
The majority of our net sales, expenses and capital purchases are transacted in U.S. dollars. However, we have exposure with respect to foreign exchange rate fluctuations. Our primary exposure to foreign exchange rates is the Canadian dollar and Mexican peso against the U.S. dollar. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred. As of June 30, 2019,March 31, 2020, the impact to our income from operations of a 10% change (up or down) in exchange rates is estimated to be an increase or decrease of approximately $32$25 million on an annual basis.
We use derivative instruments such as foreign exchange forward contracts to manage a portion of our exposure to changes in foreign exchange rates. As of June 30, 2019,March 31, 2020, we had derivative contracts outstanding with a notional value of $475$471 million maturing at various dates through September 25, 2024.
INTEREST RATE RISK
We centrally manage our debt portfolio through the use of interest rate swaps and monitor our mix of fixed-rate and variable ratevariable-rate debt. As of June 30, 2019,March 31, 2020, the carrying value of our fixed-rate debt, excluding lease obligations, was $11,785$11,559 million and our variable-rate debt was $3,185$2,829 million, inclusive of commercial paper.
Additionally, as of June 30, 2019, the total notional value of receive-fixed, pay-variable interest rate swaps was $50 million andMarch 31, 2020, the total notional value of receive-variable, pay-fixed interest rate swaps was $575$450 million.
The following table is an estimate of the impact to our interest rate expense based upon our variable rate debt and derivative instruments and the fair value of the interest rate swaps that could result from hypothetical interest rate changes during the term of the financial instruments, based on debt levels as of June 30, 2019:March 31, 2020:
|
| | |
| | |
Hypothetical Change in Interest Rates(1) | | Annual Impact to Interest Expense |
1-percent decrease | | $2724 million decrease |
1-percent increase | | $2724 million increase |
| |
(1) | We pay an average floating rate, which fluctuates periodically, based on LIBOR and a credit spread, as a result of certain derivative instruments and variable rate debt instruments. See Notes 72 and 87 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information. |
COMMODITY RISKS
We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. Our principal commodities risks relate to our purchases of coffee beans, PET, aluminum, diesel fuel, corn (for high fructose corn syrup), apple juice concentrate, apples, sucrose and natural gas (for use in processing and packaging)., resin, PET, corn (for high fructose corn syrup), pulp, coffee beans, diesel fuel, apple juice concentrate, apples and sucrose.
We utilize commodities derivative instruments and supplier pricing agreements to hedge the risk of adverse movements in commodity prices for limited time periods for certain commodities. As of March 31, 2020, we had derivative contracts outstanding with a notional value of $317 million maturing at various dates through June 30, 2022. The fair market value of these contracts as of June 30, 2019March 31, 2020 was a net liability of $18$37 million.
As of June 30, 2019,March 31, 2020, the impact of a 10% change (up or down) in market prices for these commodities where the risk of adverse movements has not been hedged is estimated to have a $5$9 million impact to our income from operations for the remainder of the year ending December 31, 2019.2020.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and ProceduresEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act)Act) our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, as of June 30, 2019,March 31, 2020, our disclosure controls and procedures are effective to (i) provide reasonable assurance that information required to be disclosed in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified by the SEC'sSEC's rules and forms, and (ii) ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
As described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, the DPS Merger was completed on July 9, 2018, and represented aNo change in internal control over financial reporting. Management continues to consolidate and integrate KDP’s system of controls. The processes and controls for significant areas including business combinations, intangibles and goodwill valuations, income taxes, treasury, consolidations and the preparation of financial statements and related disclosures, and entity level controls have been substantially impacted by the ongoing integration activities. The primary changes in these areas are related to the consolidation of process owner leadership and control owners, and where required, the modification of inputs, processes and associated systems. For all areas of change noted, management believes the control design and implementation thereof are being appropriately modified to address underlying risks. The above ongoing integration activities to KDP’sour internal control over financial reporting are reasonably likely to materially affect KDP’s internal control over financial reporting(as defined in 2019.
In addition,Rule 13a-15(f) of the Company adopted ASC 842 as of January 1, 2019. The Company implemented a new IT system and internal controls related to the process of gathering, recording, accounting for and disclosing leases under the new standard.
There were no other changesExchange Act) occurred during the quarter ended June 30, 2019March 31, 2020 that have materially affected, or is reasonably likely to materially affect, our internal controlscontrol over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
We are occasionally subject to litigation or other legal proceedings relating to our business.
See Note 1415 of the Notes to our Unaudited Condensed Consolidated Financial Statements for more information related to commitments and contingencies, which is incorporated herein by reference.
BA Sports Nutrition Litigation
On March 6, 2019, The American Bottling Company ("ABC"), a subsidiaryThere have been no other material changes that we are aware of KDP, filed suit against BA and Mike Repolefrom the legal proceedings set forth in the Superior CourtItem 3 of our Annual Report on Form 10-K for the State of Delaware. The complaint asserts claims for breach of contract and promissory estoppel against BA and asserts a claim for tortious interference against Mr. Repole, in each case in connection with BA's attempted early termination of the distribution contract between BA and ABC. The complaint seeks monetary damages, attorneys' fees and costs. ABC intends to vigorously prosecute the action. The Company is unable to predict the outcome of the lawsuit, the potential recovery, if any, associated with the resolution of the lawsuit or any potential effect it may have on the Company or its operations.year ended December 31, 2019.
ITEM 1A. Risk Factors
Deterioration of general macro-economic conditionsWidespread health developments and economic uncertainty resulting from the recent global COVID-19 pandemic, could have a negative impact onmaterially and adversely affect our business, financial condition and results of operations and liquidity due to impacts on our suppliers, customers and operating costs.operations.
Our business dependshas been, and may continue to be, impacted by the fear of exposure to, or actual effects, of the COVID-19 pandemic in countries where we operate or our customers and suppliers are located, such as recommendations or mandates from governmental authorities to close businesses, limit travel, avoid large gatherings or to self-quarantine, as well as temporary closures or decreased operations of the facilities of our customers, distributors or suppliers. These impacts include, but are not limited to:
Significant reductions in demand or significant volatility in demand for one or more of our products, which may be caused by, among other things: the temporary inability of consumers to purchase our products due to illness, quarantine or other restrictions, store closures, or financial hardship, shifts in demand away from one or more of our higher priced products to lower priced products, or stockpiling or similar activity, reduced options for marketing and promotion of products or other restrictions in connection with the COVID-19 pandemic; if prolonged, such impacts can further increase the difficulty of operating our business, including accurately planning and forecasting;
Inability to meet our consumers' and customers’ needs and achieve cost targets due to disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements, such as raw materials or purchased finished goods, logistics, reduction or loss of workforce due to the insufficiency or failure of our safety protocols, or other manufacturing and distribution capability;
Failure of third parties, including those located in international locations, on developing and maintaining close relationships withwhich we rely, including our suppliers, bottlers, distributors, contract manufacturers, third-party service providers, contractors, commercial banks and on our suppliers’ ability and willingnessexternal business partners, to sell quality productsmeet their obligations to us at favorable prices and terms. Many factors outside our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms. Such factors include a general declinetimely meet those obligations, or significant disruptions in the economy and economic conditions and prolonged recessionary conditions. These events could negatively affect our suppliers’ operations and make it difficult for them to obtain the credit lines or loans necessary to finance their operations in the short-term or long-term and meet our product requirements.
Financial or operational difficulties that some of our suppliers may face, including their ability to do so, which may be caused by their own financial or operational difficulties; or
Significant changes in the conditions in markets in which we manufacture, sell or distribute our products, including quarantines, governmental or regulatory actions, closures or other restrictions that limit or close our operating and manufacturing facilities, restrict our employees’ ability to perform necessary business functions, restrict or prevent consumers from having access working capital,to our products, or otherwise prevent our third-party bottlers, distributors, partners, suppliers, or customers from sufficiently staffing operations, including operations necessary for the production, distribution, sale, and support of our products.
All of these impacts could also increase the cost of the products we purchase from them, the timing of settlement for our obligation to the supplier orplace limitations on our ability to source product from them.execute on our business plan and materially and adversely affect our business, financial condition and results of operations. We might not be ablecontinue to pass our increased costs onto our customersmonitor the situation, have actively implemented policies and procedures to address the extent these difficulties impactsituation, and as the timing of settlement for our obligationpandemic continues to the supplier,further unfold, we may adjust our current policies and procedures as regulations are implemented or more information and guidance become available. The impact of COVID-19 may also exacerbate other risks discussed in Item 1A of our Annual Report, any of which could have a decrease in our cash flow from operationsmaterial effect on us. This situation is changing rapidly and additional impacts may have to use our various financing arrangements for short-term liquidity needs.arise that we are not aware of currently.
There have been no other material changes that we are aware of from the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.Report.
ITEM 6. Exhibits
|
| |
| Separation and Distribution Agreement between Cadbury Schweppes plc and Dr Pepper Snapple Group, Inc. and, solely for certain provisions set forth therein, Cadbury plc, dated as of May 1, 2008 (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (filed on May 5, 2008) and incorporated herein by reference). |
| Agreement and Plan of Merger, dated as of November 21, 2016, by and among Bai Brands LLC, Dr Pepper Snapple Group, Inc., Superfruit Merger Sub, LLC and Fortis Advisors LLC, (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K (filed on November 23, 2016) and incorporated herein by reference). |
| Amendment No. 1, dated as of January 31, 2017, to the Agreement and Plan of Merger, dated as of November 21, 2016, by and among Bai Brands LLC, Dr Pepper Snapple Group, Inc., Superfruit Merger Sub, LLC and Fortis Advisors LLC, (filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K (filed on January 31, 2017) and incorporated herein by reference). |
| Agreement and Plan of Merger, dated as of January 29, 2018, by and among Dr Pepper Snapple Group, Inc., Maple Parent Holdings Corp. and Salt Merger Sub, Inc. (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (filed on January 31, 2018) and incorporated herein by reference). |
| Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference). |
| Certificate of Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 17, 2012 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (filed July 26, 2012) and incorporated herein by reference). |
| Certificate of Second Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 19, 2016 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed May 20, 2016) and incorporated herein by reference). |
| Certificate of Third Amendment to the Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of July 9, 2018 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed July 9, 2018) and incorporate herein by reference). |
| Amended and Restated By-Laws of Dr Pepper Snapple Group, Inc. effective as of January 25, 2016 (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K (filed January 25, 2016) and incorporated herein by reference). |
| Amended and Restated By-Laws of Keurig Dr Pepper Inc. effective as of July 9, 2018 (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K (filed July 9, 2018) and incorporated herein by reference. |
| Indenture, dated April 30, 2008, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). |
| Form of 7.45% Senior Notes due 2038 (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). |
| Registration Rights Agreement, dated April 30, 2008, between Dr Pepper Snapple Group, Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, UBS Securities LLC, BNP Paribas Securities Corp., Mitsubishi UFJ Securities International plc, Scotia Capital (USA) Inc., SunTrust Robinson Humphrey, Inc., Wachovia Capital Markets, LLC and TD Securities (USA) LLC (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). |
| Registration Rights Agreement Joinder, dated May 7, 2008, by the subsidiary guarantors named therein (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference). |
| Supplemental Indenture, dated May 7, 2008, among Dr Pepper Snapple Group, Inc., the subsidiary guarantors named therein and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference). |
| Second Supplemental Indenture dated March 17, 2009, to be effective as of December 31, 2008, among Splash Transport, Inc., as a subsidiary guarantor, Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company's Annual Report on Form 10-K (filed on March 26, 2009) and incorporated herein by reference). |
| Third Supplemental Indenture, dated October 19, 2009, among 234DP Aviation, LLC, as a subsidiary guarantor; Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q (filed November 5, 2009) and incorporated herein by reference). |
| Fourth Supplemental Indenture, dated as of January 31, 2017, among Bai Brands LLC, a New Jersey limited liability company, 184 Innovations Inc., a Delaware corporation (each as a new subsidiary guarantors under the Indenture dated April 30, 2008 (as referenced in Item 4.1 in this Exhibit Index), Dr Pepper Snapple Group, Inc., each other then-existing Guarantor under the Indenture and Wells Fargo, National Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed February 2, 2017) and incorporated herein by reference). |
| Indenture, dated as of December 15, 2009, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference). |
| Second Supplemental Indenture, dated as of January 11, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on January 11, 2011) and incorporated herein by reference). |
|
| |
| Third Supplemental Indenture, dated as of November 15, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference). |
| 2.60% Senior Note due 2019 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference). |
| 3.20% Senior Note due 2021 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference). |
| Fourth Supplemental Indenture, dated as of November 20, 2012, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference). |
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| 2.00% Senior Note due 2020 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference). |
| 2.70% Senior Note due 2022 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference). |
| Fifth Supplemental Indenture, dated as of November 9, 2015, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference). |
| 3.40% Senior Note due 2025 (in global form), dated November 9, 2015, in the principal amount of $500,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference). |
| 4.50% Senior Note due 2045 (in global form), dated November 9, 2015, in the principal amount of $250,000,000 (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference). |
| Sixth Supplemental Indenture, dated as of September 16, 2016, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on September 16, 2016) and incorporated herein by reference). |
| 2.55% Senior Note due 2026 (in global form), dated September 16, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on September 16, 2016) and incorporated herein by reference). |
| Seventh Supplemental Indenture, dated as of December 14, 2016, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| 2.53% Senior Note due 2021 (in global form), dated December 14, 2016, in the principal amount of $250,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| 3.13% Senior Note due 2023 (in global form), dated December 14, 2016, in the principal amount of $500,000,000 (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| 3.43% Senior Note due 2027 (in global form), dated December 14, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| 4.42% Senior Note due 2046 (in global form), dated December 14, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| Eighth Supplemental Indenture, dated as of January 31, 2017, among Bai Brands LLC, a New Jersey limited liability company, 184 Innovations Inc., a Delaware corporation (each as a new subsidiary guarantor under the Indenture dated April 30, 2008 (as referenced in Item 4.1 in this Exhibit Index), Dr Pepper Snapple Group, Inc., each other then-existing Guarantor under the Indenture) and Wells Fargo, National Bank, N.A., as trustee (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on February 2, 2017) and incorporated herein by reference). |
| Ninth Supplemental Indenture, dated as of June 15, 2017, among Dr Pepper Snapple Group, Inc., the guarantors party thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on June 15, 2017) and incorporated herein by reference). |
| Investor Rights Agreement by and among Keurig Dr Pepper Inc. and The Holders Listed on Schedule A thereto, dated as of July 9, 2018 (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Base Indenture, dated as of May 25, 2018 between Maple Escrow Subsidiary and Wells Fargo Bank, N.A. as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| First Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2021 Notes (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
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| Second Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2023 Notes (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Third Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2025 Notes (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Fourth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2028 Notes (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
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| Fifth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2038 Notes (filed as Exhibit 4.6 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Sixth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2048 Notes (filed as Exhibit 4.7 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Seventh Supplemental Indenture, dated as of July 9, 2018, among Keurig Dr Pepper Inc., the subsidiary guarantors thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Registration Rights Agreement, dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., as representative of the several purchasers of the Notes (filed as Exhibit 4.9 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Joinder to the Registration Rights Agreement, dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., as representative of the several purchasers of the Notes (filed as Exhibit 4.10 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Term Loan Agreement,Description of registered securities (filed as Exhibit 4.40 to the Company's Annual Report on Form 10-K (filed on February 27, 2020) and incorporated herein by reference). |
| Tenth Supplemental Indenture (including 3.20% Senior Notes Due 2030 and 3.80% Senior Notes Due 2050 (in global form)), dated as of February 28, 2018,April 13, 2020, among Maple Parent Holdings Corp.Keurig Dr Pepper Inc., the banks partysubsidiary guarantors thereto, and JPMorgan ChaseWells Fargo Bank, N.A., as administrative agenttrustee (filed as Exhibit 10.14.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018)April 13, 2020) and incorporated herein by reference). |
| Term Loan Agreement, dated as of February 8, 2019, among Keurig Dr Pepper Inc., the banks party thereto and JPMorgan Chase, Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on February 11, 2019) and incorporated herein by reference). |
| Credit Agreement, dated as of February 28, 2018, among Maple Parent Holdings Corp., the banks and issuers of credit party thereto and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Borrower Joinder (Term Loan Agreement), dated as of July 9, 2018, among Keurig Dr Pepper Inc., Maple Parent Holdings Corp. and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Borrower Joinder (Credit Agreement), dated as of July 9, 2018, among Keurig Dr Pepper Inc., Maple Parent Holdings Corp. and JPMorgan Chase Bank, N.A. as administrative agent (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Credit Agreement, dated as of May 29, 2019, among Keurig Dr Pepper Inc., the banks party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on May 29, 2019) and incorporated herein by reference).
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| Amended and Restated Employment Agreement, dated as of July 2, 2018, by and between Keurig Green Mountain, Inc. and Robert J. Gamgort (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Employment Agreement, dated as of April 12, 2016, by and between Keurig Green Mountain, Inc. and Ozan Dokmecioglu (filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Matching Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Directors' Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Keurig Dr Pepper Inc. Omnibus Stock Incentive Plan of 2019 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on June 11, 2019) and incorporated herein by reference).++ |
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| Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019.* ++2019 (filed as Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q (filed on August 8, 2019) and incorporated herein by reference).++ |
| Matching Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019.2019 (filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q (filed on August 8, 2019) and incorporated herein by reference).++ |
| Keurig Dr Pepper Inc. Severance Pay Plan for Executives, effective as of January 1, 2020 (filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K (filed on February 27, 2020) and incorporated herein by reference).++ |
| Credit Agreement, dated as of April 14, 2020, among Keurig Dr Pepper Inc., the banks party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on April 15, 2020) and incorporated herein by reference). |
| List of Guarantor Subsidiaries |
| Certification of Chief Executive Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act. |
| Certification of Chief Financial Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act. |
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| Certification of Chief Executive Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| Certification of Chief Financial Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
101* | The following financial information from Keurig Dr Pepper Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019,March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statement of Changes in Stockholders' Equity, and (vi) the Notes to Condensed Consolidated Financial Statements. The Instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
104* | The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL. |
* Filed herewith.
** Furnished herewith.
++ Indicates a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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�� | Keurig Dr Pepper Inc. | |
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| By: | | /s/ Ozan Dokmecioglu | |
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| Name: | | Ozan Dokmecioglu | |
| Title: | | Chief Financial Officer of Keurig Dr Pepper Inc. | |
| | | (Principal Financial Officer) | |
Date: August 8, 2019April 30, 2020 | | | | |