01—Abstract
Summary
Summary of the 10-K filed February 14, 2018. Cited figures are marked; the original filing is the authoritative source.
Dr Pepper Snapple Group, Inc. reported 2017 net sales of $6.69 billiona, up from $6.44 billion in 2016, and net income of $1.08 billion, up from $847 million, with diluted EPS of $5.89 versus $4.54.
Results were driven largely by a $297 millionb income tax benefit from the Tax Cuts and Jobs Act, which increased diluted EPS by $1.62, and by the January 31, 2017 Bai Brands Merger, which decreased diluted EPS by $0.26 in total. Income from operations fell 3% to $1.388 billion, reflecting higher SG&A expenses tied to the Bai acquisition. Total indebtedness was $4.479 billion at year-end.
The dominant event for investors is the January 29, 2018 Merger Agreement with Maple Parent Holdings Corp., owner of Keurig Green Mountain, Inc. Upon closing, Maple Parent's stockholders will own approximately 87% of the combined company, now named Keurig Dr Pepper Inc., and DPS stockholders approximately 13% on a fully diluted basis. DPS will pay a special cash dividend of $103.75c per share, and the transaction requires stockholder approval, regulatory clearances, and a condition that post-closing total indebtedness not exceed $16.9 billion. Termination fees of $700 million apply in specified circumstances.
KDP will be a controlled company under NYSE rules. Standalone, the company reports a strong brand portfolio, with a #1 position in U.S. flavored CSDs, and 2017 net sales split 90% U.S., 7% Mexico and the Caribbean, and 3% Canada. Share repurchases were suspended during the Keurig negotiations, and the company's Board declared dividends of $2.32d per share for 2017.
02—Key points
Key Highlights
- Net income rose to $1.076 billion in 2017 from $847 million in 2016, helped by a $297 million income tax benefit from the TCJA; the effective tax rate fell to 8.1% from 33.8%.
- Net sales increased 4% to $6.69 billion, including $64 million of acquired Bai Brands shipments to third parties since the January 31, 2017 merger.
- Gross margin was 59.7% versus 59.9% in 2016, while SG&A expenses rose $227 million to $2.556 billion, primarily due to the Bai Brands Merger.
- Proposed Keurig transaction: Maple Parent holders will own about 87% of the combined company, with DPS stockholders retaining about 13%, plus a $103.75 per share special cash dividend to DPS holders.
- Transaction risks include a $700 million termination fee payable in specified circumstances, a closing condition that total indebtedness not exceed $16.9 billion, and a possible credit rating downgrade below investment grade that could require repurchase of senior notes at 101% of principal.
- Share repurchases were suspended under the Merger Agreement, and the company is restricted to the quarterly dividend payable April 12, 2018 and the special dividend.
- Debt totaled $4.479 billion at December 31, 2017; cash and cash equivalents fell to $61 million from $1.787 billion after the Bai Brands acquisition.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Keurig Dr Pepper kept $0.06.
- Revenue$6.69B100.0%
- Cost of revenue−$4.65B69.4%
- Gross profit$2.04B30.6%
- Operating costs−$1.15B17.1%
- Operating income$897.0M13.4%
- Interest, other & tax−$519.0M7.8%
- Net income$378.0M5.7%
Where FY2017 revenue went
$6.69B- Cost of revenue: $2.69B, 40% of revenue
- Other operating costs: $1.90B, 28% of revenue
- SG&A: $1.15B, 17% of revenue
- Net income: $378.0M, 5.7% of revenue
- R&D: $56.0M, 0.8% of revenue
- Interest, other & tax: $519.0M, 7.8% of revenue
Kept 5.7% as net incomeR&D $56.0M · 0.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 14, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $6.69B$6.44B | +3.9% |
| Cost of Revenue | $2.69B$2.58B | +4.4% |
| Gross Profit | $2.04B$3.86B | −47.0% |
| R&D Expenses | $56.00M$20.00M | +180.0% |
| SG&A Expenses | $1.15B$2.33B | −50.8% |
| Operating Income | $897.00M$1.43B | −37.4% |
| Interest Expense | $101.00M$147.00M | −31.3% |
| Net Income | $378.00M$847.00M | −55.4% |
| EPS (Basic) | $0.48$4.57 | −89.5% |
| EPS (Diluted) | $0.47$4.54 | −89.6% |
| Shares Outstanding (Basic) | 790.50M185.40M | +326.4% |
| Shares Outstanding (Diluted) | 790.50M186.60M | +323.6% |
05—Questions
Frequently Asked Questions
What happens to DPS stockholders if the Keurig transaction closes?
DPS stockholders will remain stockholders of the renamed Keurig Dr Pepper Inc., owning approximately 13% of the outstanding common stock on a fully diluted basis, while former Maple Parent stockholders will own about 87%. Each DPS stockholder will also receive a special cash dividend of $103.75 per share, subject to required tax withholding, payable to holders as of the business day before completion.
What approvals and conditions must be met for the transaction to close?
The transaction requires approval by DPS stockholders of an amendment to increase authorized shares and change the company's name, and of the issuance of the Acquisition Shares. It also requires regulatory approvals, including expiration or early termination of HSR Act waiting periods, the NYSE listing of the Acquisition Shares, and no injunction. DPS's obligation to close is conditioned on total indebtedness, excluding capital leases, not exceeding $16.9 billion after giving effect to the transaction and related financings.
What drove the large jump in 2017 net income?
The Tax Cuts and Jobs Act produced a $297 million income tax benefit, primarily from revaluing deferred tax liabilities, which increased diluted EPS by $1.62. The adoption of ASU 2016-09 added a $19 million tax benefit. Income from operations actually decreased 3%, to $1.388 billion.
What are the financing and termination costs if the deal fails?
DPS would pay Maple Parent a termination fee of $700 million in specified circumstances, such as accepting a superior proposal or a change in board recommendation. Maple Parent would pay DPS a $700 million reverse termination fee if it cannot obtain the required financing. DPS has also agreed to pay a financial advisor a fee of approximately $50 million, of which $5 million related to the fairness opinion.
How concentrated are DPS's customers and brands?
Walmart was the largest customer, representing approximately 13% of consolidated net sales in 2017, and about 16% of Packaged Beverages segment net sales and 12% of Latin America Beverages segment net sales. Dr Pepper was the largest brand, and about 83% of bottler case sales volume came from brands ranked #1 or #2 in their category.
06—Continue