01—Abstract
Summary
Summary of the 10-K filed February 28, 2019. Cited figures are marked; the original filing is the authoritative source.
Keurig Dr Pepper Inc. (KDP) reports its 2018 Annual Report on Form 10-K following the July 9, 2018 merger of Dr Pepper Snapple Group, Inc. (DPS) and Maple Parent Holdings Corp. (Keurig Green Mountain).
Maple was the accounting acquirer, so 2018 net sales were $7,442 milliona, up from $4,226 million for the calendar year 2017 on a comparable basis as presented, and income from operations was $1,237 million. Net income attributable to KDP was $586 million, or $0.53 per diluted share, compared with $847 million, or $1.07 per diluted share, in 2017; the decline was driven mainly by the prior-year income tax benefit from the Tax Cuts and Jobs Act and higher interest, transaction and restructuring charges tied to the merger. On an adjusted pro forma basis, net sales rose 2.3% to $11,024 million and adjusted pro forma diluted EPS increased 22.4% to $1.04.
The company's four segments are Beverage Concentrates ($669 millionb net sales), Packaged Beverages ($2,415 million), Latin America Beverages ($244 million) and Coffee Systems ($4,114 million). Coffee Systems generated the largest share of 2018 income from operations at $1,163 million. Walmart was the largest customer, representing approximately 14% of consolidated net sales.
Total assets were $48,918 millionc, including goodwill of $20,011 million and other intangible assets of $23,967 million, and total stockholders' equity was $22,533 million. JAB Holding Company, through Maple Holdings B.V., owns approximately 72% of the fully diluted shares, and the company is a controlled company under NYSE rules. On the cash and debt side, net cash provided by operating activities was $1,613 million in 2018.
Senior unsecured notes totaled $12,019 milliond carrying value at year-end, and the company paid down approximately $938 million of its term loan, commercial paper and revolver after the merger. Moody's (Baa2, negative outlook) and S&P (BBB, stable) rated the company's debt as investment grade. Management guided to 2019 adjusted diluted EPS growth of 15% to 17% (or $1.20 to $1.22), net sales growth of about 2%, and $200 million of merger synergies.
02—Key points
Key Highlights
- Transformational merger: DPS merged with Maple (Keurig) on July 9, 2018; Maple's shareholders own about 87% of KDP on a fully diluted basis, and KDP paid a $103.75 per share special cash dividend.
- 2018 net sales of $7,442 million and income from operations of $1,237 million (16.6% of net sales); net income attributable to KDP of $586 million, or $0.53 per diluted share, down from $847 million in 2017 due to the 2017 TCJA tax benefit and merger-related costs.
- Adjusted pro forma net sales grew 2.3% to $11,024 million and adjusted pro forma diluted EPS rose 22.4% to $1.04, with adjusted pro forma operating margin of 23.8%.
- Coffee Systems was the largest segment with $4,114 million of net sales and $1,163 million of income from operations; K-Cup pod revenue represented approximately 43% of the hot business's net revenue.
- Total assets of $48,918 million, including $20,011 million of goodwill and $23,967 million of other intangible assets, leaving the balance sheet heavily weighted toward intangibles.
- Leverage and liquidity: $12,019 million of senior unsecured notes, about $938 million of debt repaid after the merger, and investment-grade ratings from Moody's (Baa2, negative outlook) and S&P (BBB, stable).
- JAB Holding Company's affiliate owns approximately 72% of fully diluted shares, making KDP a controlled company under NYSE rules with reduced governance requirements.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Keurig Dr Pepper kept $0.08.
- Revenue$7.44B100.0%
- Cost of revenue−$3.56B47.8%
- Gross profit$3.88B52.2%
- Operating costs−$2.65B35.5%
- Operating income$1.24B16.6%
- Interest, other & tax−$651.0M8.7%
- Net income$586.0M7.9%
Where FY2018 revenue went
$7.44B- Cost of revenue: $3.56B, 48% of revenue
- SG&A: $2.63B, 35% of revenue
- Net income: $586.0M, 7.9% of revenue
- R&D: $64.0M, 0.9% of revenue
- Interest, other & tax: $651.0M, 8.7% of revenue
Kept 7.9% as net incomeNet income $586.0M · 7.9%R&D $64.0M · 0.9%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 28, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $7.44B$6.69B | +11.2% |
| Cost of Revenue | $3.56B$2.69B | +32.1% |
| Gross Profit | $3.88B$2.04B | +89.9% |
| R&D Expenses | $64.00M$56.00M | +14.3% |
| SG&A Expenses | $2.63B$1.15B | +129.7% |
| Operating Income | $1.24B$897.00M | +37.9% |
| Interest Expense | $401.00M$101.00M | +297.0% |
| Net Income | $586.00M$378.00M | +55.0% |
| EPS (Basic) | $0.54$0.48 | +12.5% |
| EPS (Diluted) | $0.53$0.47 | +12.8% |
| Shares Outstanding (Basic) | 1.09B790.50M | +37.4% |
| Shares Outstanding (Diluted) | 1.10B790.50M | +38.8% |
05—Questions
Frequently Asked Questions
Who controls Keurig Dr Pepper and what does that mean for public shareholders?
JAB, through its affiliate Maple Holdings B.V., owns approximately 72% of the fully diluted shares. This gives JAB significant influence over stockholder votes, including director elections and significant transactions such as a merger or sale. KDP qualifies as a controlled company under NYSE rules, so it is exempt from requirements such as a majority-independent board and independent compensation and nominating processes, although its audit committee is composed entirely of independent directors.
Why did 2018 net income fall compared with 2017?
Net income attributable to KDP decreased $261 million to $586 million, or $0.53 per diluted share, from $847 million, or $1.07 per diluted share. The filing attributes this mainly to the unfavorable comparison with the 2017 income tax benefit related to the TCJA, along with higher interest expense, transaction costs, and restructuring and integration charges associated with the DPS Merger, partially offset by the incremental income from operations of the merger.
What are the company's key customer and concentration risks?
Walmart was the largest retailer, representing approximately 14% of consolidated net sales in 2018. The filing also notes that PepsiCo and Coca-Cola affiliated bottler systems are a small number of customers for Beverage Concentrates, with about 60% of Dr Pepper, Schweppes and Crush finished goods volume distributed through those systems. Walmart is the largest customer of Packaged Beverages, and Walmart and Costco are significant to Coffee Systems.
What is the outlook for 2019 provided in the filing?
KDP expects adjusted diluted EPS growth of 15% to 17%, or $1.20 to $1.22. Supporting expectations include net sales growth of approximately 2%, merger synergies of $200 million, other expense of about $30 million, an adjusted effective tax rate of 25.0% to 25.5%, adjusted interest expense of $570 million to $590 million, and roughly 1,420 million shares outstanding.
What were the notable events after year-end 2018?
In January 2019, KDP repaid its 2019 Notes at maturity using commercial paper and made voluntary prepayments on its term loan. On February 8, 2019, it refinanced the KDP Term Loan with a new $2 billion term loan agreement to achieve a more favorable interest rate. The company also agreed on February 15, 2019 to lease a new Texas headquarters building in Frisco, and the filing discloses a malware attack on Coffee Systems business networks in February 2019.
06—Continue