01—Abstract
Summary
Summary of the 10-K filed February 27, 2020. Cited figures are marked; the original filing is the authoritative source.
Keurig Dr Pepper Inc. (KDP) reported net sales of $11.12 billiona for the year ended December 31, 2019, up from $7.44 billion in 2018, primarily driven by the incremental impact of the DPS Merger completed on July 9, 2018.
Net income attributable to KDP was $1.25 billionb, or $0.88 diluted EPS, compared with $586 million, or $0.53, in 2018. On an adjusted basis, diluted EPS rose 17.3% to $1.22, and adjusted income from operations increased 10.3% to $2.89 billion, with adjusted operating margin expanding 220 bps to 26.0%. Operating cash flow was $2.47 billion, and the company repaid approximately $1.29 billion of senior notes, term loans and commercial paper during 2019.
Management guided for 2020 net sales growth of 3.0% to 4.0%, adjusted diluted EPS of $1.38 to $1.40c (13% to 15% growth), $200 million of merger synergies, and a management leverage ratio of 3.5x to 3.8x by year-end. The company's balance sheet carries $11.975 billion of senior unsecured notes and total assets of $49.52 billion, with goodwill and other intangibles making up most of that figure. JAB Holding Company owns approximately 66% of fully diluted shares, making KDP a controlled company.
Key risks highlighted include customer concentration (Walmart represented approximately 13%d of consolidated net sales in 2019), dependence on K-Cup pods (about 80% of Coffee Systems net sales), declining CSD demand as consumers shift to NCBs, intangible asset impairment risk, and the leverage created by the merger. The filing also discloses a pending lawsuit by ABC against BodyArmor and a Proposition 65 acrylamide case, for which the company says it cannot estimate potential loss.
02—Key points
Key Highlights
- Net sales rose 49.4% to $11.12 billion in 2019, driven mainly by the full-year effect of the DPS Merger completed July 9, 2018.
- Net income attributable to KDP was $1.25 billion ($0.88 diluted EPS) versus $586 million ($0.53) in 2018; adjusted diluted EPS grew 17.3% to $1.22.
- Adjusted operating margin expanded 220 bps to 26.0%, with adjusted income from operations of $2.89 billion, up 10.3%.
- Coffee Systems remains the largest segment at $4.23 billion of net sales; K-Cup pods were approximately 80% of its net sales and Keurig is the #1 single serve brewing system in the U.S. and Canada.
- Operating cash flow was $2.47 billion, and the company made net debt repayments of approximately $1.29 billion, reducing senior notes, term loans and commercial paper.
- 2020 guidance calls for net sales growth of 3.0% to 4.0%, adjusted diluted EPS of $1.38 to $1.40, and $200 million of merger synergies.
- JAB Holding Company owns approximately 66% of fully diluted shares, so KDP is a controlled company exempt from certain NYSE governance requirements.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Keurig Dr Pepper kept $0.11.
- Revenue$11.12B100.0%
- Cost of revenue−$4.78B43.0%
- Gross profit$6.34B57.0%
- Operating costs−$3.96B35.6%
- Operating income$2.38B21.4%
- Interest, other & tax−$1.12B10.1%
- Net income$1.25B11.3%
Where FY2019 revenue went
$11.12B- Cost of revenue: $4.78B, 43% of revenue
- SG&A: $3.96B, 36% of revenue
- Net income: $1.25B, 11% of revenue
- R&D: $81.0M, 0.7% of revenue
- Interest, other & tax: $1.12B, 10% of revenue
Kept 11% as net incomeNet income $1.25B · 11%R&D $81.0M · 0.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 27, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $11.12B$7.44B | +49.4% |
| Cost of Revenue | $4.78B$3.56B | +34.2% |
| Gross Profit | $6.34B$3.88B | +63.4% |
| R&D Expenses | $81.00M$64.00M | +26.6% |
| SG&A Expenses | $3.96B$2.63B | +50.4% |
| Operating Income | $2.38B$1.24B | +92.2% |
| Interest Expense | $654.00M$401.00M | +63.1% |
| Net Income | $1.25B$586.00M | +114.0% |
| EPS (Basic) | $0.89$0.54 | +64.8% |
| EPS (Diluted) | $0.88$0.53 | +66.0% |
| Shares Outstanding (Basic) | 1.41B1.09B | +29.5% |
| Shares Outstanding (Diluted) | 1.42B1.10B | +29.3% |
05—Questions
Frequently Asked Questions
What drove the large increase in 2019 net sales and net income?
The filing attributes the increase primarily to the incremental impact of the DPS Merger, which was completed on July 9, 2018 and therefore contributed only partial-year results in 2018. Net sales rose $3.68 billion to $11.12 billion, and net income attributable to KDP rose $668 million to $1.25 billion, helped by the favorable comparison to $158 million of DPS Merger transaction costs and a $131 million inventory step-up in 2018.
How concentrated is KDP's customer base?
The filing states that Walmart was the company's largest retailer, representing approximately 13% of consolidated net sales in 2019, and that Walmart and Costco were the largest customers of Coffee Systems. Walmart and Costco are also major customers for other segments, and the filing notes that losing one of the major customers in each segment could have a material adverse effect on that segment.
What is the company's debt position and how is it managing leverage?
Senior unsecured notes carried a principal amount of $11.975 billion at year-end 2019, and the company had a total carrying value of $1.593 billion in short-term borrowings and $12.827 billion in long-term obligations. Management expects a leverage ratio of 3.5x to 3.8x as of December 31, 2020, and adjusted interest expense of $530 million to $545 million. The company repaid $250 million of notes in January 2020 and expects to benefit from unwinding interest rate swaps.
What legal matters could affect investors?
The filing describes an ongoing antitrust multidistrict litigation regarding Keurig single-serve coffee, a Canadian claim by Club Coffee seeking CDN $600 million, and a Proposition 65 acrylamide lawsuit in California. KDP states it cannot predict the outcome or estimate potential loss for these matters. It also describes its own lawsuit against BodyArmor and Mike Repole, which the court has allowed to proceed past a motion to dismiss, and says it cannot predict that outcome either.
06—Continue