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Keurig Dr Pepper Reports Strong Third Quarter Results
Company expects Full-Year 2020 Net Sales and Adjusted Diluted EPS at the High End of its Guidance

BURLINGTON, Mass. and PLANO, Texas, Oct. 29, 2020 /PRNewswire/ -- Keurig Dr Pepper Inc. (NASDAQ: KDP) today reported strong financial results for the third quarter ended September 30, 2020 and strengthened guidance for the full year.

On a GAAP basis, net sales in the third quarter of 2020 increased 5.2% and diluted earnings per share totaled $0.31, compared to $0.21 in the year-ago period. Constant currency net sales in the third quarter advanced 5.8% versus year ago and Adjusted1 diluted EPS grew 22% to $0.39.

Commenting on the announcement, Chairman and CEO Bob Gamgort stated, "Since the beginning of the pandemic, our broad beverage portfolio, unique route to market capabilities and resilient and dedicated team members have enabled KDP to successfully navigate through the challenging and volatile operating environment.  In Q3, we delivered another strong quarter, marked by accelerated growth in net sales, adjusted operating income and EPS, while continuing to post strong market share growth across our portfolio and reducing our management leverage ratio.  As a result, we're confident in our ability to deliver 2020 at the high-end of our guidance, while reinvesting any upside performance in brand marketing and innovation."  

Third Quarter Consolidated Results
Net sales for the third quarter of 2020 increased 5.2% to $3.02 billion, compared to $2.87 billion in the year-ago period.  On a constant currency basis, net sales advanced 5.8%, reflecting strong volume/mix growth of 6.6%, partially offset by lower net price realization of 0.8%. COVID-19 continued to have a significant impact on the beverage industry, requiring KDP to navigate the challenging environment to deliver growth in the quarter. Highlights of net sales performance by segment include:

  • Coffee Systems: Double-digit dollar growth in K-Cup coffee pods for at-home consumption was partially offset by weakness in the office coffee channel, as elevated work-from-home trends persisted throughout the quarter. Keurig brewers posted exceptional growth, driven by successful innovation and retailer inventory stocking ahead of the holiday season.
  • Packaged Beverages: Broad-based market share expansion drove net sales in the majority of the segment's portfolio. Growth in large-format channels continued to be strong, and performance in the convenience and gas channels improved sequentially during the quarter, as consumer mobility increased.
  • Beverage Concentrates: Performance improved significantly from the previous quarter, declining slightly versus the prior year, reflecting a sequential reopening of quick-serve and other fast-casual restaurants, which are serviced by the fountain foodservice component of the business.
  • Latin America Beverages: Modest constant currency growth reflected sequential improvements in consumer mobility in Mexico.

KDP in-market performance2 in tracked channels for the third quarter of 2020 continued to be very strong, with market share advancing in more than 90% of the Company's liquid refreshment beverages retail base, including CSDs3, premium unflavored water, shelf stable fruit drinks, shelf stable vegetable juice and shelf stable apple juice and apple sauce. This performance reflected the strength of Dr Pepper, A&W and Canada Dry CSDs, CORE hydration and evian premium water, Snapple teas and juice drinks, Clamato vegetable juice and Motts apple juice and apple sauce. In coffee, retail consumption of single-serve pods manufactured by KDP grew 10.1% in IRi tracked channels, with dollar market share of KDP manufactured pods remaining strong at 82% and KDP's owned and licensed brand portfolio posting improving share trends.  

GAAP operating income increased 29.8% to $753 million in the third quarter of 2020, compared to $580 million in the year-ago period, reflecting the benefits of the strong growth in net sales, lower discretionary expenses, including marketing, continued productivity and merger synergies. Partially offsetting these factors were higher operating expenses associated with the increased consumer demand, inflation in logistics and the unfavorable year-over-year impact of items affecting comparability, including certain COVID-19 related expenses.  Excluding items affecting comparability, Adjusted operating income increased 15.9% to $874 million, compared to $754 million in the year-ago period, and Adjusted operating margin advanced 260 basis points to 28.9%.  On a constant currency basis, Adjusted operating income grew 16.3%.  

The COVID-19 related operating costs incurred in the third quarter of 2020 totaled $49 million, all of which were recognized as items affecting comparability, consisted of temporary compensation increases and incentives for front-line employees, as well as incremental safety and sanitation expenses.

GAAP net income in the third quarter of 2020 increased 45.7% to $443 million, or $0.31 per diluted share, compared to GAAP net income of $304 million, or $0.21 per diluted share, in the year-ago period, reflecting the strong growth in operating income, lower interest expense and a lower effective tax rate reflecting comparison to favorable discrete tax items and valuation adjustments in the prior year period, as well as the favorable year-over-year impact of items affecting comparability, which included a $12 million non-cash impairment on equity investments in the current quarter. Excluding items affecting comparability, Adjusted net income advanced 23.5% in the third quarter of 2020 to $557 million, compared to $451 million in the year-ago period. This performance reflected the growth in Adjusted operating income, continued deleveraging and a lower Adjusted effective tax rate.  Adjusted diluted EPS advanced 22% to $0.39, compared to $0.32 in the year-ago period.

The Company generated strong free cash flow totaling $525 million in the third quarter of 2020, enabling KDP to reduce bank debt by approximately $225 million. The Company's management leverage ratio declined from 4.8x at the end of the third quarter of 2019 to 3.8x at the end of the third quarter of 2020, primarily driven by ongoing debt reduction and earnings growth. Since the close of the merger in July 2018, KDP's management leverage ratio has declined 2.2x.

______________________________

1 Adjusted financial metrics used in this release are non-GAAP. See reconciliations of GAAP results to Adjusted results in the accompanying tables.
2 In-market performance (retail consumption; market share) based on Keurig Dr Pepper's custom IRi category definitions.
3  CSD refers to "Carbonated Soft Drink".

Third Quarter Segment Results

Coffee Systems
Net sales for the third quarter of 2020 increased 3.0% to $1.10 billion, compared to $1.07 billion in the year-ago period, primarily reflecting higher volume/mix of 6.0%, partially offset by lower net price realization of 2.8%, primarily due to strategic pricing for pods. Also impacting the net sales performance was unfavorable foreign currency translation of 0.2%.  On a constant currency basis, net sales increased 3.2% in the quarter.

The volume/mix increase of 6.0% in the quarter reflected pod volume growth of 2.4%, driven by double-digit at-home consumption, significantly offset by continued softness in the away-from-home business, as return to offices and hospitality remained depressed.  Brewer volume was exceptionally strong, increasing 34% in the quarter. Driving this performance were successful innovation introduced over the past two years and continued marketing focused on growing household penetration, as well as increased brewer shipments to retailers for the upcoming holiday season.

Operating income increased 3.2% to $320 million in the third quarter of 2020, compared to $310 million in the year-ago period, reflecting the benefits of the net sales growth and continued productivity and merger synergies, partially offset by unfavorable margin mix related to the exceptionally strong brewer growth and the unfavorable year-over-year impact of items affecting comparability, including costs totaling $12 million  related to COVID-19.  Excluding these and other items affecting comparability, Adjusted operating income in the quarter increased 1.6% to $373 million, compared to $367 million in the year-ago period, and Adjusted operating margin declined 50 basis points to 34.0%.

Packaged Beverages
Net sales for the third quarter of 2020 advanced 10.7% to $1.45 billion, compared to $1.31 billion in the year-ago period, reflecting strong volume/mix growth of 11.4%, partially offset by lower net price realization of 0.7%.  The net sales performance was driven by market share growth across the portfolio with particular strength in CSDs, premium unflavored water, juice and juice drinks, apple sauce and mixers, partially offset by enhanced flavored premium water, due to continued softness in convenience and gas channels.  

Driving the net sales performance in the quarter were Dr Pepper, including the recently launched Dr Pepper & Cream Soda, and Canada Dry, including the recently launched Canada Dry Bold. Also contributing to the net sales growth were A&W, Snapple, Motts, 7UP, CORE, Sunkist, Squirt, Clamato, Real Lemon and mixers, partially offset by a decline in Bai.

Operating income increased 32.7% to $260 million in the third quarter of 2020, compared to $196 million in the year-ago period, reflecting the strong net sales growth, lower discretionary expenses, including marketing, and continued productivity and merger synergies. These growth drivers were partially offset by higher operating costs to meet the strong consumer demand and inflation in logistics, as well as the unfavorable year-over-year impact of items affecting comparability, including costs totaling $36 million related to COVID-19.  Excluding these and other items affecting comparability, Adjusted operating income increased 51% to $304 million, compared to $201 million in the year-ago period, and Adjusted operating margin advanced 560 basis points to 21.0%.

Beverage Concentrates
Net sales for the third quarter of 2020 decreased 2.2% to $352 million, compared to $360 million in the year-ago period, reflecting unfavorable volume/mix of 4.8%, partially offset by higher net price realization of 2.6%.

The volume/mix performance, while still negatively impacted by COVID-19, improved significantly on a sequential basis in the quarter, reflecting a modest reopening of quick-serve and other fast-casual restaurants.

Total shipment volume versus year-ago declined 3.9% in the third quarter of 2020, primarily reflecting the impact of COVID-19 on the fountain foodservice business, with Dr Pepper and Crush the most impacted. Bottler case sales decreased 1.6% in the third quarter of 2020.

Operating income increased 6.9% to $262 million in the third quarter of 2020, compared to $245 million in the year-ago period, reflecting lower discretionary expenses, including marketing, partially offset by the net sales performance and the unfavorable year-over-year impact of items affecting comparability. Excluding items affecting comparability, Adjusted operating income increased 8.6% to $265 million, compared to $244 million in the year-ago period, resulting in Adjusted operating margin growth of 750 basis points versus year-ago to 75.3%.

Latin America Beverages
Net sales for the third quarter of 2020 decreased 10.1% to $124 million, compared to net sales of $138 million in the year-ago period, primarily reflecting the unfavorable impact of foreign currency translation. On a constant currency basis, net sales increased 0.7% in the quarter, reflecting net price realization of 5.2%, partially offset by a 4.5% decline in volume/mix, largely related to COVID-19.

Operating income of $25 million in the third quarter of 2020 was even with year-ago, reflecting continued productivity and lower marketing expense, offset by foreign currency transaction expense. Operating margin increased 210 basis points versus year-ago to 20.2%.  On a constant currency basis, Operating income increased 12.0% over the year-ago period.

KDP Outlook for 2020
KDP net sales and Adjusted diluted EPS growth for the first nine months of 2020 were 3.8% and 16%, respectively.  As a result, KDP expects constant currency net sales growth for the full year at the high end of its 3% to 4% guidance range. The Company also expects Adjusted diluted EPS growth for the full year at the high end of its 13% to 15% guidance range, or $1.38 to $1.40 per diluted share.  The Company intends to invest any upside performance in marketing and innovation. Finally, the Company now expects its management leverage ratio in the middle of its of 3.5x to 3.8x range by year end 2020 and continues to expect its management leverage ratio to be below 3.0x within two to three years of the July 2018 merger closing.

KDP Investor Contacts:
Tyson Seely
T: 781-418-3352 / tyson.seely@kdrp.com

Steve Alexander
T: 972-673-6769 / steve.alexander@kdrp.com

KDP Media Contact:
Katie Gilroy
T: 781-418-3345 / katie.gilroy@kdrp.com

About Keurig Dr Pepper
Keurig Dr Pepper (KDP) is a leading beverage company in North America, with annual revenue in excess of $11 billion and nearly 26,000 employees. KDP holds leadership positions in soft drinks, specialty coffee and tea, water, juice and juice drinks and mixers, and markets the #1 single serve coffee brewing system in the U.S. and Canada. The Company's portfolio of more than 125 owned, licensed and partner brands is designed to satisfy virtually any consumer need, any time, and includes Keurig®, Dr Pepper®, Green Mountain Coffee Roasters®, Canada Dry®, Snapple®, Bai®, Mott's®, CORE® and The Original Donut Shop®. Through its powerful sales and distribution network, KDP can deliver its portfolio of hot and cold beverages to nearly every point of purchase for consumers.  The Company is committed to sourcing, producing and distributing its beverages responsibly through its Drink Well. Do Good. corporate responsibility platform, including efforts around circular packaging, efficient natural resource use and supply chain sustainability.  For more information, visit, www.keurigdrpepper.com.

FORWARD LOOKING STATEMENTS
Certain statements contained herein are "forward-looking statements" within the meaning of applicable securities laws and regulations. These forward-looking statements can generally be identified by the use of words such as "outlook," "guidance," "anticipate," "expect," "believe," "could," "estimate," "feel," "forecast," "intend," "may," "plan," "potential," "project," "should," "target," "will," "would," and similar words, phrases or expressions and variations or negatives of these words, although not all forward-looking statements contain these identifying words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements regarding the estimated or anticipated future results of the combined company following the combination of Keurig Green Mountain, Inc. ("KGM") and Dr Pepper Snapple Group, Inc. ("DPS" and such combination, the "transaction"), the anticipated benefits of the transaction, including estimated synergies and cost savings, the long-term merger targets, and other statements that are not historical facts. These statements are based on the current expectations of our management and are not predictions of actual performance.

These forward-looking statements are subject to a number of risks and uncertainties regarding the company's business and the transaction and actual results may differ materially. These risks and uncertainties include, but are not limited to: (i) the impact the significant additional debt incurred in connection with the transaction may have on our ability to operate our business, (ii) risks relating to the integration of the KGM and DPS operations, products and employees into the combined company and assumption of certain potential liabilities of KGM and the possibility that the anticipated synergies and other benefits of the transaction, including cost savings, will not be realized or will not be realized within the expected timeframe, (iii) the impact of the global COVID-19 pandemic, and (iv) risks relating to the businesses and the industries in which our combined company operates. These risks and uncertainties, as well as other risks and uncertainties, are more fully discussed in the Company's filings with the SEC, including our Annual Report on Form 10-K and subsequent filings. While the lists of risk factors presented here and in our public filings are considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Any forward-looking statement made herein speaks only as of the date of this document. We are under no obligation to, and expressly disclaim any obligation to, update or alter any forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required by applicable laws or regulations.

NON-GAAP FINANCIAL MEASURES
This release includes certain non-GAAP financial measures including Adjusted operating income, Adjusted net income, Adjusted diluted EPS and Free Cash Flow, which differ from results using U.S. Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures should be considered as supplements to the GAAP reported measures, should not be considered replacements for, or superior to, the GAAP measures and may not be comparable to similarly named measures used by other companies. Non-GAAP financial measures typically exclude certain charges, including one-time costs related to the transaction and integration activities, which are not expected to occur routinely in future periods. The Company uses non-GAAP financial measures internally to focus management on performance excluding these special charges to gauge our business operating performance. Management believes this information is helpful to investors because it increases transparency and assists investors in understanding the underlying performance of the Company and in the analysis of ongoing operating trends. Additionally, management believes that non-GAAP financial measures are frequently used by analysts and investors in their evaluation of companies, and continued inclusion provides consistency in financial reporting and enables analysts and investors to perform meaningful comparisons of past, present and future operating results. The most directly comparable GAAP financial measures and reconciliations to non-GAAP financial measures are set forth in the appendix to this release and included in the Company's filings with the SEC.

To the extent that the Company provides guidance, it does so only on a non-GAAP basis and does not provide reconciliations of such forward-looking non-GAAP measures to GAAP due to the inability to predict the amount and timing of impacts outside of the Company's control on certain items, such as non-cash gains or losses resulting from mark-to-market adjustments of derivative instruments, among others.

 

KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Third Quarter and First Nine Months of 2020 and 2019
(Unaudited, in millions, except per share data)

       
 

Third Quarter

 

First Nine Months

(in millions, except per share data)

2020

 

2019

 

2020

 

2019

Net sales

$

3,020

   

$

2,870

   

$

8,497

   

$

8,186

 

Cost of sales

1,316

   

1,245

   

3,779

   

3,537

 

Gross profit

1,704

   

1,625

   

4,718

   

4,649

 

Selling, general and administrative expenses

949

   

1,012

   

2,978

   

2,951

 

Other operating expense (income), net

2

   

33

   

(40)

   

33

 

Income from operations

753

   

580

   

1,780

   

1,665

 

Interest expense

148

   

158

   

458

   

497

 

Loss on early extinguishment of debt

   

   

4

   

9

 

Impairment on investments and note receivable

16

   

   

102

   

 

Other expense, net

5

   

9

   

21

   

15

 

Income before provision for income taxes

584

   

413

   

1,195

   

1,144

 

Provision for income taxes

141

   

109

   

298

   

296

 

Net income

$

443

   

$

304

   

$

897

   

$

848

 

Less: Net income attributable to non-controlling interest

   

   

   

 

Net income attributable to KDP

$

443

   

$

304

   

$

897

   

$

848

 
               

Earnings per common share:

             

Basic

$

0.31

   

$

0.22

   

$

0.64

   

$

0.60

 

Diluted

0.31

   

0.21

   

0.63

   

0.60

 

Weighted average common shares outstanding:

             

Basic

1,407.3

   

1,406.8

   

1,407.2

   

1,406.6

 

Diluted

1,422.9

   

1,419.4

   

1,421.5

   

1,418.8

 

 

 

 

 

KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2020 and December 31, 2019
(Unaudited, in millions, except shares and per share data)

       
 

September 30,

 

December 31,

(in millions, except share and per share data)

2020

 

2019

Assets

 

Current assets:

     

Cash and cash equivalents

$

191

   

$

75

 

Restricted cash and restricted cash equivalents

27

   

26

 

Trade accounts receivable, net

1,051

   

1,115

 

Inventories

824

   

654

 

Prepaid expenses and other current assets

323

   

403

 

Total current assets

2,416

   

2,273

 

Property, plant and equipment, net

2,092

   

2,028

 

Investments in unconsolidated affiliates

90

   

151

 

Goodwill

20,029

   

20,172

 

Other intangible assets, net

23,834

   

24,117

 

Other non-current assets

889

   

748

 

Deferred tax assets

31

   

29

 

Total assets

$

49,381

   

$

49,518

 

Liabilities and Stockholders' Equity

     

Current liabilities:

     

Accounts payable

$

3,517

   

$

3,176

 

Accrued expenses

1,067

   

939

 

Structured payables

160

   

321

 

Short-term borrowings and current portion of long-term obligations

2,182

   

1,593

 

Other current liabilities

403

   

445

 

Total current liabilities

7,329

   

6,474

 

Long-term obligations

11,707

   

12,827

 

Deferred tax liabilities

5,945

   

6,030

 

Other non-current liabilities

1,103

   

930

 

Total liabilities

26,084

   

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, 1,407,253,294 and 1,406,852,305 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

14

   

14

 

Additional paid-in capital

21,654

   

21,557

 

Retained earnings

1,845

   

1,582

 

Accumulated other comprehensive (income) loss

(217)

   

104

 

Total equity

23,296

   

23,257

 

Non-controlling interest

1

   

 

Total stockholders' equity

23,297

   

23,257

 

Total liabilities and stockholders' equity

$

49,381

   

$

49,518

 

 

 

 

 

KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Third Quarter of 2020 and 2019
(Unaudited, in millions)

   
 

First Nine Months

(in millions)

2020

 

2019

Operating activities:

     

Net income

$

897

   

$

848

 

Adjustments to reconcile net income to net cash provided by operating activities:

     

Depreciation expense

272

   

271

 

Amortization of intangibles

100

   

94

 

Other amortization expense

118

   

135

 

Provision for sales returns

36

   

25

 

Deferred income taxes

(27)

   

(5)

 

Employee stock-based compensation expense

62

   

47

 

Loss on early extinguishment of debt

4

   

9

 

(Gain) loss on disposal of property, plant and equipment

(39)

   

11

 

Unrealized loss (gain) on foreign currency

14

   

(22)

 

Unrealized loss on derivatives

47

   

60

 

Equity in loss of unconsolidated affiliates

19

   

38

 

Impairment on investments and note receivable of unconsolidated affiliate

102

   

 

Other, net

50

   

33

 

Changes in assets and liabilities:

     

Trade accounts receivable

(1)

   

36

 

Inventories

(175)

   

(124)

 

Income taxes receivable and payables, net

(118)

   

(9)

 

Other current and non-current assets

(387)

   

(156)

 

Accounts payable and accrued expenses

500

   

561

 

Other current and non-current liabilities

192

   

(49)

 

Net change in operating assets and liabilities

11

   

259

 

Net cash provided by operating activities

1,666

   

1,803

 

Investing activities:

     

Acquisitions of businesses

   

(8)

 

Issuance of related party note receivable

(6)

   

(22)

 

Investments in unconsolidated affiliates

(4)

   

(16)

 

Purchases of property, plant and equipment

(356)

   

(208)

 

Proceeds from sales of property, plant and equipment

203

   

19

 

Purchases of intangibles

(26)

   

(4)

 

Other, net

7

   

23

 

Net cash used in investing activities

(182)

   

(216)

 

Financing activities:

     

Proceeds from controlling shareholder stock transactions

29

   

 

Proceeds from unsecured credit facility

1,850

   

 

Proceeds from senior unsecured notes

1,500

   

 

Proceeds from term loan

   

2,000

 

Net (payment) issuance of commercial paper

(911)

   

335

 

Proceeds from structured payables

128

   

246

 

Payments on structured payables

(290)

   

(432)

 

Payments on senior unsecured notes

(250)

   

(250)

 

Payment on unsecured credit facility

(1,850)

   

 

Payments on term loan

(880)

   

(2,873)

 

Payments on finance leases

(35)

   

(29)

 

Cash dividends paid

(635)

   

(633)

 

Other, net

(22)

   

10

 

Net cash used in financing activities

(1,366)

   

(1,626)

 

Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from:

     

Operating, investing and financing activities

118

   

(39)

 

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents

(11)

   

12

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period

111

   

139

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period

$

218

   

$

112

 

 

 

 

 

KEURIG DR PEPPER INC.
RECONCILIATION OF SEGMENT INFORMATION
(Unaudited)

       
 

Third Quarter

 

First Nine Months

(in millions)

2020

 

2019

 

2020

 

2019

Net Sales

             

Coffee Systems

$

1,097

   

$

1,065

   

$

3,113

   

$

3,023

 

Packaged Beverages

1,447

   

1,307

   

4,056

   

3,734

 

Beverage Concentrates

352

   

360

   

967

   

1,034

 

Latin America Beverages

124

   

138

   

361

   

395

 

Total net sales

$

3,020

   

$

2,870

   

$

8,497

   

$

8,186

 
               

Income from Operations

             

Coffee Systems

$

320

   

$

310

   

$

882

   

$

890

 

Packaged Beverages

260

   

196

   

657

   

531

 

Beverage Concentrates

262

   

245

   

679

   

690

 

Latin America Beverages

25

   

25

   

73

   

62

 

Unallocated corporate costs

(114)

   

(196)

   

(511)

   

(508)

 

Total income from operations

$

753

   

$

580

   

$

1,780

   

$

1,665

 

 

 

KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN NON-GAAP INFORMATION
(Unaudited)

 

The company reports its financial results in accordance with U.S. GAAP. However, management believes that certain non-GAAP financial measures that reflect the way management evaluates the business may provide investors with additional information regarding the company's results, trends and ongoing performance on a comparable basis.

For the third quarter and first nine months of 2020 and 2019, we define our Adjusted non-GAAP financial measures as certain financial statement captions and metrics adjusted for certain items affecting comparability. The items affecting comparability are defined below.

Specifically, investors should consider the following with respect to our financial results:

Adjusted: Defined as certain financial statement captions and metrics adjusted for certain items affecting comparability.

Items affecting comparability: Defined as certain items that are excluded for comparison to prior year periods, adjusted for the tax impact as applicable. Tax impact is determined based upon an approximate rate for each item. For each period, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S. GAAP 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 Keurig 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 Ownership Plan, the Keurig Dr Pepper Omnibus Incentive Plan of 2009 or the Keurig Dr Pepper Inc. Omnibus Incentive Plan of 2019; and (vi) other certain items that are excluded for comparison purposes to prior year periods.

For third quarter and first nine months of 2020, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant nonroutine legal matters; (iv) the loss on early extinguishment of debt related to the redemption of debt; (v) incremental temporary costs to our operations related to risks associated with the COVID-19 pandemic and (vi) impairment recognized on equity method investments with Bedford Systems, LLC and LifeFuels Inc.

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 third quarter and first nine months of 2019, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (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 impact of the step-up of acquired inventory not associated with the DPS Merger (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.

For the third quarter and first nine months of 2020 and 2019, the supplemental financial data set forth below includes reconciliations of 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.

Reconciliations for these items are provided in the tables below.

 

 

KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
For the Third Quarter of 2020
(Unaudited, in millions, except per share data)

                       
 

Cost of sales

 

Gross profit

 

Gross margin

 

Selling, general
and administrative
expenses

 

Income from operations

 

Operating margin

Reported

$

1,316

   

$

1,704

   

56.4

%

 

$

949

   

$

753

   

24.9

%

Items Affecting Comparability:

                     

Mark to market

46

   

(46)

       

(1)

   

(45)

     

Amortization of intangibles

   

       

(34)

   

34

     

Stock compensation

   

       

(6)

   

6

     

Restructuring and integration costs

   

       

(39)

   

39

     

Productivity

(10)

   

10

       

(20)

   

30

     

Nonroutine legal matters

   

       

(8)

   

8

     

COVID-19

(19)

   

19

       

(30)

   

49

     

Adjusted GAAP

$

1,333

   

$

1,687

   

55.9

%

 

$

811

   

$

874

   

28.9

%

                               

 

                               
 

Interest expense

 

Impairment on
investments
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

$

148

   

$

16

   

$

584

   

$

141

   

24.1

%

 

$

443

   

1,422.9

 

$

0.31

 

Items Affecting Comparability:

                             

Mark to market

(1)

   

   

(44)

   

(13)

       

(31)

       

(0.02)

 

Amortization of intangibles

   

   

34

   

9

       

25

       

0.02

 

Amortization of deferred financing costs

(2)

   

   

2

   

1

       

1

       

 

Amortization of fair value debt adjustment

(6)

   

   

6

   

1

       

5

       

 

Stock compensation

   

   

6

   

1

       

5

       

 

Restructuring and integration costs

   

   

39

   

8

       

31

       

0.02

 

Productivity

   

   

30

   

8

       

22

       

0.02

 

Investment Impairment

   

(16)

   

16

   

4

       

12

       

0.01

 

Nonroutine legal matters

   

   

8

   

1

       

7

       

 

COVID-19

   

   

49

   

12

       

37

       

0.03

 

Adjusted GAAP

$

139

   

$

   

$

730

   

$

173

   

23.7

%

 

$

557

   

1,422.9

 

$

0.39

 
 

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 Third Quarter of 2019
(Unaudited, in millions, except per share data)

 
 

Cost of sales

 

Gross profit

 

Gross margin

 

Selling, general and
administrative expenses

 

Other
operating
expense
(income), net

 

Income
from
operations

 

Operating margin

Reported

$

1,245

   

$

1,625

   

56.6

%

 

$

1,012

   

$

33

   

$

580

   

20.2

%

Items Affecting Comparability:

                         

Mark to market

(5)

   

5

       

(4)

   

   

9

     

Amortization of intangibles

   

       

(31)

   

   

31

     

Stock compensation

   

       

(3)

   

   

3

     

Restructuring and integration costs

1

   

(1)

       

(54)

   

(24)

   

77

     

Productivity

(10)

   

10

       

(12)

   

(13)

   

35

     

Transaction costs

   

       

(7)

   

   

7

     

Nonroutine legal matters

   

       

(12)

   

   

12

     

Adjusted GAAP

$

1,231

   

$

1,639

   

57.1

%

 

$

889

   

$

(4)

   

$

754

   

26.3

%

 

 

Interest expense

 

Income before
provision for
income taxes

 

Provision for income taxes

 

Effective tax rate

 

Net income

 

Weighted
Average
Diluted shares

 

Diluted
earnings
per share

Reported

$

158

   

$

413

   

$

109

   

26.4

%

 

$

304

   

1,419.4

 

$

0.21

 

Items Affecting Comparability:

                         

Mark to market

1

   

8

   

       

8

       

0.01

 

Amortization of intangibles

   

31

   

9

       

22

       

0.02

 

Amortization of deferred financing costs

(3)

   

3

   

1

       

2

       

 

Amortization of fair value debt adjustment

(7)

   

7

   

3

       

4

       

 

Stock compensation

   

3

   

       

3

       

 

Restructuring and integration costs

   

77

   

13

       

64

       

0.04

 

Productivity

   

35

   

8

       

27

       

0.02

 

Transaction costs

(4)

   

11

   

3

       

8

       

0.01

 

Nonroutine legal matters

   

12

   

3

       

9

       

0.01

 

Adjusted GAAP

$

145

   

$

600

   

$

149

   

24.8

%

 

$

451

   

1,419.4

 

$

0.32

 
 

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 Nine Months Ended September 30, 2020
(Unaudited, in millions, except per share data)

 
 

Cost of sales

 

Gross profit

 

Gross margin

 

Selling, general
and

administrative
expenses

 

Income from operations

 

Operating margin

Reported

$

3,779

   

$

4,718

   

55.5

%

 

$

2,978

   

$

1,780

   

20.9

%

Items Affecting Comparability:

                     

Mark to market

2

   

(2)

       

(28)

   

26

     

Amortization of intangibles

   

       

(100)

   

100

     

Stock compensation

   

       

(21)

   

21

     

Restructuring and integration costs

   

       

(143)

   

143

     

Productivity

(28)

   

28

       

(75)

   

103

     

Nonroutine legal matters

   

       

(43)

   

43

     

COVID-19

(38)

   

38

       

(79)

   

117

     

Adjusted GAAP

$

3,715

   

$

4,782

   

56.3

%

 

$

2,489

   

$

2,333

   

27.5

%

 

 

Interest expense

 

Loss on early extinguishment of debt

 

Impairment on
investments

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

$

458

   

$

4

   

$

102

   

$

1,195

   

$

298

   

24.9

%

 

$

897

   

1,421.5

 

$

0.63

 

Items Affecting Comparability:

                                 

Mark to market

(28)

   

   

   

54

   

13

       

41

       

0.03

 

Amortization of intangibles

   

   

   

100

   

27

       

73

       

0.05

 

Amortization of deferred financing costs

(8)

   

   

   

8

   

2

       

6

       

 

Amortization of fair value debt adjustment

(18)

   

   

   

18

   

4

       

14

       

0.01

 

Stock compensation

   

   

   

21

   

4

       

17

       

0.01

 

Restructuring and integration costs

   

   

   

143

   

34

       

109

       

0.08

 

Productivity

   

   

   

103

   

27

       

76

       

0.05

 

Loss on early extinguishment of debt

   

(4)

   

   

4

   

1

       

3

       

 

Impairment on investment

   

   

(102)

   

102

   

25

       

77

       

0.05

 

Nonroutine legal matters

   

   

   

43

   

10

       

33

       

0.02

 

COVID-19

   

   

   

117

   

29

       

88

       

0.06

 

Adjusted GAAP

$

404

   

$

   

$

   

$

1,908

   

$

474

   

24.8

%

 

$

1,434

   

1,421.5

 

$

1.01

 
 

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 Nine Months Ended September 30, 2019
(Unaudited, in millions, except per share data)

 
 

Cost of sales

 

Gross profit

 

Gross margin

 

Selling, general and
administrative
expenses

 

Other operating
expense
(income), net

 

Income from operations

 

Operating margin

Reported

$

3,537

   

$

4,649

   

56.8

%

 

$

2,951

   

$

33

   

$

1,665

   

20.3

%

Items Affecting Comparability:

                         

Mark to market

(6)

   

6

       

5

   

   

1

     

Amortization of intangibles

   

       

(94)

   

   

94

     

Stock compensation

   

       

(18)

   

   

18

     

Restructuring and integration costs

(1)

   

1

       

(151)

   

(24)

   

176

     

Productivity

(14)

   

14

       

(41)

   

(22)

   

77

     

Transaction costs

   

       

(8)

   

   

8

     

Nonroutine legal matters

   

       

(27)

   

   

27

     

Inventory step-up

(3)

   

3

       

   

   

3

     

Malware incident

(2)

   

2

       

(6)

   

   

8

     

Adjusted GAAP

$

3,511

   

$

4,675

   

57.1

%

 

$

2,611

   

$

(13)

   

$

2,077

   

25.4

%

 

 

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

Reported

$

497

   

$

9

   

$

1,144

   

$

296

   

25.9

%

 

$

848

   

1,418.8

 

$

0.60

 

Items Affecting Comparability:

                             

Mark to market

(44)

   

   

45

   

11

       

34

       

0.02

 

Amortization of intangibles

   

   

94

   

26

       

68

       

0.05

 

Amortization of deferred financing costs

(10)

   

   

10

   

3

       

7

       

0.01

 

Amortization of fair value debt adjustment

(20)

   

   

20

   

5

       

15

       

0.01

 

Stock compensation

   

   

18

   

4

       

14

       

0.01

 

Restructuring and integration costs

   

   

176

   

39

       

137

       

0.10

 

Productivity

   

   

77

   

17

       

60

       

0.04

 

Transaction costs

(16)

   

   

24

   

6

       

18

       

0.01

 

Loss on early extinguishment of debt

   

(9)

   

9

   

2

       

7

       

 

Nonroutine legal matters

   

   

27

   

7

       

20

       

0.01

 

Inventory step-up

   

   

3

   

1

       

2

       

 

Malware incident

   

   

8

   

2

       

6

       

 

Adjusted GAAP

$

407

   

$

   

$

1,655

   

$

419

   

25.3

%

 

$

1,236

   

1,418.8

 

$

0.87

 
 

Diluted earnings per common share may not foot due to rounding.

 

 

 

 

KEURIG DR PEPPER INC.
RECONCILIATION OF SEGMENT ITEMS TO CERTAIN NON-GAAP ADJUSTED SEGMENT ITEMS
(Unaudited)

 

(in millions)

Reported

 

Items Affecting Comparability

 

Adjusted GAAP

For the third quarter of 2020:

         

Income from Operations

         

Coffee Systems

$

320

   

$

53

   

$

373

 

Packaged Beverages

260

   

44

   

304

 

Beverage Concentrates

262

   

3

   

265

 

Latin America Beverages

25

   

   

25

 

Unallocated corporate costs

(114)

   

21

   

(93)

 

Total income from operations

$

753

   

$

121

   

$

874

 
           

For the third quarter of 2019:

         

Income from Operations

         

Coffee Systems

$

310

   

$

57

   

$

367

 

Packaged Beverages

196

   

5

   

201

 

Beverage Concentrates

245

   

(1)

   

244

 

Latin America Beverages

25

   

   

25

 

Unallocated corporate costs

(196)

   

113

   

(83)

 

Total income from operations

$

580

   

$

174

   

$

754

 
 

Numbers may not foot due to rounding.

 

 

 

KEURIG DR PEPPER INC.
RECONCILIATION OF SEGMENT ITEMS TO CERTAIN NON-GAAP ADJUSTED SEGMENT ITEMS
(Unaudited)

 

(in millions)

Reported

 

Items Affecting Comparability

 

Adjusted GAAP

For the first nine months of 2020:

         

Income from Operations

         

Coffee Systems

$

882

   

$

201

   

$

1,083

 

Packaged Beverages

657

   

119

   

776

 

Beverage Concentrates

679

   

5

   

684

 

Latin America Beverages

73

   

2

   

75

 

Unallocated corporate costs

(511)

   

226

   

(285)

 

Total income from operations

$

1,780

   

$

553

   

$

2,333

 
           

For the first nine months of 2019:

         

Income from Operations

         

Coffee Systems

$

890

   

$

143

   

$

1,033

 

Packaged Beverages

531

   

20

   

551

 

Beverage Concentrates

690

   

1

   

691

 

Latin America Beverages

62

   

(5)

   

57

 

Unallocated corporate costs

(508)

   

253

   

(255)

 

Total income from operations

$

1,665

   

$

412

   

$

2,077

 

 

 

 

KEURIG DR PEPPER INC.
RECONCILIATION OF ADJUSTED EBITDA AND MANAGEMENT LEVERAGE RATIO
(Unaudited)

   

(in millions, except for ratio)

 

ADJUSTED EBITDA RECONCILIATION - LAST TWELVE MONTHS

 

Net income

$

1,303

 

Interest expense

615

 

Provision for income taxes

442

 

Loss on early extinguishment of debt

6

 

Impairment on investment

102

 

Other (income) expense, net

25

 

Depreciation expense

359

 

Other amortization

156

 

Amortization of intangibles

132

 

EBITDA

$

3,140

 

Items affecting comparability:

 

Restructuring and integration expenses

$

205

 

Transaction costs

1

 

Productivity

106

 

Nonroutine legal matters

64

 

Stock compensation

27

 

Mark to market

(20)

 

COVID-19

117

 

Adjusted EBITDA

$

3,640

 
   
 

September 30,

 

2020

Principal amounts of:

 

Commercial paper notes

$

335

 

Term loan

500

 

Senior unsecured notes

13,225

 

Total principal amounts

14,060

 

Less: Cash and cash equivalents

191

 

Total principal amounts less cash and cash equivalents

$

13,869

 
   

September 30, 2020 Management Leverage Ratio

3.8

 

 

 

KEURIG DR PEPPER INC.
RECONCILIATION OF ADJUSTED EBITDA - LAST TWELVE MONTHS
(Unaudited)

 

(in millions)

FOURTH QUARTER OF 2019

 

FIRST NINE MONTHS OF 2020

 

LAST TWELVE MONTHS

Net income

$

406

   

$

897

   

$

1,303

 

Interest expense

157

   

458

   

615

 

Provision for income taxes

144

   

298

   

442

 

Loss on early extinguishment of debt

2

   

4

   

6

 

Impairment on investment

   

102

   

102

 

Other (income) expense, net

4

   

21

   

25

 

Depreciation expense

87

   

272

   

359

 

Other amortization(1)

38

   

118

   

156

 

Amortization of intangibles

32

   

100

   

132

 

EBITDA

$

870

   

$

2,270

   

$

3,140

 

Items affecting comparability:

         

Restructuring and integration expenses

$

62

   

$

143

   

$

205

 

Transaction costs

1

   

   

1

 

Productivity

20

   

86

   

106

 

Nonroutine legal matters

21

   

43

   

64

 

Stock compensation

6

   

21

   

27

 

COVID-19

   

117

   

117

 

Mark to market

(46)

   

26

   

(20)

 

Adjusted EBITDA

$

934

   

$

2,706

   

$

3,640

 
 

(1) Other amortization was added to the EBITDA calculation in the first quarter of 2020.

 

 

 

KEURIG DR PEPPER INC.
R
ECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW
(
Unaudited)

Free cash flow is defined as net cash provided by operating activities adjusted for purchases of property, plant and equipment, proceeds from sales of property, plant and equipment, and certain items excluded for comparison to prior year periods. For the first nine months of 2020 and 2019, there were no certain items excluded for comparison to prior year periods.

   

First Nine Months

(in millions)

 

2020

 

2019

Net cash provided by operating activities

 

$

1,666

   

$

1,803

 

Purchases of property, plant and equipment

 

(356)

   

(208)

 

Proceeds from sales of property, plant and equipment

 

203

   

19

 

Free Cash Flow

 

$

1,513

   

$

1,614

 

 

 

 

RECONCILIATION OF CERTAIN CURRENCY NEUTRAL ADJUSTED FINANCIAL RESULTS
(Unaudited)

Net sales, adjusted income from operations and adjusted earnings per share, as adjusted to currency neutral: These adjusted financial results are calculated on a currency neutral basis by converting our current-period local currency financial results using the prior-period foreign currency exchange rates.

   

For the Third Quarter of 2020

   

Coffee

 

Packaged

 

Beverage

 

Latin

America

   

Percent change

 

Systems

 

Beverages

 

Concentrates

 

Beverages

 

Total

Net sales

 

3.0

%

 

10.7

%

 

(2.2)

%

 

(10.1)

%

 

5.2

%

Impact of foreign currency

 

0.2

%

 

%

 

%

 

10.8

%

 

0.6

%

Net sales, as adjusted to currency neutral

 

3.2

%

 

10.7

%

 

(2.2)

%

 

0.7

%

 

5.8

%

 

   

For the Third Quarter of 2020

   

Coffee

 

Packaged

 

Beverage

 

Latin

America

   

Percent change

 

Systems

 

Beverages

 

Concentrates

 

Beverages

 

Total

Adjusted income from operations

 

1.6

%

 

51.2

%

 

8.6

%

 

%

 

15.9

%

Impact of foreign currency

 

%

 

%

 

%

 

12.0

%

 

0.4

%

Adjusted income from operations, as adjusted to currency neutral

 

1.6

%

 

51.2

%

 

8.6

%

 

12.0

%

 

16.3

%

 

   

For the First Nine Months of 2020

   

Coffee

 

Packaged

 

Beverage

 

Latin

America

   

Percent change

 

Systems

 

Beverages

 

Concentrates

 

Beverages

 

Total

Net sales

 

3.0

%

 

8.6

%

 

(6.5)

%

 

(8.6)

%

 

3.8

%

Impact of foreign currency

 

0.1

%

 

0.1

%

 

0.1

%

 

10.9

%

 

0.6

%

Net sales, as adjusted to currency neutral

 

3.1

%

 

8.7

%

 

(6.4)

%

 

2.3

%

 

4.4

%

 

   

For the First Nine Months of 2020

   

Coffee

 

Packaged

 

Beverage

 

Latin

America

   

Percent change

 

Systems

 

Beverages

 

Concentrates

 

Beverages

 

Total

Adjusted income from operations

 

4.8

%

 

40.8

%

 

(1.0)

%

 

31.6

%

 

12.3

%

Impact of foreign currency

 

0.1

%

 

%

 

0.1

%

 

14.0

%

 

0.5

%

Adjusted income from operations, as adjusted to currency neutral

 

4.9

%

 

40.8

%

 

(0.9)

%

 

45.6

%

 

12.8

%

 

   

For the Third Quarter of 2020

 

For the First Nine Months of 2020

Adjusted diluted earnings per share

 

$

0.39

   

$

1.01

 

Impact of foreign currency

 

   

 

Adjusted diluted earnings per share, as adjusted to currency neutral

 

$

0.39

   

$

1.01

 

 

The following table sets forth our reconciliation of significant COVID-19-related expenses. However, employee compensation expense and employee protection costs, which impact our SG&A expenses and cost of sales, are included as the COVID-19 item affecting comparability and is excluded in our Adjusted financial measures. In addition, reported amounts under U.S. GAAP also include additional costs, not included as the COVID-19 item affecting comparability, as presented in tables below.

 

                   
 

Items Effecting Comparability(1)

           

(in millions)

Employee Compensation Expense(2)

 

Employee Protection Costs(3)

 

Allowances for Expected Credit Losses(4)

 

Inventory Write-Downs(5)

 

Total

For the third quarter of 2020:

                 

Coffee Systems

$

7

   

$

5

   

$

   

$

   

$

12

 

Packaged Beverages

32

   

4

   

   

   

36

 

Beverage Concentrates

   

   

   

   

 

Latin America Beverages

   

1

   

   

   

1

 

Unallocated corporate costs

   

   

   

   

 

Total

$

39

   

$

10

   

$

   

$

   

$

49

 
                   

For the first nine months of 2020:

                 

Coffee Systems

$

14

   

$

7

   

$

2

   

$

8

   

$

31

 

Packaged Beverages

73

   

22

   

8

   

   

103

 

Beverage Concentrates

   

   

4

   

   

4

 

Latin America Beverages

   

1

   

   

   

1

 

Unallocated corporate costs

   

   

   

   

 

Total

$

87

   

$

30

   

$

14

   

$

8

   

$

139

 
                   

 

(1)

Employee compensation expense and employee protection costs are both included as the COVID-19 items affecting comparability in the reconciliation of our Adjusted Non-GAAP financial measures.

(2)

Reflects temporary incremental frontline incentive pay and the associated taxes in order to maintain essential operations during the COVID-19 pandemic. Impacts both cost of sales and SG&A expenses.

(3)

Includes costs associated with personal protective equipment, temperature scans, cleaning and other sanitization services. Impacts both cost of sales and SG&A expenses.

(4)

Allowances reflect the expected impact of the economic uncertainty caused by COVID-19, leveraging estimates of credit worthiness, default and recovery rates for certain of our customers. Impacts SG&A expenses.

(5)

Inventory write-downs include obsolescence charges of $8 million for the first nine months of 2020. Impacts cost of sales.

 

(PRNewsfoto/Keurig Dr Pepper)

 

 

 

SOURCE Keurig Dr Pepper

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