KDP
$30.11
Keurig Dr Pepper
$.54
1.83%
Earnings Details
2nd Quarter June 2020
Thursday, July 30, 2020 6:30:00 AM
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Summary

Keurig Dr Pepper Reports In-line

Keurig Dr Pepper (KDP) reported 2nd Quarter June 2020 earnings of $0.33 per share on revenue of $2.9 billion. The consensus earnings estimate was $0.32 per share on revenue of $2.8 billion. The Earnings Whisper number was $0.33 per share. Revenue grew 1.8% on a year-over-year basis.

The company said it continues to expect 2020 earnings of $1.38 to $1.40 per share. The current consensus earnings estimate is $1.39 per share for the year ending December 31, 2020.

Results
Reported Earnings
$0.33
Earnings Whisper
$0.33
Consensus Estimate
$0.32
Reported Revenue
$2.86 Bil
Revenue Estimate
$2.78 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Keurig Dr Pepper Reports Strong Q2 2020 Results

BURLINGTON, Mass. and PLANO, Texas, July 30, 2020 /PRNewswire/ -- Keurig Dr Pepper Inc. (NYSE: KDP) today reported strong financial results for the second quarter ended June 30, 2020 and reaffirmed guidance for the year.

On a GAAP basis, net sales in the second quarter of 2020 increased 1.8% and diluted earnings per share totaled $0.21, compared to $0.22 in the year-ago period. Constant currency net sales in the second quarter advanced 2.9% versus year ago and Adjusted1 diluted EPS grew 10% to $0.33.

Commenting on the announcement, Chairman and CEO Bob Gamgort stated, "Since its formation in 2018, KDP has delivered strong and balanced financial performance. Our second quarter results demonstrated the ability of our broad beverage portfolio, unique routes to market and culture of execution to deliver growth in the most challenging of environments. I am proud of and grateful for our 26,000 employees who have stepped up in the face of adversity to deliver for our customers, consumers and communities, while supporting each other during this uncertain time. Despite the expectation for significant volatility ahead, we remain confident in both our business model and organization to continue to execute well to deliver on the guidance we reaffirmed today."

Second Quarter Consolidated Results
Net sales for the second quarter of 2020 increased 1.8% to $2.86 billion, compared to $2.81 billion in the year-ago period. On a constant currency basis, net sales advanced 2.9%, reflecting strong volume/mix growth of 4.3%, partially offset by lower net price realization of 1.4%. COVID-19 had a significant impact on the beverage industry during the quarter, requiring KDP to navigate the challenging environment to deliver balanced growth in the quarter. Highlights of net sales performance by segment include:

  • Coffee Systems: Significant growth in brewers and K-Cup coffee pods for at-home consumption more than offset a significant drop-off in the office coffee and hospitality businesses. E-commerce demonstrated particular strength during the quarter, reflecting an acceleration of consumers shifting some of their purchases to the on-line channel, including at the Keurig.com retail site.
  • Packaged Beverages: Strong in-market execution, leading to share growth in the majority of KDP's cold beverage segments, more than offset the decline in convenience and gas channels due to reduced consumer mobility. Recent successful innovation also contributed to the strong performance in the quarter.
  • Beverage Concentrates: Declined due to the fountain foodservice component of the business, which services restaurants and hospitality, reflecting changes in consumer behavior.
  • Latin America Beverages experienced a modest negative impact due to limited consumer mobility in Mexico.

KDP in-market performance2 in tracked channels in the second quarter of 2020 continued to be very strong, with market share advancing in the majority of the Company's key categories, 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 and Canada Dry CSDs, CORE hydration and evian premium water, Snapple juice drinks, Clamato vegetable juice and Motts apple juice and apple sauce. In coffee, retail consumption of single-serve pods manufactured by KDP grew nearly 15% in IRi tracked channels, with dollar market share of KDP manufactured pods remaining strong at 82% and improving share trends in KDP's owned and licensed brand portfolio.

New product introductions, most notably Dr Pepper & Cream Soda and Canada Dry Bold and, to a lesser extent, Snapple Lemonades supported the strength of the Packaged Beverages segment, while the new The Original Donut Shop One Step Lattes and ongoing successful brewer innovation, including the most recent K-Duo and K-Slim introductions, supported the strength of the Coffee Systems segment.  

GAAP operating income decreased 4.4% to $561 million in the second quarter of 2020, compared to $587 million in the year-ago period, including the unfavorable year-over-year impact of items affecting comparability, which include certain COVID-19 related expenses, as well as lower pricing, inflation in input costs and logistics and higher operating costs associated with increased consumer demand. Partially offsetting these factors were lower marketing and other discretionary expenses, productivity and merger synergies and the strong growth in net sales. Excluding items affecting comparability, Adjusted operating income increased 10.4% to $775 million, compared to $702 million in the year-ago period, and Adjusted operating margin advanced 210 basis points to 27.1%. On a constant currency basis, Adjusted operating income grew 11.1%.  

The COVID-19 related operating costs incurred in the second quarter of 2020 totaled $75 million, of which $63 million were recognized as items affecting comparability and consisted of temporary compensation increases and incentives for front-line employees, as well as incremental safety and sanitation expenses. The balance of the COVID-19 related costs in the quarter, which consisted of inventory write-downs and bad debt expense, are included in the Company's Adjusted results. 

GAAP net income in the second quarter of 2020 decreased 5.1% to $298 million, or $0.21 per diluted share, compared to GAAP net income of $314 million, or $0.22 per diluted share, in the year-ago period, reflecting the decline in GAAP operating income, a higher effective tax rate resulting from the comparison to favorable discrete tax items and valuation adjustments in the prior year period and higher interest expense, as well as the unfavorable year-over-year impact of items affecting comparability, partially offset by an increase in non-operating income. Adjusted net income advanced 10.9% in the second quarter of 2020 to $469 million, compared to $423 million in the year-ago period and Adjusted diluted EPS advanced 10% to $0.33, compared to $0.30 in the year-ago period.

The Company generated strong free cash flow totaling $524 million in the second quarter of 2020, enabling KDP to reduce bank debt by approximately $274 million. The Company's management leverage ratio declined from 4.9x at the end of the second quarter of 2019 to 4.0x at the end of the second 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 2.0x.

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".

Second Quarter Segment Results

Coffee Systems
Net sales for the second quarter of 2020 increased 5.4% to $1.04 billion, compared to $0.99 billion in the year-ago period, reflecting higher volume/mix of 8.3%, partially offset by lower net price realization of 2.5% and unfavorable foreign currency translation of 0.4%. On a constant currency basis, net sales increased 5.8% in the quarter.

The volume/mix increase of 8.3% versus year-ago was driven by strong pod volume growth of 9.5%, with a large increase in the at-home business, partially offset by a significant decline in the away-from-home office and hospitality businesses. Brewer volume increased 11.6%, on 19% growth in the year-ago period, reflecting successful innovation introduced over the past 12 months and investments to drive household penetration. 

Operating income increased 1.0% to $290 million in the second quarter of 2020, compared to $287 million in the year-ago period, reflecting the benefits of the strong net sales growth and continued productivity and merger synergies, partially offset by the unfavorable year-over-year impact of items affecting comparability, including costs related to COVID-19 and an increase in a litigation reserve. In the second quarter of 2020, the segment incurred $17 million of costs related to COVID-19, of which $9 million were treated as items affecting comparability. Excluding these and other items affecting comparability, Adjusted operating income in the quarter increased 9.7% to $363 million, compared to $331 million in the year-ago period, and Adjusted operating margin advanced 140 basis points to 34.8%. On a constant currency basis, Adjusted operating income increased 10.0%.

Packaged Beverages
Net sales for the second quarter of 2020 advanced 6.2% to $1.39 billion, compared to $1.31 billion in the year-ago period, reflecting strong volume/mix growth of 6.6%, partially offset by lower net price realization of 0.3% and unfavorable foreign currency translation of 0.1%. The net sales performance reflected strength in CSDs, juice and juice drinks, apple sauce and mixers, partially offset by lower net sales of premium water, driven by softness in convenience and gas channels as consumer mobility was limited. Driving the net sales performance in the quarter were Canada Dry, including the recently launched Canada Dry Bold, and Dr Pepper, including the recently launched Dr Pepper & Cream Soda. Also supporting the net sales growth were A&W, 7UP, Squirt, A Shoc, Real Lemon, Sunkist, Motts and Clamato, as well as increased contract manufacturing, partially offset by the Snapple tea business and Bai.

Operating income increased approximately 12% to $208 million in the second quarter of 2020, compared to $186 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 manufacturing and logistics costs to meet the strong consumer demand in the quarter, as well as the unfavorable year-over-year impact of items affecting comparability, including costs related to COVID-19.  In the second quarter of 2020, the segment incurred $54 million of costs related to COVID-19, all of which were treated as items affecting comparability. Excluding these and other items affecting comparability, Adjusted operating income increased 42% to $269 million, compared to $190 million in the year-ago period, and Adjusted operating margin advanced 480 basis points to 19.3%.

Beverage Concentrates
Net sales for the second quarter of 2020 decreased 16.5% to $309 million, compared to $370 million in the year-ago period, reflecting unfavorable volume/mix of 11.4%, lower net price realization of 4.8% and unfavorable foreign currency translation of 0.3%. The volume/mix performance reflected a significant decline to the fountain foodservice business, which services the restaurant and hospitality sectors, due to the shelter-in-place consumer behavior during the quarter.

Total shipment volume versus year-ago declined 10.5% in the second quarter of 2020, primarily reflecting the impact of COVID-19 on the fountain foodservice business. Dr Pepper and Crush net sales were the most impacted in the quarter. Bottler case sales decreased approximately 7% in the second quarter of 2020.

Operating income decreased 9.8% to $220 million in the second quarter of 2020, compared to $244 million in the year-ago period, reflecting the decline in net sales and modest COVID-19 costs, partially offset by lower discretionary expenses, including marketing. Excluding items affecting comparability, Adjusted operating income decreased 9.8% to $222 million, compared to $246 million in the year-ago period, resulting in Adjusted operating margin increasing 530 basis points versus year-ago to 71.8%.  On a constant currency basis, Adjusted operating income declined 9.3%.

Latin America Beverages
Net sales for the second quarter of 2020 decreased 14.9% to $120 million, compared to net sales of $141 million in the year-ago period, largely reflecting the unfavorable impact of foreign currency translation. On a constant currency basis, net sales increased 1.4% in the quarter, reflecting net price realization of 6.1%, partially offset by a 4.7% decline in volume/mix, largely related to COVID-19 impacts in Mexico.

Operating income decreased to $21 million in the second quarter of 2020, compared to $26 million in the year-ago period, reflecting the unfavorable impacts of the lower net sales, foreign currency transaction expense and the unfavorable year-over-year impact of items affecting comparability. Partially offsetting these factors were continued productivity and lower marketing expense.  Excluding items affecting comparability, Adjusted operating income increased 15% to $23 million in the second quarter of 2020, compared to $20 million in the year-ago period, resulting in Adjusted operating margin advancing 500 basis points versus year-ago to 19.2%. On a constant currency basis, Adjusted operating income increased 30%.

KDP Outlook for 2020
Given the Company's diverse brand portfolio and extensive distribution network, which combined, have enabled the Company to successfully navigate the volatility caused by COVID-19 to date, the Company has confidence in its ability to deliver continued growth in the second half of the year.

Specifically, for the full-year 2020, KDP continues to expect constant currency net sales growth in the range of 3% to 4%. The Company also continues to 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 the Company maintains over its cost structure, including strong cost management, productivity programs and merger synergies. Finally, the Company continues to expect its management leverage ratio in the range of 3.5x to 3.8x at year end 2020 and its management leverage ratio to be below 3.0x within two to three years of the July 2018 merger closing.

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

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

Media Contact:
Katie Gilroy
Keurig Dr Pepper
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. ("DPSG" 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 our subsequent filings with the SEC. 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 Second Quarter and First Six Months of 2020 and 2019

(Unaudited, in millions, except per share data)



Second Quarter


First Six Months

(in millions, except per share data)

2020


2019


2020


2019

Net sales

$

2,864



$

2,812



$

5,477



$

5,316


Cost of sales

1,302



1,186



2,463



2,292


Gross profit

1,562



1,626



3,014



3,024


Selling, general and administrative expenses

1,001



1,028



2,029



1,939


Other operating (income) expense, net



11



(42)




Income from operations

561



587



1,027



1,085


Interest expense

157



170



310



339


Loss on early extinguishment of debt

2





4



9


Impairment on investment and note receivable





86




Other (income) expense, net

(4)



1



16



6


Income before provision for income taxes

406



416



611



731


Provision for income taxes

108



102



157



187


Net income

$

298



$

314



$

454



$

544










Earnings per common share:








Basic

$

0.21



$

0.22



$

0.32



$

0.39


Diluted

0.21



0.22



0.32



0.38


Weighted average common shares outstanding:








Basic

1,407.2



1,406.7



1,407.1



1,406.5


Diluted

1,421.5



1,419.2



1,420.8



1,418.5


 

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2020 and December 31, 2019

(Unaudited, in millions, except shares and per share data)



June 30,


December 31,

(in millions, except share and per share data)

2020


2019

Assets

Current assets:




Cash and cash equivalents

$

149



$

75


Restricted cash and restricted cash equivalents

28



26


Trade accounts receivable, net

1,010



1,115


Inventories

747



654


Prepaid expenses and other current assets

306



403


Total current assets

2,240



2,273


Property, plant and equipment, net

2,071



2,028


Investments in unconsolidated affiliates

102



151


Goodwill

19,968



20,172


Other intangible assets, net

23,785



24,117


Other non-current assets

831



748


Deferred tax assets

29



29


Total assets

$

49,026



$

49,518


Liabilities and Stockholders' Equity

Current liabilities:




Accounts payable

$

3,377



$

3,176


Accrued expenses

940



939


Structured payables

182



321


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

2,256



1,593


Other current liabilities

543



445


Total current liabilities

7,298



6,474


Long-term obligations

11,849



12,827


Deferred tax liabilities

5,922



6,030


Other non-current liabilities

1,034



930


Total liabilities

26,103



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, 1,407,193,674 and 1,406,852,305 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

14



14


Additional paid-in capital

21,624



21,557


Retained earnings

1,613



1,582


Accumulated other comprehensive (income) loss

(328)



104


Total stockholders' equity

22,923



23,257


Total liabilities and stockholders' equity

$

49,026



$

49,518


 

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Second Quarter of 2020 and 2019

(Unaudited, in millions)



First Six Months

(in millions)

2020


2019

Operating activities:




Net income

$

454



$

544


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




Depreciation expense

183



172


Amortization of intangibles

66



63


Other amortization expense

76



90


Provision for sales returns

20



16


Deferred income taxes

(29)



(5)


Employee stock based compensation expense

42



34


Loss on early extinguishment of debt

4



9


Gain on disposal of property, plant and equipment

(40)



(8)


Unrealized loss (gain) on foreign currency

12



(25)


Unrealized loss on derivatives

76



43


Equity in losses of unconsolidated affiliates

18



27


Impairment on investment and note receivable of unconsolidated affiliate

86




Other, net

36



8


Changes in assets and liabilities, net of effects of acquisition:




Trade accounts receivable

58



68


Inventories

(101)



(56)


Income taxes receivable, prepaid and payables, net

69



64


Other current and non current assets

(234)



(149)


Accounts payable and accrued expenses

260



339


Other current and non current liabilities

6



(31)


Net change in operating assets and liabilities

58



235


Net cash provided by operating activities

1,062



1,203


Investing activities:




Acquisitions of businesses



(8)


Issuance of related party note receivable

(6)



(14)


Investments in unconsolidated affiliates



(11)


Purchases of property, plant and equipment

(276)



(118)


Proceeds from sales of property, plant and equipment

202



19


Purchases of intangibles

(15)



(4)


Other, net

3



22


Net cash used in investing activities

(92)



(114)


Financing activities:




Proceeds from controlling shareholder stock transactions

22




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

(836)



381


Proceeds from structured payables

86



78


Payments on structured payables

(227)



(9)


Payments on senior unsecured notes

(250)



(250)


Payment on unsecured credit facility

(1,850)




Payments on term loan

(730)



(2,848)


Payments on finance leases

(24)



(19)


Cash dividends paid

(423)



(423)


Other, net

(19)



10


Net cash used in financing activities

(901)



(1,080)


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




Operating, investing and financing activities

69



9


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

(3)



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

$

177



$

160


 

KEURIG DR PEPPER INC.

RECONCILIATION OF SEGMENT INFORMATION

(Unaudited)



Second Quarter


First Six Months

(in millions)

2020


2019


2020


2019

Net Sales








Coffee Systems

$

1,043



$

990



$

2,016



$

1,958


Packaged Beverages

1,392



1,311



2,609



2,427


Beverage Concentrates

309



370



615



674


Latin America Beverages

120



141



237



257


Total net sales

$

2,864



$

2,812



$

5,477



$

5,316










Income from Operations








Coffee Systems

$

290



$

287



$

562



$

580


Packaged Beverages

208



186



397



335


Beverage Concentrates

220



244



417



445


Latin America Beverages

21



26



48



37


Unallocated corporate costs

(178)



(156)



(397)



(312)


Total income from operations

$

561



$

587



$

1,027



$

1,085


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 second quarter and first six 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 second quarter and first six 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) 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 temporary 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 second quarter and first six 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 second quarter and first six 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 Second 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

$

1,302



$

1,562



54.5

%


$

1,001



$

561



19.6

%

Items Affecting Comparability:












Mark to market

(29)



29





16



13




Amortization of intangibles







(33)



33




Stock compensation







(8)



8




Restructuring and integration costs







(52)



52




Productivity

(2)



2





(17)



19




Nonroutine legal matters







(26)



26




COVID-19

(18)



18





(45)



63




Adjusted GAAP

$

1,253



$

1,611



56.3

%


$

836



$

775



27.1

%



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

$

157



$

2



$

406



$

108



26.6

%


$

298



1,421.5


$

0.21


Items Affecting Comparability:
















Mark to market

(3)





16



5





11





0.01


Amortization of intangibles





33



9





24





0.02


Amortization of deferred financing costs

(3)





3







3






Amortization of fair value debt adjustment

(6)





6



1





5






Stock compensation





8



2





6






Restructuring and integration costs





52



12





40





0.03


Productivity





19



4





15





0.01


Loss on early extinguishment of debt



(2)



2



1





1






Nonroutine legal matters





26



7





19





0.01


COVID-19





63



16





47





0.03


Adjusted GAAP

$

145



$



$

634



$

165



26.0

%


$

469



1,421.5


$

0.33



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 2019

(Unaudited, in millions, except per share data)



Cost of sales


Gross
profit


Gross
margin


Selling, general and
administrative expenses


Other
operating
(income)
expense, net


Income
from
operations


Operating
margin

Reported

$

1,186



$

1,626



57.8

%


$

1,028



$

11



$

587



20.9

%

Items Affecting Comparability:














Mark to market

11



(11)





(3)





(8)




Amortization of intangibles







(32)





32




Stock compensation







(8)





8




Restructuring and integration costs

(1)



1





(37)





38




Productivity

(1)



1





(23)



(9)



33




Transaction costs







(1)





1




Nonroutine legal matters







(8)





8




Malware Incident







(3)





3




Adjusted GAAP

$

1,195



$

1,617



57.5

%


$

913



$

2



$

702



25.0

%



Interest
expense


Other
(income)
expense, 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



1,419.2


$

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






Nonroutine legal matters





8



2





6






Malware Incident





3



1





2






Adjusted GAAP

$

138



$

(1)



$

565



$

142



25.1

%


$

423



1,419.2


$

0.30



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 Ended June 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

$

2,463



$

3,014



55.0

%


$

2,029



$

1,027



18.8

%

Items Affecting Comparability:












Mark to market

(44)



44





(27)



71




Amortization of intangibles







(66)



66




Stock compensation







(15)



15




Restructuring and integration costs







(104)



104




Productivity

(18)



18





(55)



73




Nonroutine legal matters







(35)



35




COVID-19

(19)



19





(49)



68




Adjusted GAAP

$

2,382



$

3,095



56.5

%


$

1,678



$

1,459



26.6

%



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

$

310



$

4



$

86



$

611



$

157



25.7

%


$

454



1,420.8


$

0.32


Items Affecting Comparability:


















Mark to market

(27)







98



26





72





0.05


Amortization of intangibles







66



18





48





0.03


Amortization of deferred financing costs

(6)







6



1





5






Amortization of fair value debt adjustment

(12)







12



3





9





0.01


Stock compensation







15



3





12





0.01


Restructuring and integration costs







104



26





78





0.05


Productivity







73



19





54





0.04


Loss on early extinguishment of debt



(4)





4



1





3






Impairment on investment





(86)



86



21





65





0.05


Nonroutine legal matters







35



9





26





0.02


COVID-19







68



17





51





0.04


Adjusted GAAP

$

265



$



$



$

1,178



$

301



25.6

%


$

877



1,420.8


$

0.62



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 Months Ended June 30, 2019

(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

$

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)



42




Transaction costs







(1)



1




Nonroutine legal matters







(15)



15




Inventory step-up

(3)



3







3




Malware incident

(2)



2





(6)



8




Adjusted GAAP

$

2,280



$

3,036



57.1

%


$

1,722



$

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

Reported

$

339



$

9



$

731



$

187



25.6

%


$

544



1,418.5


$

0.38


Items Affecting Comparability:
















Mark to market

(45)





37



11





26





0.02


Amortization of intangibles





63



17





46





0.03


Amortization of deferred financing costs

(7)





7



2





5






Amortization of fair value debt adjustment

(13)





13



2





11





0.01


Stock compensation





15



4





11





0.01


Restructuring and integration costs





99



26





73





0.05


Productivity





42



9





33





0.02


Transaction costs

(12)





13



3





10





0.01


Loss on early extinguishment of debt



(9)



9



2





7






Nonroutine legal matters





15



4





11





0.01


Inventory step-up





3



1





2






Malware incident





8



2





6






Adjusted GAAP

$

262



$



$

1,055



$

270



25.6

%


$

785



1,418.5


$

0.55



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 second quarter of 2020:






Income from Operations






Coffee Systems

$

290



$

73



$

363


Packaged Beverages

208



61



269


Beverage Concentrates

220



2



222


Latin America Beverages

21



2



23


Unallocated corporate costs

(178)



76



(102)


Total income from operations

$

561



$

214



$

775








For the second quarter of 2019:






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



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 six months of 2020:






Income from Operations






Coffee Systems

$

562



$

148



$

710


Packaged Beverages

397



75



472


Beverage Concentrates

417



2



419


Latin America Beverages

48



2



50


Unallocated corporate costs

(397)



205



(192)


Total income from operations

$

1,027



$

432



$

1,459








For the first six months of 2019:






Income from Operations






Coffee Systems

$

580



$

86



$

666


Packaged Beverages

335



15



350


Beverage Concentrates

445



2



447


Latin America Beverages

37



(5)



32


Unallocated corporate costs

(312)



140



(172)


Total income from operations

$

1,085



$

238



$

1,323


 

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

$

1,164


Interest expense

625


Provision for income taxes

410


Loss on early extinguishment of debt

6


Impairment on investment

86


Other (income) expense, net

29


Depreciation expense

369


Other amortization

160


Amortization of intangibles

129


EBITDA

$

2,978


Items affecting comparability:


Restructuring and integration expenses

$

240


Transaction costs

8


Productivity

114


Nonroutine legal matters

68


Stock compensation

24


Mark to market

34


COVID-19

68


Adjusted EBITDA

$

3,534





June 30,


2020

Principal amounts of:


Commercial paper notes

$

410


Term loan

650


Senior unsecured notes

13,225


Total principal amounts

14,285


Less: Cash and cash equivalents

149


Total principal amounts less cash and cash equivalents

$

14,136




June 30, 2020 Management Leverage Ratio

4.0


 

KEURIG DR PEPPER INC.

RECONCILIATION OF ADJUSTED EBITDA - LAST TWELVE MONTHS

(Unaudited)


(in millions)

THIRD
QUARTER
OF 2019


FOURTH
QUARTER
OF 2019


FIRST SIX
MONTHS
OF 2020


LAST
TWELVE
MONTHS

Net income

$

304



$

406



$

454



$

1,164


Interest expense

158



157



310



625


Provision for income taxes

109



144



157



410


Loss on early extinguishment of debt



2



4



6


Impairment on investment





86



86


Other (income) expense, net

9



4



16



29


Depreciation expense

99



87



183



369


Other amortization(1)

46



38



76



160


Amortization of intangibles

31



32



66



129


EBITDA

$

756



$

870



$

1,352



$

2,978


Items affecting comparability:








Restructuring and integration expenses

$

74



$

62



$

104



$

240


Transaction costs

7



1





8


Productivity

34



20



60



114


Nonroutine legal matters

12



21



35



68


Stock compensation

3



6



15



24


COVID-19





68



68


Mark to market

9



(46)



71



34


Adjusted EBITDA

$

895



$

934



$

1,705



$

3,534



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

 

KEURIG DR PEPPER INC.

RECONCILIATION 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 six months of 2020 and 2019, there were no certain items excluded for comparison to prior year periods.




First Six Months

(in millions)


2020


2019

Net cash provided by operating activities


$

1,062



$

1,203


Purchases of property, plant and equipment


(276)



(118)


Proceeds from sales of property, plant and equipment


202



19


Free Cash Flow


$

988



$

1,104


 

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 Second Quarter of 2020



Coffee


Packaged


Beverage


Latin

America



Percent change


Systems


Beverages


Concentrates


Beverages


Total

Net sales


5.4

%


6.2

%


(16.5)

%


(14.9)

%


1.8

%

Impact of foreign currency


0.4

%


0.1

%


0.3

%


16.3

%


1.1

%

Net sales, as adjusted to currency neutral


5.8

%


6.3

%


(16.2)

%


1.4

%


2.9

%




For the Second Quarter of 2020



Coffee


Packaged


Beverage


Latin

America



Percent change


Systems


Beverages


Concentrates


Beverages


Total

Adjusted income from operations


9.7

%


41.6

%


(9.8)

%


15.0

%


10.4

%

Impact of foreign currency


0.3

%


%


0.5

%


15.0

%


0.7

%

Adjusted income from operations, as adjusted to currency
neutral


10.0

%


41.6

%


(9.3)

%


30.0

%


11.1

%




For the First Six Months of 2020



Coffee


Packaged


Beverage


Latin

America



Percent change


Systems


Beverages


Concentrates


Beverages


Total

Net sales


3.0

%


7.5

%


(8.8)

%


(7.8)

%


3.0

%

Impact of foreign currency


0.1

%


0.1

%


0.2

%


10.9

%


0.7

%

Net sales, as adjusted to currency neutral


3.1

%


7.6

%


(8.6)

%


3.1

%


3.7

%




For the First Six Months of 2020



Coffee


Packaged


Beverage


Latin

America



Percent change


Systems


Beverages


Concentrates


Beverages


Total

Adjusted income from operations


6.6

%


34.9

%


(6.3)

%


56.3

%


10.3

%

Impact of foreign currency


0.2

%


%


0.3

%


15.6

%


0.5

%

Adjusted income from operations, as adjusted to currency
neutral


6.8

%


34.9

%


(6.0)

%


71.9

%


10.8

%




For the Second Quarter
of 2020


For the First Six Months
of 2020

Adjusted diluted earnings per share


$

0.33



$

0.62


Impact of foreign currency





Adjusted diluted earnings per share, as adjusted to currency neutral


$

0.33



$

0.62


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 second quarter of 2020:










Coffee Systems

$

7



$

2



$



$

8



$

17


Packaged Beverages

38



16







54


Beverage Concentrates





4





4


Latin America Beverages










Unallocated corporate costs










Total

$

45



$

18



$

4



$

8



$

75












For the first six months of 2020:










Coffee Systems

$

7



$

2



$

2



$

8



$

19


Packaged Beverages

41



18



8





67


Beverage Concentrates





4





4


Latin America Beverages










Unallocated corporate costs










Total

$

48



$

20



$

14



$

8



$

90












(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 both the second quarter and first six months of 2020. Impacts cost of sales.

 

(PRNewsfoto/Keurig Dr Pepper)

 

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SOURCE Keurig Dr Pepper