KEURIG DR PEPPER INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
The following discussion should be read in conjunction with our audited consolidated financial statements and accompanying notes in our annual report.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, in particular, statements about the impact of the global COVID-19 pandemic, inflation, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters, supply chain issues and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology 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 in this Quarterly Report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report, as well as our subsequent filings with the
SEC. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them, after the date of this Quarterly Report on Form 10-Q, except to the extent required by applicable securities laws. This Quarterly Report on Form 10-Q contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands. All of the product names included in this Quarterly Report on Form 10-Q are either our registered trademarks or those of our licensors.
KDP is a leading beverage company in
North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including water (enhanced and flavored), ready-to-drink tea and coffee, juice, juice drinks, mixers and specialty coffee, and is a leading producer of innovative single serve brewing systems. With a wide range of hot and cold beverages that meet virtually any consumer need, our key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountainand The Original Donut Shop. We have some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. We offer more than 125 owned, licensed, and partner brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S., according to IRi, which are available nearly everywhere people shop and consume beverages. KDP operates as an integrated brand owner, manufacturer and distributor. We believe our integrated business model strengthens our route-to-market and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our DSD and our WD systems. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, e-commerce retailers, office superstores, vending machines, grocery and drug stores, and convenience stores; to restaurants, hotel chains, office product and coffee distributors, and partner brand owners; and directly to consumers through its websites. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.
Our reportable segments consist of the following:
• The Coffee Systems segment reflects sales in the
•The Packaged Beverages segment reflects sales in the
U.S.and Canadafrom the manufacture and distribution of finished beverages and other products, including sales of our own brands and third-party brands, through both the DSD and WD systems.
• The beverage concentrates segment reflects sales primarily in the
• The Beverages segment in Latin America reflects sales primarily in
COMPARABLE RESULTS OF OPERATIONS
Management believes that there are certain non-GAAP financial measures that allow management to evaluate our results, trends and ongoing performance on a comparable basis. In order to derive the adjusted financial information, we adjust certain financial statement captions and metrics prepared under
U.S.GAAP for certain items affecting comparability and the impact of foreign currency. See Non-GAAP Financial Measures for further information.
Financial Overview – Second Quarter 2022 vs. Second Quarter 2021
As Reported, in millions (except EPS)
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As Adjusted, in millions (except EPS)
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Main events of the second quarter of 2022
April 2022, we announced a succession plan where Robert J. Gamgortwill transition from his position as President and Chief Executive Officer, remaining as our Executive Chairman of our Board. Our Board appointed Ozan Dokmecioglu, currently Chief Financial Officer & President of International, as the Company's next President and Chief Executive Officer, effective July 29, 2022. In connection with this leadership transition, George Lagoudakis, currently our Senior Vice President of Finance for Cold Beverages, was appointed to serve as our interim Chief Financial Officer, effective July 29, 2022, while we continue our external search for our permanent Chief Financial Officer.
During the second quarter of 2022, we repurchased and retired
We were added to the S&P 500 Index, effective before markets opened on
During the second quarter, we acquired equity interests in Tractor Beverage and entered into an exclusive sales agreement, which leverages the strength of our fountain foodservice business and expands our FFS portfolio. We also announced an agreement to acquire the global rights to the non-alcoholic, ready-to-drink cocktail brand Atypique, which is expected to close during the second half of 2022. 30
Uncertainties and trends affecting our business
We believe that the North American beverage market is influenced by certain key trends and uncertainties. See Section 1A, “Risk Factors,” of our Annual Report for more information about the risks and uncertainties facing us.
Some of these items, such as the ongoing COVID-19 pandemic and the invasion of
Ukraineby Russia, and the resulting impacts on the global economy, including supply chain constraints and labor shortages, have led to inflation in input costs, logistics, manufacturing and labor costs. During the first six months of 2022, we have experienced supply chain disruptions and a significant inflationary impact compared to the prior year period. These impacts have created headwinds for our products that we expect to continue through the remainder of 2022.
Due to these inflationary pressures, we have increased the prices of a number of our products across our portfolio. As a result, we may experience reduced volume or net sales which, combined with inflationary pressures, could impact our margins and results of operations.
Refer to Note 4 of the Notes to our unaudited condensed consolidated financial statements for our discussion of how we manage our exposure to commodity risk.
Impact of COVID-19 on our financial statements
The following table sets forth our reconciliation of significant COVID-19-related expenses. 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 are 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 Affecting Comparability(1) Allowances for Expected Employee Compensation Employee Protection Credit (in millions) Expense(2) Costs(3) Losses(4) Total For the second quarter of 2022: Coffee Systems $ - $ 1 $ - $ 1Packaged Beverages 1 1 - 2 Beverage Concentrates - - - - Latin America Beverages - 1 - 1 Total $ 1 $ 3 $ - $ 4For the second quarter of 2021: Coffee Systems $ 1 $ 4 $ (2) $ 3Packaged Beverages 3 3 (8) (2) Beverage Concentrates - - (3) (3) Latin America Beverages - - - - Total $ 4 $ 7 $ (13) $ (2)For the first six months of 2022: Coffee Systems $ 1 $ 3 $ - $ 4Packaged Beverages 2 2 - 4 Beverage Concentrates - - - - Latin America Beverages - 1 - 1 Total $ 3 $ 6 $ - $ 9For the first six months of 2021: Coffee Systems $ 2 $ 13 $ (2) $ 13Packaged Beverages 6 5 (8) 3 Beverage Concentrates - - (3) (3) Latin America Beverages - 1 - 1 Total $ 8 $ 19 $ (13) $ 14(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)Amounts include pay for temporary employees, including the associated taxes, as well as incremental benefits provided to frontline workers such as extended sick leave, in order to maintain essential operations during the COVID-19 pandemic. (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)Reflects reversal of allowances initially recorded in 2020 specifically related to the COVID-19 pandemic, driven by improving economic conditions during 2021. 31
Table of Contents RESULTS OF OPERATIONS
We eliminate from our financial results all applicable intercompany transactions between entities included in our consolidated financial statements and intercompany transactions with our equity affiliates.
References in the financial tables to percentage changes that are not significant are denoted by “NM”.
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