EX-99.1 2 ex991-keurigdrpepperreport.htm KEURIG DR PEPPER INC. PRESS RELEASE DATED MAY 9, 2019 - "KEURIG DR PEPPER REPORT Exhibit

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Keurig Dr Pepper Reports Solid Start to 2019
 
Delivers Strong EPS Growth and Repays $414 Million of Bank Debt in the Quarter

BURLINGTON, MA and PLANO, TX (May 9, 2019) - Keurig Dr Pepper Inc. (NYSE: KDP) today reported financial results for the first quarter ended March 31, 2019 and affirmed guidance for Adjusted diluted EPS(1) growth of 15% to 17% for the full year.

GAAP performance in the first quarter of 2019 was significantly impacted by the merger between Keurig Green Mountain and Dr Pepper Snapple Group, Inc., which was completed in July 2018. As a result, compared to the prior year period, net sales advanced 164% to $2.5 billion, operating income increased 180% to $498 million and earnings per diluted share (“diluted EPS”) grew 45% to $0.16.

The net sales of $2.50 billion in the first quarter of 2019 declined 1.1%, compared to Adjusted pro forma net sales of $2.53 billion in the prior year period, reflecting strong underlying net sales growth of 2.5% that was more than offset by the expected unfavorable impacts of changes in the Company’s Allied Brands portfolio, as well as calendar timing that affected year-over-year comparisons-namely, the shift of Easter into the second quarter of 2019 and one less shipping day this year in the first quarter. Adjusted diluted EPS increased 32% to $0.25 in the first quarter, compared to Adjusted pro forma diluted EPS of $0.19 in the year-ago period.

Commenting on the quarter, Keurig Dr Pepper Chairman and CEO Bob Gamgort stated, “Our first quarter results represent a good start to the year, with strong EPS delivery and all four segments registering underlying net sales growth. In addition, our in-market performance was also solid, as we grew retail dollar consumption across the majority of our portfolio and held or grew market share in nearly all categories. Our cash flow generation remains strong and we continue to reduce debt in line with our deleveraging targets. We remain confident in our targets for 2019 and our long-term value creation framework.”


First Quarter Consolidated Results

Net sales more than doubled to $2.50 billion in the first quarter of 2019, compared to $0.95 billion in the year-ago quarter, primarily reflecting the impact of the merger. Compared to Adjusted pro forma net sales of $2.53 billion in the first quarter of 2018, net sales decreased 1.1%. This performance reflected strong underlying net sales growth of 2.5%, driven by higher volume/mix of 1.4% and net price realization of 1.1%, more than offset by the expected unfavorable impacts related to changes in the Company’s Allied Brands portfolio of 2.5% and calendar timing of 0.6%. Also impacting the comparison was unfavorable foreign currency translation of 0.5%.





                                                          
(1) Adjusted financial metrics used in this release are non-GAAP measures and refer to results in 2019. In 2018, Adjusted pro forma financial metrics are also non-GAAP measures and assume the merger occurred on December 31, 2016 and adjust for other items affecting comparability. See reconciliations of GAAP results to Adjusted results, in the case of 2019 metrics, and to Adjusted pro forma results, in the case of 2018 metrics, in the accompanying tables.

1

Retail market performance(2) remained strong in the first quarter, with dollar consumption growth registered across the majority of the Company’s portfolio and KDP holding or growing market share in the vast majority of its categories. The Company’s CSD(3), premium unflavored still water, RTD(3) coffee and shelf stable apple juice portfolios registered market share growth in the quarter, driven by strong performances of Dr Pepper and Canada Dry CSD’s, CORE waters, Peet’s and Forto RTD coffees and Mott’s apple juice. In coffee, retail consumption of single-serve pods manufactured by KDP increased essentially in line with category unit growth of 5%.

Operating income of $498 million also more than doubled in the first quarter of 2019, compared to $178 million in the year-ago quarter, primarily reflecting the impact of the merger, partially offset by the unfavorable year-over-year impact of items affecting comparability.

Adjusted operating income advanced 10.5% to $621 million in the first quarter of 2019, compared to Adjusted pro forma operating income of $562 million in the year-ago period. This performance primarily reflected strong productivity and merger synergies, both of which benefitted cost of goods sold and SG&A. Partially offsetting these growth drivers was inflation, particularly in packaging and logistics. On a percentage of net sales basis, Adjusted operating income grew 260 basis points to 24.8% in the first quarter.

Net income increased to $230 million in the first quarter of 2019, compared to $88 million in the year-ago quarter, primarily reflecting the impact of the merger, partially offset by the unfavorable year-over-year impact of items affecting comparability. Diluted EPS grew 45% to $0.16 in the first quarter of 2019, compared to diluted EPS of $0.11 in the year-ago period.

Adjusted net income advanced 35% to $356 million in the first quarter of 2019, compared to Adjusted pro forma net income of $263 million in the year-ago period, primarily reflecting the growth in Adjusted operating income and significantly lower interest expense, due to the benefits of unwinding several interest rate swap contracts and reduced outstanding indebtedness. Also benefitting the comparison was a lower effective tax rate, due to U.S. tax reform enacted in December 2017. Adjusted diluted EPS increased 32% to $0.25, compared to Adjusted pro forma diluted EPS of $0.19 in the year-ago period.

During the quarter, due to the Company’s strong operating profit results and ongoing effective working capital management, KDP reduced debt by $414 million.


First Quarter Segment Results

Coffee Systems
Net sales for the first quarter of 2019 increased 2.1% to $968 million, compared to $948 million in the year-ago period. Compared to Adjusted pro forma net sales of $952 million, net sales increased 1.7%, reflecting higher volume/mix of 5.0%, partially offset by lower net price realization of 2.5% and unfavorable foreign currency translation of 0.8%.

The volume/mix growth of 5.0% for Coffee Systems was driven by a 7.0% increase in K-Cup pod volume and a 12.4% increase in brewer volume, partially offset by lower pod sales mix, primarily reflecting the impact of significant volume growth of branded partners in the first quarter of 2019.












_________________________
(2) Retail market performance (retail consumption; market share) based on Keurig Dr Pepper’s custom IRi category definitions.
(3) CSD refers to “Carbonated Soft Drink” and RTD refers to “Ready to Drink”.

2

Operating income for Coffee Systems advanced 15.4% to $293 million in the first quarter of 2019, compared to $254 million in the year-ago period. Adjusted operating income advanced 7.4% to $335 million, compared to Adjusted pro forma operating income of $312 million in the year-ago period, primarily reflecting the net sales growth and productivity. On a percentage of net sales basis, Adjusted operating income grew 180 basis points versus year-ago to 34.6%.


Packaged Beverages
Net sales for the first quarter of 2019 decreased 5.3% to $1.12 billion, compared to Adjusted pro forma net sales of $1.18 billion in the year-ago period, reflecting underlying net sales growth of 1.4%, driven by higher net price realization of 2.3%, partially offset by lower volume/mix of 0.9%. More than offsetting the underlying net sales growth in the quarter were the expected unfavorable impacts of 5.4% from changes in the Allied Brands portfolio and 1.2% from calendar timing. Unfavorable foreign currency translation also impacted the comparison by 0.1%.

Strong net sales growth in the quarter was registered by CORE, Evian, Dr Pepper, Canada Dry and Xyience, while Motts and 7UP declined. Contract manufacturing also registered growth in the quarter.

Operating income for Packaged Beverages totaled $149 million in the first quarter of 2019. Adjusted operating income of $160 million for the first quarter of 2019 was even with year-ago, largely reflecting strong productivity, including an earlier than expected $10 million net gain in the quarter related to the renegotiation of a manufacturing contract, as well as merger synergies. These positive drivers were offset by inflation, particularly in packaging and logistics. On a percentage of net sales basis, Adjusted operating income grew 70 basis points versus year-ago to 14.3%.


Beverage Concentrates
Net sales for the first quarter of 2019 increased 4.8% to $304 million, compared to Adjusted pro forma net sales of $290 million in the year-ago period, reflecting higher net price realization of 7.1%, partially offset by lower volume/mix of 2.0% and unfavorable foreign currency translation of 0.3%.
 
Dr Pepper continued to fuel the growth in net sales for the segment, along with increases for Crush and Big Red, partially offset by Canada Dry. Shipment volume was unfavorable 2.5%, largely due to declines in Canada Dry, Dr Pepper and Schweppes, partially offset by higher volume for Big Red and Crush.
 
Bottler case sales volume decreased 1.9%, including fountain foodservice which was 2.0% lower compared to the year-ago period.
 
Operating income for Beverage Concentrates totaled $201 million in the first quarter of 2019. Adjusted operating income in the quarter increased 11.7% to $201 million, compared to Adjusted pro forma operating income of $180 million in the year-ago period, primarily reflecting the growth in net sales and timing of marketing investments. On a percentage of net sales basis, Adjusted operating income grew 400 basis points versus year-ago to 66.1%.


Latin America Beverages
Net sales in the first quarter of 2019 increased 2.7% to $116 million, compared to Adjusted pro forma net sales of $113 million in the year-ago period, reflecting higher net price realization of 4.1% and favorable volume/mix of 1.0%, partially offset by unfavorable foreign currency translation of 2.4%.
 

3

Operating income for Latin America Beverages totaled $11 million in the first quarter of 2019. Adjusted operating income of $12 million in the quarter was even with Adjusted pro forma operating income in the year-ago period, reflecting the benefit of the net sales growth, entirely offset by an unfavorable foreign currency transaction impact and inflation in input costs and logistics.

KDP Adjusted Pro forma Outlook for 2019

The Company affirmed Adjusted diluted EPS growth in 2019 in the range of 15% to 17%, or $1.20 to $1.22 per diluted share, in line with its long-term merger target. Supporting this guidance are the following unchanged expectations:
•
Net sales growth of approximately 2%, consistent with the Company’s long-term merger target of 2-3%, which incorporates an approximate 100 bps unfavorable impact from the changes in the Allied Brands portfolio.
•
Merger synergies of $200 million in 2019, consistent with the Company’s long-term merger target for $200 million per year over the 2019-2021 period.
•
Other expense, net is expected to approximate $30 million of expense in 2019 and assumes no gains related to changes in the Allied Brands portfolio.
•
Adjusted interest expense is expected to be in the range of $570 million to $590 million, reflecting ongoing deleveraging and the continued benefit of unwinding interest rate swap contracts.
•
The Adjusted effective tax rate is expected to be in the range of 25.0% to 25.5%.
•
Diluted weighted average shares outstanding are estimated to be approximately 1,420 million.
•
The Company continues to expect significant cash flow generation and rapid deleveraging, with a targeted leverage ratio below 3.0x in two to three years from the July 2018 closing of the merger.




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. 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. The Company maintains a highly competitive distribution system that enables its portfolio of more than 125 owned, licensed and partner brands to be available nearly everywhere people shop and consume beverages. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig®, Dr Pepper®, Green Mountain Coffee Roasters®, Canada Dry®, Snapple®, Bai®, Mott’s® and The Original Donut Shop®. The Company employs more than 25,000 employees and operates more than 120 offices, manufacturing plants, warehouses and distribution centers across North America. For more information, visit www.keurigdrpepper.com.


4

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 “anticipate,” “expect,” “believe,” “could,” “estimate,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “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, 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 combined company’s business and the combination 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 combined 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 combination, including cost savings, will not be realized or will not be realized within the expected timeframe, and (iii) risks relating to the combined 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 Current Report on Form 10-K filed with the SEC on February 28, 2019, 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 pro forma net sales, Adjusted pro forma operating income, and Adjusted diluted EPS, 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, and to provide a meaningful comparison of the Company’s performance to periods prior to the Transaction. 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 its 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 presentation and included in the Company’s filings with the SEC.

See the attached schedules for the supplemental financial data and corresponding reconciliations of KDP Adjusted pro forma net sales, Adjusted pro forma operating income, and Adjusted diluted EPS.




5

KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the First Quarter of 2019 and 2018
(Unaudited)
 
First Quarter
(in millions, except per share data)
2019
 
2018
Net sales
$
2,504

 
$
948

Cost of sales
1,106

 
467

Gross profit
1,398

 
481

Selling, general and administrative expenses
911

 
300

Other operating (income) expense, net
(11
)
 
3

Income from operations
498

 
178

Interest expense
169

 
(2
)
Interest expense - related party
—

 
25

Loss on early extinguishment of debt
9

 
2

Other expense, net
5

 
13

Income before provision (benefit) for income taxes
315

 
140

Provision (benefit) for income taxes
85

 
51

Net income
230

 
89

Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards
—

 
1

Net income attributable to KDP
$
230

 
$
88

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.16

 
$
0.11

Diluted
0.16

 
0.11

Weighted average common shares outstanding:
 
 
 
Basic
1,406.3

 
790.5

Diluted
1,417.7

 
790.5





A-1

KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2019 and December 31, 2018
(Unaudited)
 
March 31,
 
December 31,
(in millions, except share and per share data)
2019
 
2018
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
85

 
$
83

Restricted cash and restricted cash equivalents
44

 
46

Trade accounts receivable, net
1,016

 
1,150

Inventories
663

 
626

Prepaid expenses and other current assets
354

 
254

Total current assets
2,162

 
2,159

Property, plant and equipment, net
2,282

 
2,310

Investments in unconsolidated affiliates
172

 
186

Goodwill
20,077

 
20,011

Other intangible assets, net
23,988

 
23,967

Other non-current assets
584

 
259

Deferred tax assets
26

 
26

Total assets
$
49,291

 
$
48,918

Liabilities and Stockholders' Equity
Current liabilities:
 
 
 
Accounts payable
$
2,558

 
$
2,300

Accrued expenses
962

 
1,012

Structured payables
595

 
526

Short-term borrowings and current portion of long-term obligations
2,018

 
1,458

Other current liabilities
523

 
406

Total current liabilities
6,656

 
5,702

Long-term obligations
13,246

 
14,201

Deferred tax liabilities
5,940

 
5,923

Other non-current liabilities
775

 
559

Total liabilities
26,617

 
26,385

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, 1,406,689,275 and 1,405,944,922 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
14

 
14

Additional paid-in capital
21,505

 
21,471

Retained earnings
1,192

 
1,178

Accumulated other comprehensive loss
(37
)
 
(130
)
Total stockholders' equity
22,674

 
22,533

Total liabilities and stockholders' equity
$
49,291

 
$
48,918


A-2

KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The First Quarter of 2019 and 2018
(Unaudited)
 
First Quarter
(in millions)
2019
 
2018
Operating activities:
 
 
 
Net income
$
230

 
$
89

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
85

 
32

Amortization expense
78

 
33

Provision for sales returns
9

 
11

Deferred income taxes
1

 
(14
)
Employee stock based compensation expense
14

 
11

Loss on early extinguishment of debt
9

 
2

Unrealized (gain) or loss on foreign currency
(17
)
 
8

Unrealized loss or (gain) on derivatives
7

 
(29
)
Other, net
—

 
18

Changes in assets and liabilities, net of effects of acquisition:
 
 
 
Trade accounts receivable
126

 
97

Inventories
(36
)
 
(7
)
Income taxes receivable, prepaid and payables, net
68

 
(4
)
Other current and non current assets
(102
)
 
(7
)
Accounts payable and accrued expenses
125

 
28

Other current and non current liabilities
(6
)
 
(1
)
Net change in operating assets and liabilities
175

 
106

Net cash provided by operating activities
591

 
267

Investing activities:
 
 
 
Issuance of related party note receivable
(7
)
 
—

Purchases of property, plant and equipment
(62
)
 
(20
)
Other, net
24

 
(6
)
Net cash used in investing activities
(45
)
 
(26
)
Financing activities:
 
 
 
Proceeds from term loan
2,000

 
—

Net Issuance of Commercial Paper
594

 
—

Proceeds from structured payables
78

 
—

Payments on structure payables
(9
)
 
—

Payments on senior unsecured notes
(250
)
 
—

Repayment of term loan
(2,758
)
 
(200
)
Payments on finance leases
(10
)
 
(3
)
Proceeds from issuance of common stock under compensation plans
8

 
—

Cash Dividends paid
(211
)
 
(11
)
Other, net
2

 
(1
)
Net cash used in financing activities
(556
)
 
(215
)
Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from:
 
 
 
Operating, investing and financing activities
(10
)
 
26

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
10

 
1

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
139

 
95

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
139

 
$
122


A-3

KEURIG DR PEPPER INC.
RECONCILIATION OF SEGMENT INFORMATION
(Unaudited)
 
First Quarter
(in millions)
2019
 
2018
Net Sales
 
 
 
Coffee Systems
$
968

 
$
948

Packaged Beverages
1,116

 
—

Beverage Concentrates
304

 
—

Latin America Beverages
116

 
—

Total net sales
$
2,504

 
$
948

 
 
 
 
Income from Operations
 
 
 
Coffee Systems
$
293

 
$
254

Packaged Beverages
149

 
—

Beverage Concentrates
201

 
—

Latin America Beverages
11

 
—

Unallocated corporate costs
(156
)
 
(76
)
Total income from operations
$
498

 
$
178



A-4

Unaudited Pro Forma Financial Information
On January 29, 2018, DPS entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among DPS, Maple and Salt Merger Sub, Inc. (“Merger Sub”), whereby Merger Sub will be merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS (the “Transaction”). The Transaction was consummated on July 9, 2018 (the "Merger Date"), at which time DPS changed its name to "Keurig Dr Pepper Inc.".
Immediately prior to the consummation of the Transaction (the “Effective Time”), each share of common stock of Maple issued and outstanding was converted into the right to receive a number of fully paid and nonassessable shares of common stock of Merger Sub determined pursuant to an exchange ratio set forth in the Merger Agreement (the “Acquisition Shares”). As a result of the Transaction, the stockholders of Maple as of immediately prior to the Effective Time own approximately 87% of DPS common stock following the closing and the stockholders of DPS as of immediately prior to the Effective Time own approximately 13% on a fully diluted basis. Upon consummation of the Transaction, DPS declared a special cash dividend equal to $103.75 per share, subject to any withholding of taxes required by law, payable to holders of its common stock as of the record date for the special dividend.
The following unaudited pro forma combined financial information (the “financial information”) is presented to illustrate the estimated effects of the Transaction. The financial information for the first quarter of 2018 is based on the actual first quarter financial statements of KDP after giving effect to the Transaction and the assumptions, reclassifications and adjustments described in the accompanying notes to this financial information. The financial information is presented as if the Transaction had been consummated on December 31, 2016, and combines the historical results of DPS and Maple. Refer to the Summary of Pro Forma Adjustments and Summary of Reclassifications below for details of the reclassifications and adjustments applied to the historical financial statements of DPS and of Maple, which is now reflected under the KDP column.
The financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized estimated fair values at the Merger Date for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. During the measurement period, we will continue to obtain information to assist in determining the fair value of the net tangible and intangible assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. The historical consolidated financial statements have been adjusted in the accompanying financial information to give effect to unaudited pro forma events that are (1) directly attributable to the transaction, (2) factually supportable, and (3) are expected to have a continuing impact on the results of operations of KDP.
The financial information has been prepared based upon currently available information and assumptions deemed appropriate by the Company's management. This financial information is not necessarily indicative of what our results of operations actually would have been had the Transaction been completed as of December 31, 2016. In addition, the financial information is not indicative of future results or current financial conditions and does not reflect any anticipated synergies, operating efficiencies, cost savings or any integration costs that may result from the Transaction. The financial information should be read in conjunction with historical financial statements and accompanying notes filed with the SEC.  

A-5

Summary of Pro Forma Adjustments
Pro forma adjustments included in the Pro Forma Combined Statements of Income are as follows:
a.
A decrease in Net sales to remove the historical deferred revenue associated with DPS' arrangements with PepsiCo, Inc. and The Coca-Cola Company, which were eliminated in the fair value adjustments for DPS as part of purchase price accounting.
b.
An increase in Net sales to remove the historical amortization of certain capitalized upfront customer incentive program payments. These were eliminated in the fair value adjustments for DPS as these upfront payments were revalued within the customer relationship intangible assets recorded in purchase price accounting.
c.
Adjustments to Selling, general and administrative ("SG&A") expenses due to changes in amortization as a result of the fair value adjustments for DPS' intangible assets with definite lives as part of purchase price accounting.
d.
Adjustments to SG&A expenses due to changes in depreciation as a result of the fair value adjustments for DPS' property, plant and equipment as part of purchase price accounting.
e.
A decrease to SG&A expenses for both DPS and KDP (Maple) to remove non-recurring transaction costs as a result of the Transaction.
f.
Removal of the Interest expense - related party caption for KDP (Maple), as the related party debt was capitalized into Additional paid-in capital immediately prior to the Transaction.
g.
Adjustments to Interest expense to remove the historical amortization of deferred debt issuance costs, discounts and premiums and to record incremental amortization as a result of the fair value adjustments for DPS' senior unsecured notes as part of purchase price accounting.
h.
Adjustments to Interest expense to record incremental interest expense and amortization of deferred debt issuance costs for borrowings related to the Transaction.
i.
Removal of the Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards caption as the Maple non-controlling interest was eliminated to reflect the capital structure of the combined company.
Summary of Reclassifications
Reclassifications included in the Pro Forma Combined Statements of Income for the three months ended March 31, 2018 are as follows:
a.
Foreign currency transaction gains and losses were reclassified from Cost of sales and SG&A expenses in the historical DPS Statements of Income to Other (income) expense, net.
b.
Depreciation and amortization expenses were reclassified from Depreciation and amortization in the historical DPS Statements of Income to SG&A expenses.
c.
Interest income was reclassified from Interest income in the historical DPS Statements of Income to Other (income) expense, net.

A-6

KEURIG DR PEPPER INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Three Months Ended March 31, 2018
(Unaudited)
(in millions, except per share data)
Reported KDP(1)
 
Historical DPS(2)
 
Reclassifications(3)
 
Pro Forma Adjustments(3)
 
Pro Forma Combined
Net sales
$
948

 
$
1,594

 
$
—

 
$
(13
)
 
$
2,529

Cost of sales
467

 
681

 
—

 
(13
)
 
1,135

Gross profit
481

 
913

 
—

 
—

 
1,394

Selling, general and administrative expenses
300

 
626

 
27

 
(49
)
 
904

Depreciation and amortization
—

 
27

 
(27
)
 
—

 
—

Other operating income, net
3

 
1

 
—

 
2

 
6

Income from operations
178

 
259

 
—

 
47

 
484

Interest expense
(2
)
 
41

 
—

 
106

 
145

Interest expense - related party
25

 
—

 
—

 
(25
)
 
—

Interest income
—

 
(1
)
 
1

 
—

 
—

Loss on early extinguishment of debt
2

 
—

 
—

 
—

 
2

Other expense, net
13

 
—

 
5

 
(1
)
 
17

Income before provision for income taxes
140

 
219

 
(6
)
 
(33
)
 
320

Provision (benefit) for income taxes
51

 
54

 
—

 
(7
)
 
98

Income before equity in loss of unconsolidated affiliates
89

 
159

 
(6
)
 
(26
)
 
222

Equity in loss of unconsolidated affiliates, net of tax
—

 
(6
)
 
6

 
—

 
—

Net income
89

 
153

 
—

 
(26
)
 
222

Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards
1

 
—

 
—

 
(1
)
 
—

Net income attributable to KDP
$
88

 
$
159

 
$
—

 
$
(25
)
 
$
222

Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.88

 
 
 
 
 
$
0.16

Diluted
0.11

 
0.88

 


 
 
 
0.16

Weighted average common shares outstanding:
 
 
 
 

 
 
 
 
Basic
790.5

 
179.9

 
 
 
416.1

 
1,386.5

Diluted
790.5

 
180.8

 
 
 
415.2

 
1,386.5


(1)
Refer to the Statements of Income.
(2)
Refers to DPS's activity during the first quarter of 2018. Refer to the Quarterly Report on Form 10-Q as filed on April 25, 2018.
(3)
Refer to Summary of Pro Forma Adjustments.





A-7



KEURIG DR PEPPER INC.
RECONCILIATION OF PRO FORMA SEGMENT INFORMATION
(Unaudited)
(in millions)
Reported KDP(1)
 
Reported DPS(2)
 
Pro Forma Adjustments(3)
 
Pro Forma Combined
For the First Quarter 2018
 
 
 
 
 
 
 
Net Sales
 
 
 
 
 
 
 
Coffee Systems
$
948

 
$
—

 
$
—

 
$
948

Packaged Beverages
—

 
1,178

 
—

 
1,178

Beverage Concentrates
—

 
303

 
(13
)
 
290

Latin America Beverages
—

 
113

 
—

 
113

Total net sales
$
948

 
$
1,594

 
$
(13
)
 
$
2,529

 
 
 
 
 
 
 
 
Income from Operations
 
 
 
 
 
 
 
Coffee Systems
$
254

 
$
—

 
$
—

 
$
254

Packaged Beverages
—

 
149

 
9

 
158

Beverage Concentrates
—

 
194

 
(14
)
 
180

Latin America Beverages
—

 
12

 
—

 
12

Unallocated Corporate
(76
)
 
(96
)
 
52

 
(120
)
Total income from operations
$
178

 
$
259

 
$
47

 
$
484


(1)
Refer to the Statements of Income.
(2)
Refers to DPS's activity during the the first quarter of 2018. Refer to the Quarterly Report on Form 10-Q as filed on April 25, 2018.
(3)
Refer to Summary of Pro Forma Adjustments.





A-8

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 periods that occur in 2019, management compares the Adjusted GAAP, which is defined as U.S. GAAP results adjusted for certain items affecting comparability, for the first quarter of 2019 to Adjusted Pro Forma, which is defined as Pro Forma results adjusted for certain items affecting comparability, for the first quarter of 2018. Pro Forma information is no longer prepared as the first quarter of 2019 reflects DPS and Maple as a combined company for the entire period.
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) 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 or the Keurig Dr Pepper Omnibus Incentive Plan of 2009; and (v) other certain items that are excluded for comparison purposes to prior year periods.
For the first quarter of 2019, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) transaction costs not associated with the DPS Merger; (iv) provision for legal settlements; (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 malware incident.
For the first quarter of 2018, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) provisions for legal settlements; and (iv) the loss on early extinguishment of debt related to the redemption of debt; and (v) tax reform associated with the TCJA.
Reconciliations for these items are provided in the tables below.

A-9

KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
(Unaudited, in millions, except per share data)
 
For the Three Months Ended March 31, 2019
 
 
 
 
 
Amortization of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reported
 
Mark to Market
 
Intangibles
 
Deferred Financing Costs
 
Stock Compensation
 
Restructuring and Integration Expenses
 
Productivity
 
Transaction Costs
 
Loss on Early Payment of Debt
 
Inventory Step-Up
 
Provision for Settlements
 
Malware Incident
 
Adjusted GAAP
Cost of sales
$
1,106

 
$
(12
)
 
$
—

 
$
—

 
$
—

 
$
(1
)
 
$
(3
)
 
$
—

 
$
—

 
$
(3
)
 
$
—

 
$
(2
)
 
$
1,085

Gross profit
1,398

 
12

 
—

 
—

 
—

 
1

 
3

 
—

 
—

 
3

 
—

 
2

 
1,419

Gross margin
55.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
56.7
%
Selling, general and administrative expenses
$
911

 
$
12

 
$
(31
)
 
$
—

 
$
(7
)
 
$
(60
)
 
$
(6
)
 
$
—

 
$
—

 
$
—

 
$
(7
)
 
$
(3
)
 
809

Income from operations
498

 
—

 
31

 
—

 
7

 
61

 
9

 
—

 
—

 
3

 
7

 
5

 
621

Operating margin
19.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
24.8
%
Interest expense
$
169

 
$
(29
)
 
$
—

 
$
(4
)
 
$
—

 
$
—

 
$
—

 
$
(5
)
 
$
—

 
$
—

 
$
—

 
$
—

 
131

Loss on early extinguishment of debt
9

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(9
)
 
—

 
—

 
—

 
—

Other income, net
5

 
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
7

Income before provision for income taxes
315

 
27

 
31

 
4

 
7

 
61

 
9

 
5

 
9

 
3

 
7

 
5

 
483

Provision for income taxes
85

 
7

 
8

 
1

 
2

 
15

 
2

 
1

 
2

 
1

 
2

 
1

 
127

Effective tax rate
27.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
26.3
%
Net income
$
230

 
$
20

 
$
23

 
$
3

 
$
5

 
$
46

 
$
7

 
$
4

 
$
7

 
$
2

 
$
5

 
$
4

 
356

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reported EPS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EPS
Diluted earnings per common share
$
0.16

 


 


 


 


 


 


 


 


 


 


 
 
 
$
0.25

Shares
1,417.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,417.7



A-10

KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN PRO FORMA ITEMS TO CERTAIN NON-GAAP ADJUSTED PRO FORMA ITEMS
(Unaudited, in millions, except per share data)
 
For the Three Months Ended March 31, 2018
 
 
 
 
 
Amortization of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro Forma
 
Mark to Market
 
Intangibles
 
Deferred Financing Costs
 
Stock Compensation
 
Restructuring and Integration Expenses
 
Productivity
 
Provision for Settlements
 
Loss on Early Payment of Debt
 
Tax Reform
 
Adjusted Pro Forma
Net sales
$
2,529

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
4

 
$
—

 
$
—

 
$
2,533

Cost of sales
1,135

 
(14
)
 
—

 
—

 
—

 
—

 
(4
)
 
—

 
—

 
—

 
1,117

Gross profit
1,394

 
14

 
—

 
—

 
—

 
—

 
4

 
4

 
—

 
—

 
1,416

Gross margin
55.1
%
 


 


 


 


 


 


 


 


 


 
55.9
%
Selling, general and administrative expenses
$
904

 
$
—

 
$
(28
)
 
$
—

 
$
(6
)
 
$
(6
)
 
$
(14
)
 
$
2

 
$
—

 
$
—

 
$
852

Other operating income, net
6

 
—

 
—

 
—

 
—

 
—

 
(4
)
 
—

 
—

 
—

 
2

Income from operations
484

 
14

 
28

 
—

 
6

 
6

 
22

 
2

 
—

 
—

 
562

Operating margin
19.1
%
 


 


 


 


 


 


 


 


 


 
22.2
%
Interest expense
$
145

 
$
27

 
$
—

 
$
(1
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
171

Loss on early extinguishment of debt
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
—

 
—

Other income, net
17

 
4

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
21

Income before provision for income taxes
320

 
(17
)
 
28

 
1

 
6

 
6

 
22

 
2

 
2

 
—

 
370

Provision for income taxes
98

 
(4
)
 
7

 
1

 
2

 
—

 
6

 
—

 
—

 
(3
)
 
107

Effective tax rate
30.6
%
 


 


 


 


 


 


 


 


 


 
28.9
%
Net income
$
222

 
$
(13
)
 
$
21

 
$
—

 
$
4

 
$
6

 
$
16

 
$
2

 
$
2

 
$
3

 
$
263

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro Forma EPS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro Forma Adjusted EPS
Diluted earnings per common share
$
0.16

 


 


 


 


 


 


 


 


 


 
$
0.19

Shares
1,386.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,386.5








A-11

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 Quarter of 2019
 
 
 
 
 
Net Sales
 
 
 
 
 
Coffee Systems
$
968

 
$
—

 
$
968

Packaged Beverages
1,116

 
—

 
1,116

Beverage Concentrates
304

 
—

 
304

Latin America Beverages
116

 
—

 
116

Total net sales
$
2,504

 
$
—

 
$
2,504

 
 
 
 
 
 
Income from Operations
 
 
 
 
 
Coffee Systems
$
293

 
$
42

 
$
335

Packaged Beverages
149

 
11

 
160

Beverage Concentrates
201

 
—

 
201

Latin America Beverages
11

 
1

 
12

Unallocated corporate costs
(156
)
 
69

 
(87
)
Total income from operations
$
498

 
$
123

 
$
621

(in millions)
Pro Forma
 
Items Affecting Comparability
 
Adjusted Pro Forma
For the First Quarter of 2018
 
 
 
 
 
Net Sales
 
 
 
 
 
Coffee Systems
$
948

 
$
4

 
$
952

Packaged Beverages
1,178

 
—

 
1,178

Beverage Concentrates
290

 
—

 
290

Latin America Beverages
113

 
—

 
113

Total net sales
$
2,529

 
$
4

 
$
2,533

 
 
 
 
 
 
Income from Operations
 
 
 
 
 
Coffee Systems
$
254

 
$
58

 
$
312

Packaged Beverages
158

 
2

 
160

Beverage Concentrates
180

 
—

 
180

Latin America Beverages
12

 
—

 
12

Unallocated corporate costs
(120
)
 
18

 
(102
)
Total income from operations
$
484

 
$
78

 
$
562



A-12

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
$
1,126

Interest expense
695

Provision for income taxes
399

Loss on early extinguishment of debt
20

Other (income) expense, net
(44
)
Depreciation expense
333

Amortization of intangibles
125

EBITDA
$
2,654

Items affecting comparability:
 
Restructuring and integration expenses
$
225

Transaction costs
4

Productivity
19

Provision for settlements
27

Stock compensation
22

Malware incident
5

Mark to market
86

Step-up of acquired inventory
5

Adjusted EBITDA
$
3,047

 
 
 
March 31,
 
2019
Principal amounts of:
 
Commercial paper
$
1,674

Term loan
1,825

Senior unsecured notes
11,975

Total principal amounts
15,474

Less: Cash and cash equivalents
85

Total principal amounts less cash and cash equivalents
$
15,389

 
 
March 31, 2019 Management Leverage Ratio
5.1


A-13

KEURIG DR PEPPER INC.
RECONCILIATION OF ADJUSTED EBITDA - LAST TWELVE MONTHS
(Unaudited)
 
 
ADJUSTED PROFORMA
 
ADJUSTED
 
 
(in millions)
 
SECOND QUARTER OF 2018
 
THIRD QUARTER OF 2018
 
FOURTH QUARTER OF 2018
 
FIRST QUARTER OF 2019
 
LAST TWELVE MONTHS
Net income
 
$
332

 
$
301

 
$
263

 
$
230

 
$
1,126

Interest expense
 
170

 
178

 
178

 
169

 
695

Provision for income taxes
 
99

 
121

 
94

 
85

 
399

Loss on early extinguishment of debt
 
—

 
11

 
—

 
9

 
20

Other (income) expense, net
 
(21
)
 
(37
)
 
9

 
5

 
(44
)
Depreciation expense
 
80

 
88

 
80

 
85

 
333

Amortization of intangibles
 
31

 
30

 
33

 
31

 
125

EBITDA
 
$
691

 
$
692

 
$
657

 
$
614

 
$
2,654

Items affecting comparability:
 
 
 
 
 
 
 
 
 
 
Restructuring and integration expenses
 
$
33

 
$
47

 
$
84

 
$
61

 
$
225

Transaction costs
 
—

 
2

 
2

 
—

 
4

Productivity
 
(5
)
 
12

 
3

 
9

 
19

Provision for settlements
 
2

 
11

 
7

 
7

 
27

Stock compensation
 
6

 
4

 
5

 
7

 
22

Malware incident
 
—

 
—

 
—

 
5

 
5

Mark to market
 
(7
)
 
26

 
40

 
27

 
86

Step-up of acquired inventory
 
—

 
—

 
2

 
3

 
5

Adjusted EBITDA
 
$
720

 
$
794

 
$
800

 
$
733

 
$
3,047

 
 
 
 
 
 
 
 
 
 
 



A-14

RECONCILIATION OF CERTAIN ADJUSTED FINANCIAL RESULTS TO CERTAIN
CURRENCY NEUTRAL ADJUSTED FINANCIAL RESULTS
(Unaudited)
Adjusted 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 Three Months Ended March 31, 2019
 
 
Coffee
 
Packaged
 
Beverage
 
Latin
America
 
 
Percent change
 
Systems
 
Beverages
 
Concentrates
 
Beverages
 
Total
Adjusted net sales
 
1.7
%
 
(5.3
)%
 
4.8
%
 
2.7
%
 
(1.1
)%
Impact of foreign currency
 
0.8
%
 
0.1
 %
 
0.3
%
 
2.4
%
 
0.5
 %
Adjusted net sales, as adjusted to currency neutral
 
2.5
%
 
(5.2
)%
 
5.1
%
 
5.1
%
 
(0.6
)%
 
 
For the Three Months Ended March 31, 2019
 
 
Coffee
 
Packaged
 
Beverage
 
Latin
America
 
 
Percent change
 
Systems
 
Beverages
 
Concentrates
 
Beverages
 
Total
Adjusted income from operations
 
7.4
%
 
—
%
 
11.7
%
 
—
%
 
10.5
%
Impact of foreign currency
 
1.6
%
 
—
%
 
0.5
%
 
1.3
%
 
1.1
%
Adjusted income from operations, as adjusted to currency neutral
 
9.0
%
 
—
%
 
12.2
%
 
1.3
%
 
11.6
%
 
 
For the Three Months Ended
 
 
March 31, 2019
Adjusted diluted earnings per share
 
$
0.25

Impact of foreign currency
 
—

Adjusted diluted earnings per share, as adjusted to currency neutral
 
$
0.25


A-15