Correspondence 0001418135-23-000036 from Keurig Dr Pepper Inc. (KDP) (CIK 0001418135) (KDP)
Keurig Dr Pepper Inc. (KDP) (CIK 0001418135)
Date: Nov. 30, 2023 · CIK: 0001418135 · Accession: 0001418135-23-000036
AI Filing Summary & Sentiment
File numbers found in text: 001-33829
Referenced dates: October 30, 2023
Letter
VIA EDGAR United States Securities and Exchange Commission Division of Corporation Finance Office of Manufacturing Attention: Claire Erlanger and Heather Clark Form 10-K for the Year Ended December 31, 2022 Form 10-Q for the Quarter Ended September 30, 2023 Form 8-K furnished October 26, 2023 File No. 001-33829
Dear Sir or Madam:
This letter sets forth the responses of Keurig Dr Pepper Inc. (“KDP” or the “Company”) to the comments provided by the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) in its comment letter dated October 30, 2023 (the “Comment Letter”). For your convenience, we have repeated the comments of the Staff in bold type face exactly as given in the Comment Letter and set forth is our response below each comment.
References in the “Response:” sections below to “we”, “our”, or “us” refer to Keurig Dr Pepper Inc. and its consolidated subsidiaries, unless the context requires otherwise.
Form 10-K for the Year Ended December 31, 2022
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations, page 29
1.Where you describe two or more business reasons that contributed to a material change in a financial statement line item between periods, please quantify, where possible, the extent to which each factor contributed to the overall change in that line item. Please apply this comment to both your consolidated and segment results of operations. As an example, your disclosures on page 30 attribute the increase in selling, general and administrative expenses to higher logistics costs, inflation, volume/mix impacts, increases in labor, and unfavorable mark to market losses and only the mark to market loss is quantified. See Item 303 of Regulation S-K and SEC Release No. 33-8350.
Response:
The Company respectfully acknowledges the Staff’s comment and will endeavor in future filings to enhance its discussion by quantifying certain factors that result in material changes to the Company’s consolidated and segment results of operations to the extent such information is both available and appropriate to enhance investors’ understanding of the magnitude and relative impact of each factor.
Presented below for illustrative purposes is an example of the Company’s proposed revised disclosure (comparing the fiscal years ended December 31, 2022 and 2021) that includes enhanced quantitative detail. The revisions are marked with underlines or strikethroughs to facilitate the Staff’s review.
Selling, General and Administrative Expenses. SG&A expenses increased $492 million, or 11.8%, to $4,645 million for the year ended December 31, 2022 compared to $4,153 million in the prior year. The increase primarily reflected higher logistics costs (6.8%), driven by both inflation and volume/mix impacts, increases in labor costs (1.8%) and other operating expenses, and an unfavorable comparison of unrealized mark-to-market losses of $55 million on commodity contracts (1.3%).
Supplemental Guarantor Financial Information, page 4
2.We note that the summarized financial information disclosed for the Parent and Guarantors includes net sales, income from operations and net income attributable to KDP. Please revise your disclosure in future filings to include the disclosure of gross profit. See Rule 13-01(a)(4) and Rule 1-02(bb)(1)(ii) of Regulation S-X.
Response:
The Company respectfully acknowledges the Staff’s comment. The Company intends to include gross profit within its disclosure of summarized financial information for the Parent and Guarantors (as defined in the relevant filing) in future filings.
Non-GAAP Financial Measures, page 42
3.We note that several of your adjusted measures include an adjustment for productivity. Please tell us the nature of these productivity expenses adjustments and explain to us why you do not believe these costs represent normal operating costs. See Question 100.01 in the SEC Staff's Compliance & Disclosure Interpretations on Non-GAAP Financial Measures.
Response:
The Company respectfully acknowledges the Staff’s comment and advises that it considered the guidance set forth in Question 100.01 in the SEC Staff’s Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. In determining that these productivity adjustments were appropriate, the Company followed a careful and rigorous process, with clear and consistent guidelines, that it uses for all non-GAAP financial presentations. Specifically, the Company has an Adjustment Committee, which includes the Chief Financial Officer and Principal Accounting Officer, that evaluates potential adjustments that may result in the presentation of a non-GAAP financial measure. The Committee uses Question 100.01, along with other relevant rules, regulations and Staff guidance relating to the presentation of non-GAAP financial measures, in determining whether an adjustment is appropriate. The Company defines its productivity adjustment as a group of discrete, non-recurring strategic projects that are transformative in nature and that are expected to generate significant cost savings (productivity) over time. These projects are both expected to occur over a multi-year time period and are outside of the Company’s ordinary business expenses. These productivity expenses are therefore not normal, recurring, cash operating expenses necessary to operate the Company’s business.
The following information is provided to the Staff in response to their comment. Furthermore, the Company will include greater disclosure in future filings to enhance the investors’ understanding of the discrete, non-recurring projects included within its productivity adjustment.
For the year ended December 31, 2022, we had four main projects included within the productivity adjustment. The first project represents the construction of a coffee manufacturing facility comprised of next-generation manufacturing lines utilizing innovative technology never before installed or used by coffee manufacturers. This facility is targeted to save the Company significant production costs and thereby decrease its cost per K-cup pod. These lines are being installed on a phased approach in coordination with the lead times required for assembly and installation associated with a third-party foreign manufacturer. During the COVID-19 pandemic, our third-party manufacturer’s focus shifted to ensuring safety of their workers, combined with mandatory foreign government shut-downs, such that the timeline for completion was significantly delayed. The Company intends to reduce the amount of the adjustment as each line is installed and becomes operational. All manufacturing lines are expected to be completed in 2025.
The second project represents the construction of a beverage manufacturing and distribution facility using next-generation aseptic lines and robotic capabilities. This facility is targeted to save the Company significant production and distribution costs and thereby decrease its overall cost per case. Once the facility is fully operational, which is currently expected in 2023, the adjustment will end.
Our third project relates to consulting fees for strategic initiatives incurred from two external consulting firms to provide specialized expertise for two distinct transformative projects, one related to supply chain strategy and the other to our long-term growth strategy. The expenses incurred in connection with these discrete strategic initiatives are outside of day-to-day business and the projects, by their nature, are not expected to reoccur or be necessary again in the foreseeable future. The majority of the consulting occurred in 2022, with a small tail expected to occur in 2023.
Our fourth project relates to the construction of a second beverage concentrate manufacturing facility, intended to create redundancy to the Company’s single existing plant, coupled with the creation of a procurement center of excellence that reorients the Company’s previous strategy. This second manufacturing facility was located in an international jurisdiction where no operations existed previously. Additionally, this facility is targeted to provide the Company overall cash flow savings. Once the facility is fully operational, which is expected to occur in 2023, the adjustment will cease.
Accordingly, the Company and the Adjustment Committee believes that these adjustments are not normal, recurring, cash operating expenses necessary to operate the Company’s business.
Financial Statements
Notes to Consolidated Financial Statements
3. Goodwill and Other Intangible Assets
Impairment Analysis, page 70
4.We note that you performed an interim impairment analysis as of September 30, 2022, recording a $311 million impairment and also performed your annual impairment analysis as of October 1, 2022, recording a $161 million impairment. Please address the following:
•Summarize for us the changes in circumstances and/or assumptions that led to the multiple impairment charges over a relatively short period of time.
•Explain the timing for recognizing the $161 million impairment and provide your basis for concluding that this additional impairment did not exist as of September 30, 2022.
•Tell us whether your valuation assumptions changed between your September 30, 2022 and October 1, 2022 impairment tests.
Response:
The Company respectfully acknowledges the Staff’s comment.
Overview:
The Company recorded impairment charges in two different quarters in 2022. The impairment charge in the third quarter of 2022 was identified by a triggering event specific to a singular brand led by margin deterioration and declining performance, which occurred during the quarter as compared to the prior period forecast. As a result of the triggering event identified and subsequent quantitative analysis performed, a $311 million impairment charge was recorded during the third quarter of 2022.
The additional $161 million impairment charge recorded in the fourth quarter of 2022 was identified in our normal annual impairment process driven primarily from increasing discount rate trends related to three of our brands (Schweppes, Crush and SunDrop) as opposed to any specific triggering event(s). The following explanation provides additional detail into these analyses.
Triggering Event Analysis - Third Quarter of 2022:
In accordance with ASC 350-20-35-3C, the Company performed its customary triggering event analysis considering all relevant events and circumstances that could affect the significant inputs used to determine the fair value of its indefinite-lived intangible assets and concluded that the Bai brand exhibited indicators that it was more likely than not impaired. At the end of the first quarter of 2022, the Company renewed its third-party manufacturing agreement for the majority of Bai products, which significantly increased its costs after no changes since 2018. The Company proceeded to increase pricing on Bai beginning in the third quarter of 2022 to offset these and other inflationary cost pressures. After experiencing greater-than-originally-forecasted volume declines starting in the same quarter, these circumstances led to a reevaluation and reduction in Bai’s forecasted future cash flows, which created a triggering event. Once the Company determined that a triggering event had occurred in the period, a quantitative Step 1 analysis was performed for the Bai brand with the assistance of external valuation specialists, which resulted in an impairment charge of $311 million being recorded. No other indefinite-lived intangible assets were determined to be more likely than not impaired as a result of our triggering event analysis, and therefore, a Step 1 quantitative analysis was not deemed to be necessary for any other indefinite-lived intangible assets as of September 30, 2022, in accordance with ASC 350-30-35-18E.
In the overarching triggering event analysis performed as of September 30, 2022, the Company identified the overall challenges in the macroeconomic environment with increases in the treasury yield rates stemming from national supply chain constraints and inflation as a risk. However, in accordance with ASC 350-30-35-18C, we further considered mitigating events such as the Company’s ability to successfully manage these challenges by increasing the prices for its products while maintaining material volumes for all brands (excluding Bai). Additionally, other compensating factors were considered such as (i) the increase in the Company’s market cap between the prior annual impairment testing date of October 1, 2021 and September 30, 2022, and (ii) the headroom on the majority of its indefinite-lived intangible assets. Based on the macroeconomic environment as well as mitigating factors, the Company concluded that the inflationary impact in the overall rising discount rate environment was not considered to be a triggering event requiring further detailed quantitative analysis as of September 30, 2022, as the Company did not believe this singular input used to determine fair value resulted in its brand assets being more likely than not impaired.
Annual Impairment Analysis - Fourth Quarter of 2022:
In accordance with ASC 350-30-35-18, the Company performs impairment tests on goodwill and all indefinite-lived intangible assets annually on October 1. The Company performed a Step 1 quantitative analysis on all of its goodwill and primary indefinite-lived intangible brands during the fourth quarter of 2022, and engaged external valuation specialists to assist in the fair value determinations using market participant assumptions in accordance with ASC 350. No key valuation assumptions changed from September 30, 2022 to October 1, 2022 specific to Bai; however, as a result of the analysis performed, the Company concluded that additional impairment charges of $161 million were necessary for three of its other brands (Schweppes, Crush and SunDrop). The annual impairment charge was primarily driven by an increase in discount rates applied in the fair value analyses due to increased Company-specific forecast risk specific to each brand as compared to the prior year and a higher weighted average cost of capital.
Form 10-Q for the Quarter Ended September 30, 2023
Financial Statements
Notes to Condensed Consolidated Financial Statements
1. General
Reportable Segments, page 8
5. We note that effective January 1, 2023, you revised your segment structure to align with changes in how the CODM manages the business, assesses performance and allocate resources. We further note that the change resulted in three reportable segments from the former four reportable segments. Please explain to us in detail, the events that led to the change in reportable segments. For example, please tell us if there was a change in segment managers that report to the CODM, level of detail of the financial information reviewed by the CODM, or other factors that led to this change. As part of your response, please also tell us, and revise future filings to disclose, if in this new structure, any operating segments have been aggregated into any of the reportable segments. See guidance in ASC 280-10-50-21. If you have aggregated certain operating segments, please provide us with a detailed analysis as to why you believe aggregation is consistent with the criteria in ASC 280-10-50-11.
Response:
The Company respectfully acknowledges the Staff’s comment. The resegmentation occurred at the time of a management transition and reflected the incoming management’s strategic focus for the Company. As previously disclosed, Robert Gamgort returned to the Company as Chief Executive Officer (“CEO”) in November 2022 after the Company’s previo
Show Raw Text
CORRESP 1 filename1.htm Document 53 South Avenue Burlington, Massachusetts 01803 November 30, 2023 VIA EDGAR United States Securities and Exchange Commission Division of Corporation Finance Office of Manufacturing 100 F Street, N.E. Washington, D.C. 20549 Attention: Claire Erlanger and Heather Clark Re: Keurig Dr Pepper Inc. Form 10-K for the Year Ended December 31, 2022 Form 10-Q for the Quarter Ended September 30, 2023 Form 8-K furnished October 26, 2023 File No. 001-33829 Dear Sir or Madam: This letter sets forth the responses of Keurig Dr Pepper Inc. (“KDP” or the “Company”) to the comments provided by the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) in its comment letter dated October 30, 2023 (the “Comment Letter”). For your convenience, we have repeated the comments of the Staff in bold type face exactly as given in the Comment Letter and set forth is our response below each comment. References in the “Response:” sections below to “we”, “our”, or “us” refer to Keurig Dr Pepper Inc. and its consolidated subsidiaries, unless the context requires otherwise. 1 Form 10-K for the Year Ended December 31, 2022 Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations, page 29 1.Where you describe two or more business reasons that contributed to a material change in a financial statement line item between periods, please quantify, where possible, the extent to which each factor contributed to the overall change in that line item. Please apply this comment to both your consolidated and segment results of operations. As an example, your disclosures on page 30 attribute the increase in selling, general and administrative expenses to higher logistics costs, inflation, volume/mix impacts, increases in labor, and unfavorable mark to market losses and only the mark to market loss is quantified. See Item 303 of Regulation S-K and SEC Release No. 33-8350. Response: The Company respectfully acknowledges the Staff’s comment and will endeavor in future filings to enhance its discussion by quantifying certain factors that result in material changes to the Company’s consolidated and segment results of operations to the extent such information is both available and appropriate to enhance investors’ understanding of the magnitude and relative impact of each factor. Presented below for illustrative purposes is an example of the Company’s proposed revised disclosure (comparing the fiscal years ended December 31, 2022 and 2021) that includes enhanced quantitative detail. The revisions are marked with underlines or strikethroughs to facilitate the Staff’s review. Selling, General and Administrative Expenses. SG&A expenses increased $492 million, or 11.8%, to $4,645 million for the year ended December 31, 2022 compared to $4,153 million in the prior year. The increase primarily reflected higher logistics costs (6.8%), driven by both inflation and volume/mix impacts, increases in labor costs (1.8%) and other operating expenses, and an unfavorable comparison of unrealized mark-to-market losses of $55 million on commodity contracts (1.3%). Supplemental Guarantor Financial Information, page 4 2.We note that the summarized financial information disclosed for the Parent and Guarantors includes net sales, income from operations and net income attributable to KDP. Please revise your disclosure in future filings to include the disclosure of gross profit. See Rule 13-01(a)(4) and Rule 1-02(bb)(1)(ii) of Regulation S-X. Response: The Company respectfully acknowledges the Staff’s comment. The Company intends to include gross profit within its disclosure of summarized financial information for the Parent and Guarantors (as defined in the relevant filing) in future filings. 2 Non-GAAP Financial Measures, page 42 3.We note that several of your adjusted measures include an adjustment for productivity. Please tell us the nature of these productivity expenses adjustments and explain to us why you do not believe these costs represent normal operating costs. See Question 100.01 in the SEC Staff's Compliance & Disclosure Interpretations on Non-GAAP Financial Measures. Response: The Company respectfully acknowledges the Staff’s comment and advises that it considered the guidance set forth in Question 100.01 in the SEC Staff’s Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. In determining that these productivity adjustments were appropriate, the Company followed a careful and rigorous process, with clear and consistent guidelines, that it uses for all non-GAAP financial presentations. Specifically, the Company has an Adjustment Committee, which includes the Chief Financial Officer and Principal Accounting Officer, that evaluates potential adjustments that may result in the presentation of a non-GAAP financial measure. The Committee uses Question 100.01, along with other relevant rules, regulations and Staff guidance relating to the presentation of non-GAAP financial measures, in determining whether an adjustment is appropriate. The Company defines its productivity adjustment as a group of discrete, non-recurring strategic projects that are transformative in nature and that are expected to generate significant cost savings (productivity) over time. These projects are both expected to occur over a multi-year time period and are outside of the Company’s ordinary business expenses. These productivity expenses are therefore not normal, recurring, cash operating expenses necessary to operate the Company’s business. The following information is provided to the Staff in response to their comment. Furthermore, the Company will include greater disclosure in future filings to enhance the investors’ understanding of the discrete, non-recurring projects included within its productivity adjustment. For the year ended December 31, 2022, we had four main projects included within the productivity adjustment. The first project represents the construction of a coffee manufacturing facility comprised of next-generation manufacturing lines utilizing innovative technology never before installed or used by coffee manufacturers. This facility is targeted to save the Company significant production costs and thereby decrease its cost per K-cup pod. These lines are being installed on a phased approach in coordination with the lead times required for assembly and installation associated with a third-party foreign manufacturer. During the COVID-19 pandemic, our third-party manufacturer’s focus shifted to ensuring safety of their workers, combined with mandatory foreign government shut-downs, such that the timeline for completion was significantly delayed. The Company intends to reduce the amount of the adjustment as each line is installed and becomes operational. All manufacturing lines are expected to be completed in 2025. The second project represents the construction of a beverage manufacturing and distribution facility using next-generation aseptic lines and robotic capabilities. This facility is targeted to save the Company significant production and distribution costs and thereby decrease its overall cost per case. Once the facility is fully operational, which is currently expected in 2023, the adjustment will end. 3 Our third project relates to consulting fees for strategic initiatives incurred from two external consulting firms to provide specialized expertise for two distinct transformative projects, one related to supply chain strategy and the other to our long-term growth strategy. The expenses incurred in connection with these discrete strategic initiatives are outside of day-to-day business and the projects, by their nature, are not expected to reoccur or be necessary again in the foreseeable future. The majority of the consulting occurred in 2022, with a small tail expected to occur in 2023. Our fourth project relates to the construction of a second beverage concentrate manufacturing facility, intended to create redundancy to the Company’s single existing plant, coupled with the creation of a procurement center of excellence that reorients the Company’s previous strategy. This second manufacturing facility was located in an international jurisdiction where no operations existed previously. Additionally, this facility is targeted to provide the Company overall cash flow savings. Once the facility is fully operational, which is expected to occur in 2023, the adjustment will cease. Accordingly, the Company and the Adjustment Committee believes that these adjustments are not normal, recurring, cash operating expenses necessary to operate the Company’s business. Financial Statements Notes to Consolidated Financial Statements 3. Goodwill and Other Intangible Assets Impairment Analysis, page 70 4.We note that you performed an interim impairment analysis as of September 30, 2022, recording a $311 million impairment and also performed your annual impairment analysis as of October 1, 2022, recording a $161 million impairment. Please address the following: •Summarize for us the changes in circumstances and/or assumptions that led to the multiple impairment charges over a relatively short period of time. •Explain the timing for recognizing the $161 million impairment and provide your basis for concluding that this additional impairment did not exist as of September 30, 2022. •Tell us whether your valuation assumptions changed between your September 30, 2022 and October 1, 2022 impairment tests. Response: The Company respectfully acknowledges the Staff’s comment. Overview: The Company recorded impairment charges in two different quarters in 2022. The impairment charge in the third quarter of 2022 was identified by a triggering event specific to a singular brand led by margin deterioration and declining performance, which occurred during the quarter as compared to the prior period forecast. As a result of the triggering event identified and subsequent quantitative analysis performed, a $311 million impairment charge was recorded during the third quarter of 2022. The additional $161 million impairment charge recorded in the fourth quarter of 2022 was identified in our normal annual impairment process driven primarily from increasing discount rate trends related to three of our brands (Schweppes, Crush and SunDrop) as opposed to any specific triggering event(s). The following explanation provides additional detail into these analyses. 4 Triggering Event Analysis - Third Quarter of 2022: In accordance with ASC 350-20-35-3C, the Company performed its customary triggering event analysis considering all relevant events and circumstances that could affect the significant inputs used to determine the fair value of its indefinite-lived intangible assets and concluded that the Bai brand exhibited indicators that it was more likely than not impaired. At the end of the first quarter of 2022, the Company renewed its third-party manufacturing agreement for the majority of Bai products, which significantly increased its costs after no changes since 2018. The Company proceeded to increase pricing on Bai beginning in the third quarter of 2022 to offset these and other inflationary cost pressures. After experiencing greater-than-originally-forecasted volume declines starting in the same quarter, these circumstances led to a reevaluation and reduction in Bai’s forecasted future cash flows, which created a triggering event. Once the Company determined that a triggering event had occurred in the period, a quantitative Step 1 analysis was performed for the Bai brand with the assistance of external valuation specialists, which resulted in an impairment charge of $311 million being recorded. No other indefinite-lived intangible assets were determined to be more likely than not impaired as a result of our triggering event analysis, and therefore, a Step 1 quantitative analysis was not deemed to be necessary for any other indefinite-lived intangible assets as of September 30, 2022, in accordance with ASC 350-30-35-18E. In the overarching triggering event analysis performed as of September 30, 2022, the Company identified the overall challenges in the macroeconomic environment with increases in the treasury yield rates stemming from national supply chain constraints and inflation as a risk. However, in accordance with ASC 350-30-35-18C, we further considered mitigating events such as the Company’s ability to successfully manage these challenges by increasing the prices for its products while maintaining material volumes for all brands (excluding Bai). Additionally, other compensating factors were considered such as (i) the increase in the Company’s market cap between the prior annual impairment testing date of October 1, 2021 and September 30, 2022, and (ii) the headroom on the majority of its indefinite-lived intangible assets. Based on the macroeconomic environment as well as mitigating factors, the Company concluded that the inflationary impact in the overall rising discount rate environment was not considered to be a triggering event requiring further detailed quantitative analysis as of September 30, 2022, as the Company did not believe this singular input used to determine fair value resulted in its brand assets being more likely than not impaired. Annual Impairment Analysis - Fourth Quarter of 2022: In accordance with ASC 350-30-35-18, the Company performs impairment tests on goodwill and all indefinite-lived intangible assets annually on October 1. The Company performed a Step 1 quantitative analysis on all of its goodwill and primary indefinite-lived intangible brands during the fourth quarter of 2022, and engaged external valuation specialists to assist in the fair value determinations using market participant assumptions in accordance with ASC 350. No key valuation assumptions changed from September 30, 2022 to October 1, 2022 specific to Bai; however, as a result of the analysis performed, the Company concluded that additional impairment charges of $161 million were necessary for three of its other brands (Schweppes, Crush and SunDrop). The annual impairment charge was primarily driven by an increase in discount rates applied in the fair value analyses due to increased Company-specific forecast risk specific to each brand as compared to the prior year and a higher weighted average cost of capital. 5 Form 10-Q for the Quarter Ended September 30, 2023 Financial Statements Notes to Condensed Consolidated Financial Statements 1. General Reportable Segments, page 8 5. We note that effective January 1, 2023, you revised your segment structure to align with changes in how the CODM manages the business, assesses performance and allocate resources. We further note that the change resulted in three reportable segments from the former four reportable segments. Please explain to us in detail, the events that led to the change in reportable segments. For example, please tell us if there was a change in segment managers that report to the CODM, level of detail of the financial information reviewed by the CODM, or other factors that led to this change. As part of your response, please also tell us, and revise future filings to disclose, if in this new structure, any operating segments have been aggregated into any of the reportable segments. See guidance in ASC 280-10-50-21. If you have aggregated certain operating segments, please provide us with a detailed analysis as to why you believe aggregation is consistent with the criteria in ASC 280-10-50-11. Response: The Company respectfully acknowledges the Staff’s comment. The resegmentation occurred at the time of a management transition and reflected the incoming management’s strategic focus for the Company. As previously disclosed, Robert Gamgort returned to the Company as Chief Executive Officer (“CEO”) in November 2022 after the Company’s previo