Keurig Green Mountain reports fiscal Q2 net earnings of US$162.1M, up 22.4% from year-ago period as net sales rise 10% to US$1.1B

WATERBURY, Vermont , May 7, 2014 (press release) – Net Sales of $1.1 billion, up 10% from year ago

GAAP operating profit of $260 million, up 23% from year ago; Non-GAAP operating profit of $272 million, up 21% from year ago

GAAP diluted EPS of $1.03, up 18% from prior year period; Non-GAAP diluted EPS of $1.08, up 16% from prior year period

Free cash flow of $263 million, up 30% from year ago

Declares quarterly cash dividend of $0.25

Entered into a $700 million accelerated stock repurchase agreement with more than 4.3 million common shares purchased during the quarter and an additional 0.5 million common shares repurchased in open market transactions under current 10b(5)-1 plan

Keurig Green Mountain, Inc., (Keurig) (GMCR), a leader in specialty coffee, coffee makers, teas and other beverages with its innovative brewing technology, today announced its results for the 13 weeks ended March 29, 2014.

Performance Highlights

“Double digit sales and earnings growth on the heels of a strong holiday season demonstrates the continued opportunity to grow our Keurig system in North America in a very competitive environment,” said Brian Kelley, Keurig’s President and CEO. “During the quarter, we drove strong brewer and portion pack net sales and accelerated our installed base. In addition, disciplined cost controls drove operating profit and margin growth that translated into solid earnings and a significant increase in free cash flow.

“At the end of the quarter, our balance sheet was very strong, with $1.1 billion in cash, even after we returned nearly $800 million of cash to shareholders in the quarter in the form of dividends and share repurchases, including purchases made through an accelerated stock repurchase agreement,” continued Kelley. “We are very pleased with our performance and continue to be optimistic about the momentum in our business and the opportunities in front of us.”

The Company’s 10% net sales growth includes the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 1%.

Net Sales by Product

Portion Packs

The 13% increase in portion pack-related net sales over the prior year period was driven by a 15 percentage point increase due to sales volume and a 2 percentage point increase due to portion pack product mix partially offset by a 4 percentage point decrease due to net price realization and the impact of foreign currency exchange.
Brewers and Accessories

For the quarter, 1.8 million Keurig® system brewers were sold including 1.7 million sold by Keurig with 0.1 million reported sold by Keurig’s licensed brewer partners. This brewer shipment number does not account for consumer returns.

The 9% increase in brewer and accessory net sales was driven by a 29 percentage point increase due to brewer sales volume, partially offset by an 18 percentage point decrease due to brewer net price realization and a 2 percentage point decrease due to brewer product mix.

Additionally, accessory net sales increased by $0.5 million, or 3 percentage points over the prior year period.

Other Products

Sales of other products declined $16.7 million, or 20%, in the quarter over the prior year period primarily due to the continuing demand shift from traditional coffee package formats to portion packs.

In the second quarter of fiscal year 2014, gross profit increased 10% and gross margin improved 20 basis points to 41.5% from 41.3% in the prior year period. During the quarter, the Company took a charge associated with portion pack manufacturing lines that were disassembled. Some components from these lines are being used for new product platform manufacturing development. 

GAAP operating income grew by 23%, representing 23.6% of net sales in the second quarter of fiscal year 2014, up from 21.1% in the prior year period.

Non-GAAP operating income grew by 21%, representing 24.6% of net sales in the second quarter of fiscal year 2014, up from 22.3% in the prior year period.

The Company’s effective income tax rate was 35.8% for the second quarter of fiscal year 2014 as compared to 35.6% for the prior year period.

Diluted weighted average shares outstanding for the second quarter of fiscal year 2014 were 157.5 million, up from 152.3 million in the prior year period as a result of 16.7 million shares issued as part of The Coca-Cola Company transaction which closed February 27, 2014 thus impacting a portion of the quarter. The transaction-related dilution was offset, in part, by the Company’s share repurchases under its previously announced share repurchase authorizations.

Balance Sheet & Cash Flow Highlights

“Strong earnings growth and a disciplined approach to working capital and capital investment contributed to a 30% increase of free cash flow in the quarter,” said Frances G. Rathke, Keurig’s Chief Financial Officer. “In addition, the strength of our balance sheet allows us to fund continued innovation and business growth while also returning significant cash to shareholders through dividends and meaningful share repurchases.”

Stock Transactions

On February 27, 2014, the Company sold 16,684,139 shares of its common stock to Atlantic Industries, an indirect wholly-owned subsidiary of The Coca-Cola Company (Coca-Cola), at $74.98 per share for an aggregate purchase price of $1.25 billion, pursuant to a common stock purchase agreement dated February 5, 2014. The sale was recorded to stockholders’ equity net of transaction-related expenses of approximately $7.9 million.

In addition, the terms of a prior stock purchase agreement with Luigi Lavazza S.p.A (Lavazza) allow Lavazza to maintain its percentage ownership of the Company’s outstanding common stock. As a result of the February 27, 2014 issuance of common stock to Atlantic Industries, on March 28, 2014 the Company entered into a common stock purchase agreement with Lavazza to sell 1,407,000 shares of newly issued common stock to Lavazza at $74.98 per share for an aggregate purchase price of $105.5 million. The transaction closed on April 17, 2014.

Share Repurchases

On July 30, 2012, the Company’s Board of Directors authorized a share repurchase program of up to $500 million of the Company’s outstanding common shares over two years. On November 19, 2013, the Company's Board of Directors authorized an additional share repurchase program of up to $1.0 billion of the Company's outstanding common shares. The second share repurchase program became effective upon completion of the first share repurchase program in March 2014.

During the second quarter of fiscal year 2014, as part of its Board repurchase authorization, the Company entered into an accelerated share repurchase (ASR) agreement with a major financial institution. The ASR allows the Company to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time. Upon settlement of the ASR, the total shares repurchased by the Company will be determined based upon a share price equal to the daily volume weighted average price (“VWAP”) of the Company’s common stock during the term of the program, less a fixed per share discount.

Under the terms of the ASR, Keurig agreed to purchase $700 million of its common stock in total, with an initial delivery to the Company of 4.3 million shares during the quarter. The initial shares represent the number of shares at the current market price equal to 70% of the total fixed purchase price of $700 million. The repurchased shares were retired. Final settlement of the ASR will occur no sooner than November 24, 2014 and no later than February 27, 2015 at the financial institution’s discretion.

In addition, during the second quarter, the Company repurchased a total of 544,100 shares from the open market at a cost of $58.4 million. From the inception of its Board authorized share repurchases through the end of the Company’s second fiscal quarter of 2014, the Company has repurchased a total of 15.4 million shares at a total cost of $936 million and an average price of $60.86 through a combination of the ASR, open market and 10(b)5-1 plans, including $490 million of ASR repurchases subject to final price adjustment. From the end of the second quarter through May 6, 2014 the Company has repurchased an additional 661,900 shares at a total cost of $67 million through its 10(b)5-1 program.

Keurig today announced its Board of Directors has approved a new share repurchase authorization of up to $1 billion over the next two years. The new share repurchase program will take effect upon completion of the Company’s current program, which has $288 million remaining of its previously authorized $1 billion subject to final price adjustment of the ASR. As was the case with the prior authorizations, the new authorization will be implemented at such times and prices as determined appropriate by the Company's management.

Dividend Declaration

Keurig’s Board of Directors has declared a regular quarterly cash dividend of $0.25 per share of the Company’s common stock. The quarterly cash dividend will be paid on August 1, 2014, to shareholders of record as of the close of business on July 3, 2014.

Business Outlook and Other Forward-Looking Information

“Short term, we are focused on successfully introducing our Keurig 2.0 hot system; adding a number of additional brands as new Keurig partners; and, preparing for the launch of our Keurig cold system in fiscal year 2015. Longer term, continued investment in innovation across all facets of our business – from new product development to merchandising – will power a robust pipeline of new products, drive financial performance and fuel continued consumer passion for the Keurig brand,” said Kelley.

The Company’s outlook for fiscal year 2014 is as follows:

Net sales growth in the high single digits compared to fiscal year 2013

An annual effective tax rate of approximately 36.5%

Non-GAAP earnings per diluted share of $3.63 to $3.73 which:

Includes the approximately $0.20 dilutive impact of the recent Coca-Cola and Lavazza equity transactions and includes share repurchases through May 6, 2014

Includes an estimated $0.09 headwind from foreign currency exchange

Excludes any additional actions the Company may take to offset dilution during the second half of fiscal year 2014

Excludes the amortization of identifiable intangibles related to the Company’s acquisitions and legal and accounting expenses related to the SEC inquiry and the Company’s pending securities and stockholder derivative class action litigation

On a currency-neutral basis and excluding the dilutive impact from recent equity transactions with Coca-Cola and Lavazza and absent any actions the Company may take to offset dilution, underlying earnings per share growth is projected to increase 16% to 19% over the prior year period.

Free cash flow in the range of $250 million to $350 million.

Capital investment in the range of $350 million to $400 million.

The Company also provided its outlook for its third quarter of fiscal year 2014 as follows:

Net sales growth in the high single digits over the third quarter of fiscal year 2013.

Non-GAAP earnings per diluted share in a range of $0.83 to $0.88 which:

Includes the approximately $0.09 dilutive impact of the recent Coca-Cola and Lavazza equity transactions and includes share repurchases through May 6, 2014

Includes an estimated $0.01 headwind from foreign currency exchange

Excludes any additional actions the Company may take to offset dilution during the quarter

Excludes the amortization of identifiable intangibles related to the Company’s acquisitions and legal and accounting expenses related to the SEC inquiry and the Company’s pending securities and stockholder derivative class action litigation

On a currency-neutral basis and excluding the dilutive impact of the recent equity transactions with Coca-Cola and Lavazza, and absent any actions the Company may take to offset dilution, underlying earnings growth is projected to increase 13% to 20% over the prior year period.

Conference Call and Webcast

Keurig Green Mountain will be discussing these financial results with analysts and investors in a conference call and live webcast available via the Internet at 5:00 p.m. ET today, May 7, 2014. The call is accessible via live webcast from the events section of the Investor Relations portion of the Company’s website at http://investor.keuriggreenmountain.com/events.cfm. The Company archives the latest conference call for a period of time. A replay of the conference call also will be available by telephone at (719) 457-0820, passcode 7999693 from 9:00 p.m. ET on May 7, 2014 through 9:00 p.m. ET on Monday, May 12, 2014.

Use of Non-GAAP Financial Measures

In addition to reporting financial results in accordance with generally accepted accounting principles (GAAP), the Company provides non-GAAP operating results that exclude legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation; and non-cash acquisition-related items such as amortization of identifiable intangibles, each of which include adjustments to show the tax impact of excluding these items. These amounts are not in accordance with, or an alternative to, GAAP. The Company’s management believes that these measures provide investors with transparency by helping illustrate the underlying financial and business trends relating to the Company’s results of operations and financial condition and comparability between current and prior periods. Management uses the measures to establish and monitor budgets and operational goals and to evaluate the performance of the Company. Please see the “GAAP to Non-GAAP Reconciliation” table that accompanies this document for a full reconciliation of the Company’s GAAP to non-GAAP results.

About Keurig Green Mountain, Inc.

As a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig) (GMCR), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace. Keurig supports local and global communities by investing in sustainably-grown coffee and by its active involvement in a variety of social and environmental projects. By helping consumers drink for themselves, we believe we can brew a better world. For more information visit: www.KeurigGreenMountain.com. To purchase Keurig® products visit: www.Keurig.com or www.Keurig.ca.

Keurig routinely posts information that may be of importance to investors in the Investor Relations section of its website, www.KeurigGreenMountain.com, including news releases and its complete financial statements, as filed with the SEC. The Company encourages investors to consult this section of its website regularly for important information and news. Additionally, by subscribing to the Company's automatic email news release delivery, individuals can receive news directly from Keurig as it is released.

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