Now let's get started with the income statement items for 2023 for Keurig Dr. Pepper. So the first thing we're going to do is we're going to go to Felix. In Felix. I'm going to find the Dr. Pepper information. So I'm going to go to the analyze section and type in Keurig Dr. Pepper and it pops up and you can see now we have a tear sheet of all the information for Keurig Dr. Pepper. And we are focused on the financial filings here. And if I just pop this link open, we've got a list of all the 10 Qs and the 10 Ks for the recent years. We're gonna focus on the year end for 2023. So we want the most recent 10 K and that's highlighted in green. I notice we've got the link to the 10 K here, but we also have a link to the press release too. We have the financial filing extracts, which we can click on and we get a little quick preview of the income statement and we can do look at the balance sheet and the cash flow statement. But I'm gonna open the 10 K filing.

And if you go to the 10 K filing, you can see at the top we have got sections, annotations, a table of contents and download all tables. I'm gonna click on the sections because that gives you a very easy navigation tool through the 10 K document. And it's a large file. So we can click on the financial statements to jump to the income statement, the balance sheets and the cashflow statements. And then we have a list of the notes to the accounts that we can jump to as well. So this is a very, very useful navigation tool. I'm gonna go back to that tear sheet and I'm also going to open the press release. And the press release is issued around the same time as the 10 K is filed. And the benefit of the press release, it's a much smaller document and it focuses on the key things that financial analysts need. So I'm gonna open that as well and we'll have the non-GAAP earnings in here. Let's go back to Excel. So in Excel, the first thing I'm going to do is I'm gonna pull in the reported revenue and the adjusted revenue. And often there's no difference between them. You can see for most of the companies, there is no difference between the reported revenue and the adjusted revenue exception is Monster, where they may have made some non-recurring adjustments to revenue in the 2022 year. But I'm gonna go back to Keurig, Dr. Pepper, and I'm going to try and find these numbers from the press release or the 8 K filing related to the 10 K. So now I'm here in the 10 K press release. I'm going to search for non-GAAP. And you can see there are 19 references. And I'm looking for non-GAAP because often the company will be doing the adjustments for us and usually it's right at the very end of the 8 K filing. And you can see here they've got breakdown of the reported and adjusted numbers, but this is for the fourth quarter. We don't want the fourth quarter, we want the year end. So I'm gonna scroll down and eventually we should get the further adjustments for the full year. And you can see here we have the adjustments for the full year, but notice it starts at gross profit. It doesn't have a revenue line so that we make the assumption then that there are no non-recurring items related revenue. So I'm gonna go up to the income statement that's further up in the document and I want the year ended numbers for 2023. And we've got the sales number here. I'm going to double click that. I'm gonna click save and then and paste in the reported revenue number.

And you can see there's a note that says that there's no adjusted revenue provided. So I'm actually also gonna paste it in there. So I have two numbers which are exactly the same. Now if I want to have a good set of annotations, if I click on my annotations here, I can actually rename this annotation, the 2023 sales. And that just makes it a little bit easier when I'm looking at the annotations to understand what each number is.

Next, we've got the reported gross profit. So I'm gonna go back to where we were for the non-gap earnings and make sure you get to the full year. Now you can see here we have gross profit on a reported basis and then we have a series of adjustments, a mark to market adjustment, productivity adjustment, property restructuring related, and then we have adjusted. So I'm gonna pull in the reported gross profit and then I'm also going to pull in the adjusted gross profit because the financial community will focus on the adjusted numbers rather than the reported numbers because they strip out the effect on non-recurring items. So I'm going to go here and just put in here, this is our reported 2023 gross profit and this is the adjusted 2023 gross profit.

Next, once I've done the gross profit, I've got the reported operating profit and the adjusted operating profit. So I'm going to stay around this table and you can see we've got the income from operations. I'm gonna take my reported number pasted in and my adjusted number and past it in as well. So I'm going to rename these, I'm gonna call this reported 2023 operating profit and then this is going to be adjusted 2023 operating profit. And that gives me really clear breakdown.

Unfortunately companies often make adjustments that we don't necessarily agree with. So what are we going to do? Well, we're going to have to adjust their adjustments. And there are two big items in Keurig Dr. Pepper, that as a financial analyst we disagree with as an adjustment.

And we've got a list here and you can see here that they are stripping out the amortization of intangibles. Now the reason they're doing that is that a lot of the amortization comes from asset step ups. Our problem with including this here is that we want to get an EBIT number, which is our adjusted operating profit, and then we're going to add back depreciation and amortization to get EBITDA. But if we have already adjusted for amortization, that means we'll potentially double count. So it's simpler and more straightforward to have an EBIT number that deducts amortization, and then an EBITDA number that adds all the amortization and depreciation back. So I'm going to select the amortization of intangibles, the 137, and I'm going to paste it in as an adjustment there. And you can see there's a little note, always make notes because if you are handing over the analysis to somebody else, it's really, really important to do that. If you want to know the keyboard shortcut to create a note, just do shift F2, the function two key on the keyboard. Now there's another adjustment that we need to make and this is a common adjustment that companies make and you'll see it's stock compensation. This is pretty naughty for the company to do this. They're adding this back and the reason they're adding this back is that they deem it's a non-cash item, but it's a real cost to the shareholders. because these options and restricted stock units that are being awarded to executives dilute other shareholders. So from a valuation perspective, we would never add back the stock-based compensation. So what I'm going to do is I'm going to deduct this Here and because I'm deducting these items to make it very clear, I'm just gonna put a minus sign at the very beginning of each of them so they'll be deducted and it's really clear then. And the reason we are not deducting stock-based compensation is that for valuation, we wanted that included as a cost in credit because it's for dilution of equity holders and debt holders have a claim ahead of shareholders, then it's more reasonable to add back stock-based compensation. But you should only ever do that as a credit metric, never for a valuation metric. Let's go and just put in some labels here. So this is at amortization expense 2023, and then this is stock compensation expense 2023 also. So we've made some good labels there and now we can go back to Excel. There are no further adjustments. So I'm just going to copy this across. And now we have EBIT and that EBIT is consistent to the other companies. It includes all the amortization and depreciation costs and includes stock-based compensation. Now we can then add back the full depreciation and amortization. And normally what we'll do is we'll go to the cash flow statement to find that. So let's go back to the 8 K. I'm using the 8 K filing because it's just so much smaller, it's much easier to navigate around than the big 10 K filing. Sometimes you have to go to the 10 K filing to get that information. So I'm going to go and find the cashflow statement. And you can see here we've got the cashflow statement and we have depreciation expense and amortization of intangibles. And we also have other amortization expense. So I've got my depreciation expense there, that 402, and I'm gonna paste that in. Now you can't have two links in the cell. So normally what I will do is I'll put one link in and then go back and create an annotation for the second number. But I'm just going to type in the 137. So I'm press F2 and then I'm going to do plus 137 and I'll put an equal sign at the very beginning of the formula. So those are two numbers added together. Now you may be thinking, why have I not adjusted for the other amortization expense? It's explicitly given a separate line to amortization of intangibles, which normally means it's amortization of things like hedging costs or financing fees. So I'm going to ignore that because that probably is recorded below the operating profit line in financing costs. So this means we have now got our EBITDA for Keurig Dr. Pepper, and I'm going to work down the rest of the income statement and pull in the other line items using information primarily from the 8 K filing the press release related to the 10 K filing. Just before I move on, I'm going to rename these items. That was our depreciation expense 2023. And then that was the amortization expense.

Let's go back to the adjustments for the year end.

And you can see we go down to the operating margin, but now we have the interest lines here. So we have the reported interest line, but we also have an adjusted interest line, so I'm going to put that in so it makes the comparability better. And then we've got the adjusted profit before tax, which we're given here, and we have the adjusted tax expense. And this is here because a lot of the adjustments that we are making or they're making in this report will also have a knock on impact on tax. So for example, you can see stripping out this marked to market interest expense of 14 also changes tax. So we have these adjustments and there'll also be an impact on tax here. So that 14 adjustment has an impact on tax of 2. This 19 adjustment has an impact of tax of 5, often not always. The impact on tax is fairly close to the adjustment times the tax rate. So in the US that will be 21%, but not always. And the reason for that is that the tax books often use different rules for the accounting than the shareholder books. So if we are given the tax adjustment by the company as we are here in this column, we should always use their numbers. So I'm going to go and get the adjusted tax expense, which is 722, and then I can calculate the normalized effective tax rate. So that's the effective tax rate after making all these adjustments that we are showing above. In addition to that, I want to calculate the marginal tax rate. And to do that, I'm going to go to the 10 K filing.

And in the 10 K filing, I'm going to go to the notes of the financial statements and I'm gonna look for income taxes. And then I'm gonna come down and we have this lovely table where they break down between the federal rate at the top and the average rate or the effect rate at the bottom. So we've got a federal rate of 21%, which I'm gonna paste in. So it's come in as a number. So I'll just divide by a hundred and I'll put an equal sign at the beginning and then reformat that as a percentage. Then we've also got the state income taxes, which is 3.2%.

I'm gonna pick that up, paste it in, slide by a hundred, and then make that a percentage.

And then I can calculate the marginal tax rate. Let me go and clear up my annotations a little bit.

So if I go to my annotations, that is the federal tax rate And this is the state tax rate. And I'm gonna go back to my 8 K filing. And we had these numbers here. So that is the reported interest expense, 2023, and this is the adjusted interest expense 2023. And then we have the adjusted profit for tax 2023. And then finally we have the adjusted tax expense, 2023. If you are doing work like this and the deal goes cold, having these labels for the annotations is very, very helpful. If the deal then two or three months later comes back. So it's really good practice to stay focused and make sure that you keep the labels, your annotations really clear. So we've done the income statement adjustments for Dr. Pepper.