Calcbench always loves to dive into the details of non-GAAP adjustments, and this week we have a fascinating — or maybe puzzling is the better word? — example from Keurig Dr. Pepper ($KDP). 

Keurig filed its latest annual report on Feb. 22, and the top lines seem to look pretty good. Net sales up 5.4 percent to $14.8 billion, gross profit up 10.3 percent to $8.08 billion. Pretax income soared 60.4 percent, although that’s largely due to a legal settlement and asset impairments that hit Keurig in 2022 and weren’t on the books last year. 

The earnings release, however, is where the puzzling part enters the picture. 

In that earnings release, Keurig reports adjusted gross profit — with a $115 million upward adjustment attributed to “productivity.” See Figure 1, below, with the productivity line highlighted blue.

That $115 million adjustment is 1.4 percent of the $8.08 gross profit number, close enough to materiality that some auditors will argue that it is. Either way, we still have the original question: Exactly what is a productivity adjustment, anyway? 

Enter the Comment Letters

Indeed, Calcbench is not the only one asking. The Securities and Exchange Commission fired off a comment letter to Keurig Dr. Pepper last October asking the same thing: 

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.

Comment letters are one of the many financial disclosures we track here at Calcbench. Comment letter correspondence typically takes several weeks to become public; we noticed this chain of correspondence the other day, which piqued our interest about Keurig and its proclivity for productivity adjustments.

Sure enough, Keurig replied back to the SEC on Nov. 30 offering an explanation:

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.

Keurig then went on to identify four such projects underway in 2022:

• Construction of a coffee manufacturing facility comprised of next-generation manufacturing lines using innovative technology never before installed or used by coffee manufacturers.

• Construction of a beverage manufacturing and distribution facility using next-generation aseptic lines and robotic capabilities.

• 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

• 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. 

But the plot thickens! After Keurig sent that explanation back to the SEC — the SEC didn’t buy it! In a letter dated Dec. 14, the SEC staff said the four above-mentioned projects “appear to represent normal, recurring, cash operating expenses.” So delete those productivity adjustments forthwith. 

Keurig then returned fire in a five-page letter dated Jan. 19, 2024. That letter detailed the cost of each project (ranging from $14 million for the concentrate manufacturing facility to $75 million for the strategic consulting work), and devoted multiple paragraphs to each one about why they are not normal, recurring, cash operating expenses. 

The SEC seems to have then reversed course, because a final letter back to Keurig dated Jan. 29 said that SEC staff had finished their review and the matter is closed. 

So there you have it, folks. Companies do file some pretty exotic non-GAAP adjustments — and sometimes, when you look closely enough, you can find some fascinating explanations for why those non-GAAP adjustments make sense.