0001418135 kdp:A2048MergerNotesMember us-gaap:SeniorNotesMember 2019-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2019~~MARCH 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission file number 001-33829



	Keurig Dr Pepper Inc.
	(Exact name of registrant as specified in its charter)



Delaware		98-0517725
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

	53 South Avenue
	Burlington,	Massachusetts
	01803
(Address of principal executive offices)
	~~(802)~~(781)	~~244-5621~~418-7000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	KDP	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~Yes~~ ☒Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ~~Yes~~ ☒Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Securities Exchange Act of 1934.

Large Accelerated Filer ☒ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ☒

~~Securities registered pursuant to Section 12(b) of the Act:~~



~~Title of each class~~	~~Trading Symbol~~	~~Name of each exchange on which registered~~
~~Common stock~~	~~KDP~~	~~New York Stock Exchange~~

As of ~~November 5, 2019,~~April 28, 2020, there were ~~1,406,787,332~~1,407,151,408 shares of the registrant's common stock, par value $0.01 per share, outstanding.

KEURIG DR PEPPER INC.

FORM 10-Q TABLE OF CONTENTS


				Page				Page
Part I.	Financial Information				Financial Information
	Item 1.	Financial Statements (Unaudited)			Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Statements of Income		1		Condensed Consolidated Statements of Income		1
		Condensed Consolidated Statements of Comprehensive Income		2		Condensed Consolidated Statements of Comprehensive (Loss) Income		2
		Condensed Consolidated Balance Sheets		3		Condensed Consolidated Balance Sheets		3
		Condensed Consolidated Statements of Cash Flows		4		Condensed Consolidated Statements of Cash Flows		4
		Condensed Consolidated Statements of Changes in Stockholders' Equity		5		Condensed Consolidated Statements of Changes in Stockholders' Equity		5
		Notes to Condensed Consolidated Financial Statements		7		Notes to Condensed Consolidated Financial Statements		6
		1	Background and Basis of Presentation	7		1	Background and Basis of Presentation	6
		2	Acquisitions and Investments in Unconsolidated Affiliates	9		2	Long-Term Obligations and Borrowing Arrangements	8
		3	Leases	13		3	Goodwill and Other Intangible Assets	9
		4	Goodwill and Other Intangible Assets	15		4	Acquisitions and Investments in Unconsolidated Affiliates	11
		5	Restructuring and Integration Costs	16		5	Restructuring and Integration Costs	11
		6	Income Taxes	17		6	Income Taxes	12
		7	Long-Term Obligations and Borrowing Arrangements	17		7	Derivatives	12
		8	Derivatives	20		8	Leases	14
		9	Earnings Per Share	22		9	Earnings Per Share	16
		10	Stock-Based Compensation	23		10	Stock-Based Compensation	16
		11	Accumulated Other Comprehensive Income (Loss)	24		11	Accumulated Other Comprehensive Income (Loss)	17
		12	Other Financial Information	25		12	Supplemental Cash Flow Information	17
		13	Supplemental Cash Flow Information	27		13	Receivables	18
		14	Commitments and Contingencies	27		14	Other Financial Information	19
		15	Related Parties	28		15	Commitments and Contingencies	20
		16	Segments	29		16	Related Parties	21
		17	Revenue Recognition	30		17	Segments	21
		18	Guarantor and Non-Guarantor Financial Information	31		18	Revenue Recognition	22
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		40		19	Subsequent Events	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		71	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		23
	Item 4.	Controls and Procedures		72	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		42
					Item 4.	Controls and Procedures		43

Part II.	Other Information				Other Information
	Item 1.	Legal Proceedings		73	Item 1.	Legal Proceedings		44
	Item 1A.	Risk Factors		73	Item 1A.	Risk Factors		44
	Item 6.	Exhibits		74	Item 6.	Exhibits		45

s-i

KEURIG DR PEPPER INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020

MASTER GLOSSARY



Term		Definition
2019 Incentive Plan		Keurig Dr Pepper Inc. Omnibus Incentive Plan of 2019
2019 KDP Term Loan		The Company refinanced the 2018 KDP Term Loan on February 8, 2019 and entered into the 2019 KDP Term Loan Agreement
2019 KDP Term Loan Agreement		The agreement executed on February 8, 2019 between KDP and the Term Loan Lenders in order to refinance the 2018 KDP Term Loan with the 2019 KDP Term Loan
2019 364-Day Credit Agreement		The Company's $750 million credit agreement, which was entered into on May 29, 2019
2020 364-Day Credit Agreement		The Company's $1,500 million credit agreement, which was entered into on April 12, 2020
2030 Notes		$750 million aggregate principal amount of 3.20% senior unsecured notes due May 1, 2030
2050 Notes		$750 million aggregate principal amount of 3.80% senior unsecured notes due May 1, 2050
A Shoc		Adrenaline Shoc
ABI		Anheuser-Busch InBev SA/NV
Annual Report		Annual Report on Form 10-K for the year ended December 31, 2019
AOCI		Accumulated other comprehensive income or loss
ASU		Accounting Standards Update
ASU 2016-13		Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
ASU 2018-13		Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements
ASU 2020-01		Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815
ASU 2020-04		Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Bai Acquisition		The acquisition of Bai by DPS
Bedford		Bedford Systems, LLC
Big Red Acquisition		The acquisition of Big Red by KDP
BodyArmor		BA Sports Nutrition, LLC
bps		basis points
Company		Keurig Dr Pepper Inc.
Core		Core Nutrition LLC
Core Acquisition		The acquisition of Core by KDP
CSD		Carbonated soft drink
DIO		Days inventory outstanding
DPO		Days of payables outstanding
DPS		Dr Pepper Snapple Group, Inc.
DPS Merger		The acquisition of DPS by Maple, whereby Merger Sub merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS as of July 9, 2018
DPS Merger Agreement		The Agreement and Plan of Merger by and among DPS, Maple and Merger Sub to effect the DPS Merger
DSD		Direct Store Delivery
DSO		Days sales outstanding
EPS		Earnings per share
Exchange Act		Securities Exchange Act of 1934, as amended
FASB		Financial Accounting Standards Board
FX		Foreign exchange
IRi		Information Resources, Inc.
JAB		JAB Holding Company S.a.r.l.
JP Morgan		JPMorgan Chase Bank, N.A.

s-ii

KEURIG DR PEPPER INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020



KDP		Keurig Dr Pepper Inc.
KDP Credit Agreements		Collectively, the KDP Revolver, the 2019 364-Day Credit Agreement, and the 2019 KDP Term Loan
KDP Revolver		The Company's $2,400 million revolving credit facility, which was entered into on February 28, 2018
LIBOR		London Interbank Offered Rate
Maple		Maple Parent Holdings Corp.
Merger Sub		Salt Merger Sub, Inc.
NCB		Non-carbonated beverage
Notes		Collectively, the Company's senior unsecured notes
Parent		Keurig Dr Pepper, Inc.
RSU		Restricted stock unit
RTD		Ready to drink
S&P		Standard & Poors
SEC		Securities and Exchange Commission
SG&A		Selling, general and administrative
Term Loan Lenders		The lenders party to the 2019 KDP Term Loan, with JP Morgan as the administrative agent of the 2019 KDP Term Loan Agreement
U.S.		United States
U.S. GAAP		Accounting principles generally accepted in the U.S.
WD		Warehouse Direct
WIP		Work-in-process

s-iii

Table of Contents

PART I - FINANCIAL INFORMATION


ITEM 1.	Financial Statements (Unaudited)

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the ~~Third~~First Quarter of 2020 and ~~First Nine Months of~~ 2019 ~~and 2018~~

(Unaudited)


	Third Quarter					First Nine Months					First Quarter
(in millions, except per share data)	2019		2018			2019		2018			2020			2019
Net sales	$	2,870	$	2,732		$	8,186	$	4,629		$	2,613		$	2,504
Cost of sales	1,245		1,367			3,537		2,292			1,161			1,106
Gross profit	1,625		1,365			4,649		2,337			1,452			1,398
Selling, general and administrative expenses	1,012		1,028			2,951		1,649			1,028			911
Other operating expense (income), net	33		(8		)	33		(2		)
Other operating income, net											(42		)	(11		)
Income from operations	580		345			1,665		690			466			498
Interest expense	158		172			497		221			153			169
Interest expense - related party	—		—			—		51
Loss on early extinguishment of debt	—		11			9		13			2			9
Other expense (income), net	9		(33		)	15		(28		)
Impairment on investment and note receivable											86			—
Other expense, net											20			5
Income before provision for income taxes	413		195			1,144		433			205			315
Provision for income taxes	109		46			296		110			49			85
Net income	304		149			848		323			$	156		$	230
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—		—			—		3
Net income attributable to KDP	$	304	$	149		$	848	$	320
Earnings per common share:
Basic	$	0.22	$	0.11		$	0.60	$	0.33		$	0.11		$	0.16
Diluted	0.21		0.11			0.60		0.32			0.11			0.16
Weighted average common shares outstanding:
Basic	1,406.8		1,361.8			1,406.6		983.0			1,407.0			1,406.3
Diluted	1,419.4		1,373.6			1,418.8		994.1			1,420.1			1,417.7

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

For the ~~Third~~First Quarter of 2020 and ~~First Nine Months of~~ 2019 ~~and 2018~~

(Unaudited)


	Third Quarter				First Nine Months				First Quarter
(in millions)	2019		2018		2019		2018		2020			2019
Comprehensive income	$	226	$	227	$	951	$	361
Comprehensive (loss) income									$	(428	)	$	323

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019

(Unaudited)


	September 30,			December 31,			March 31,			December 31,
(in millions, except share and per share data)	2019			2018			2020			2019
Assets
Current assets:
Cash and cash equivalents	$	74		$	83		$	197		$	75
Restricted cash and restricted cash equivalents	28			46			26			26
Trade accounts receivable, net	1,090			1,150			1,037			1,115
Inventories	751			626			682			654
Prepaid expenses and other current assets	326			254			335			403
Total current assets	2,269			2,159			2,277			2,273
Property, plant and equipment, net	2,236			2,310			2,017			2,028
Investments in unconsolidated affiliates	164			186			105			151
Goodwill	20,112			20,011			19,898			20,172
Other intangible assets, net	24,031			23,967			23,706			24,117
Other non-current assets	561			259			811			748
Deferred tax assets	27			26			29			29
Total assets	$	49,400		$	48,918		$	48,843		$	49,518
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	2,976		$	2,300		$	3,238		$	3,176
Accrued expenses	1,066			1,012			960			939
Structured payables	338			526			258			321
Short-term borrowings and current portion of long-term obligations	1,761			1,458			1,957			1,593
Other current liabilities	409			406			445			445
Total current liabilities	6,550			5,702			6,858			6,474
Long-term obligations	13,147			14,201			12,431			12,827
Deferred tax liabilities	6,022			5,923			5,917			6,030
Other non-current liabilities	767			559			997			930
Total liabilities	26,486			26,385			26,203			26,261
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, 1,406,787,332 and 1,405,944,922 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	14			14
Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,407,079,951 and 1,406,852,305 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively							14			14
Additional paid-in capital	21,539			21,471			21,579			21,557
Retained earnings	1,388			1,178			1,527			1,582
Accumulated other comprehensive loss	(27		)	(130		)
Accumulated other comprehensive (loss) income							(480		)	104
Total stockholders' equity	22,914			22,533			22,640			23,257
Total liabilities and stockholders' equity	$	49,400		$	48,918		$	48,843		$	49,518

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the First ~~Nine Months~~Quarter of ~~2019~~2020 and ~~2018~~2019

(Unaudited)


	First Nine Months						First Quarter
(in millions)	2019			2018			2020			2019
Operating activities:
Net income	$	848		$	323		$	156		$	230
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	271			150			98			85
Amortization expense	259			144
Amortization of intangibles							33			31
Other amortization expense							32			36
Provision for sales returns	25			38			7			9
Deferred income taxes	(5		)	(117		)	(5		)	1
Employee stock-based compensation expense	47			21			19			14
Loss on early extinguishment of debt	9			13			2			9
Gain on step acquisition of unconsolidated subsidiaries	—			(6		)
Unrealized (gain) loss on foreign currency	(22		)	7
Unrealized (gain) loss on derivatives	60			(6		)
Gain on disposal of property, plant and equipment							(43		)	—
Unrealized loss (gain) on foreign currency							22			(17		)
Unrealized loss on derivatives							43			7
Equity in loss of unconsolidated affiliates	38			12			15			15
Impairment on investment and note receivable of unconsolidated affiliate							86			—
Other, net	14			21			22			(4		)
Changes in assets and liabilities:
Trade accounts receivable	36			48			42			126
Inventories	(124		)	91			(38		)	(36		)
Income taxes receivable and payables, net	(9		)	34			(29		)	68
Other current and non-current assets	(156		)	(108		)	(179		)	(102		)
Accounts payable and accrued expenses	561			391			150			125
Other current and non-current liabilities	(49		)	7			(19		)	(6		)
Net change in operating assets and liabilities	259			463			(73		)	175
Net cash provided by operating activities	1,803			1,063			414			591
Investing activities:
Acquisitions of businesses	(8		)	(19,124		)
Cash acquired in acquisitions	—			150
Issuance of related party note receivable	(22		)	(6		)	(6		)	(7		)
Investments in unconsolidated affiliates	(16		)	(23		)
Proceeds from capital distributions from investments in unconsolidated affiliates	—			36
Purchases of property, plant and equipment	(208		)	(104		)	(151		)	(62		)
Proceeds from sales of property, plant and equipment	19			1			201			18
Purchases of intangibles	(4		)	—			(15		)	(2		)
Other, net	23			—			5			8
Net cash used in investing activities	(216		)	(19,070		)
Net cash provided by (used in) investing activities							34			(45		)
Financing activities:
Proceeds from issuance of common stock private placement	—			9,000
Proceeds from unsecured credit facility	—			1,900			1,000			—
Proceeds from senior unsecured notes	—			8,000
Proceeds from term loan	2,000			2,700			—			2,000
Net issuance of commercial paper	335			1,386
Net (repayment) issuance of commercial paper							(387		)	594
Proceeds from structured payables	246			432			44			78
Payments on structured payables	(432		)	—			(107		)	(9		)
Payments on senior unsecured notes	(250		)	—			(250		)	(250		)
Repayment of unsecured credit facility	—			(1,900		)
Repayment of term loan	(2,873		)	(3,363		)	(405		)	(2,758		)
Payments on finance leases	(29		)	(20		)	(13		)	(10		)
Deferred financing charges paid	—			(49		)
Cash contributions from redeemable non-controlling interest shareholders	—			19
Cash dividends paid	(633		)	(23		)	(212		)	(211		)
Other, net	10			2			2			10
Net cash (used in) provided by financing activities	(1,626		)	18,084
Net cash used in financing activities							(328		)	(556		)
Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from:
Operating, investing and financing activities	(39		)	77			120			(10		)
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents	12			(50		)	(8		)	10
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	139			95			111			139
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	112		$	122		$	223		$	139

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

For the ~~Third~~First Quarter of 2020 and ~~First Nine Months of~~ 2019 ~~and 2018~~

(Unaudited)

Common Stock Issued
Additional
Paid-In Capital
Retained Earnings Accumulated Other Comprehensive Income (Loss)
Total
Stockholders' Equity
(in millions, except per share data) Shares Amount
Balance as of January 1, 2019 1,405.9
$ 14
$ 21,471
$ 1,178
$ (130 ) $ 22,533
Adoption of new accounting standards —
—
—
(5 ) —
(5 )
Net income attributable to KDP —
—
—
230
—
230
Other comprehensive income —
—
—
—
93
93
Dividends declared, $0.15 per share —
—
—
(211 ) —
(211 )
Measurement period adjustment —
—
11
—
—
11
Shares issued under employee stock-based compensation plans and other 0.8
—
—
—
—
—
Stock-based compensation and stock options exercised —
—
23
—
—
23
Balance as of March 31, 2019 1,406.7
14
21,505
1,192
(37 ) 22,674
Net income attributable to KDP —
—
—
314
—
314
Other comprehensive income —
—
—
—
88
88
Dividends declared, $0.15 per share —
—
—
(212 ) —
(212 )
Stock-based compensation and stock options exercised —
—
19
—
—
19
Balance as of June 30, 2019 1,406.7
14
21,524
1,294
51
22,883
Net income attributable to KDP —
—
—
304
—
304
Other comprehensive loss —
—
—
—
(78 ) (78 )
Dividends declared, $0.15 per share —
—
—
(210 ) —
(210 )
Shares issued under stock-based compensation plans and other 0.1
—
—
—
—
—
Stock-based compensation and stock options exercised —
—
15
—
—
15
Balance as of September 30, 2019 1,406.8
$ 14
$ 21,539
$ 1,388
$ (27 ) $ 22,914

~~The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.~~

~~Table of Contents~~

~~KEURIG DR PEPPER INC.~~

~~CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY~~

~~For the Third Quarter and First Nine Months of 2019 and 2018~~

~~(Unaudited, Continued)~~

Common Stock Issued
Additional
Paid-In Capital
Retained Earnings Accumulated Other Comprehensive Income (Loss)
Total
Stockholders' Equity
(in millions, except per share data) Shares Amount
Balance as of January 1, 2018 790.5
$ 8
$ 6,377
$ 914
$ 99
$ 7,398
Adoption of new accounting standards —
—
—
(4 ) —
(4 )
Net income attributable to KDP —
—
—
88
—
88
Other comprehensive loss —
—
—
—
(24 ) (24 )
Dividends declared —
—
—
(11 ) —
(11 )
Adjustment of non-controlling interests to fair value —
—
—
(13 ) —
(13 )
Balance as of March 31, 2018 790.5
8
6,377
974
75
7,434
Net income attributable to KDP —
—
—
83
—
83
Other comprehensive loss —
—
—
—
(16 ) (16 )
Dividends declared —
—
—
(12 ) —
(12 )
Adjustment of non-controlling interests to fair value —
—
—
(5 ) —
(5 )
Balance as of June 30, 2018 790.5
8
6,377
1,040
59
7,484
Net income attributable to KDP —
—
—
149
—
149
Other comprehensive income —
—
—
—
78
78
Issuance of common stock 407.0
4
8,996
—
—
9,000
Acquisition of Dr Pepper Snapple Group, Inc. 182.5
2
3,640
—
—
3,642
Conversion of subsidiary shares 7.9
—
172
—
—
172
Capitalization of loans with related parties —
—
1,815
—
—
1,815
Reclassification of historical Maple Parent Corporation employee redeemable non-controlling interest and mezzanine equity awards —
—
9
141
—
150
Dividends declared —
—
—
(208 ) —
(208 )
Shares issued under employee stock-based compensation plans and other 1.2
—
—
—
—
—
Stock-based compensation and stock options exercised —
—
11
—
—
11
Balance as of September 30, 2018 1,389.1
$ 14
$ 21,020
$ 1,122
$ 137
$ 22,293



	Common Stock Issued			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
(in millions, except per share data)	Shares	Amount		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balance as of January 1, 2020	1,406.8	$	14	$	21,557	$	1,582		$	104		$	23,257
Net income	—	—		—		156			—			156
Other comprehensive loss	—	—		—		—			(584		)	(584		)
Dividends declared, $0.15 per share	—	—		—		(211		)	—			(211		)
Shares issued under employee stock-based compensation plans and other	0.3	—		—		—			—			—
Stock-based compensation and stock options exercised	—	—		22		—			—			22
Balance as of March 31, 2020	1,407.1	$	14	$	21,579	$	1,527		$	(480	)	$	22,640

Balance as of January 1, 2019	1,405.9	$	14	$	21,471	$	1,178		$	(130	)	$	22,533
Adoption of new accounting standards	—	—		—		(5		)	—			(5		)
Net income	—	—		—		230			—			230
Other comprehensive income	—	—		—		—			93			93
Dividends declared, $0.15 per share	—	—		—		(211		)	—			(211		)
Measurement period adjustment	—	—		11		—			—			11
Shares issued under stock-based compensation plans and other	0.8	—		—		—			—			—
Stock-based compensation and stock options exercised	—	—		23		—			—			23
Balance as of March 31, 2019	1,406.7	$	14	$	21,505	$	1,192		$	(37	)	$	22,674

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

ORGANIZATION

On January 29, 2018, ~~Dr Pepper Snapple Group, Inc. ("DPS")~~DPS entered into anthe DPS Merger Agreement ~~and Plan of Merger (the "Merger Agreement")~~ by and among DPS, Maple ~~Parent Holdings Corp. (“Maple”)~~ and ~~Salt~~ Merger ~~Sub, Inc. (“Merger Sub”), whereby Merger Sub would be merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS (the “DPS Merger”).~~Sub. The DPS Merger was consummated on July 9, 2018, ~~(the "Merger Date"),~~ at which time DPS changed its name to "Keurig Dr Pepper Inc.".

References in this Quarterly Report on Form 10-Q to "KDP" or "the Company" refer to Keurig Dr Pepper Inc. and all entities included in the unaudited condensed consolidated financial statements. Definitions of terms used in this Quarterly Report on Form 10-Q are included within the Master Glossary.

This Quarterly Report on Form 10-Q refers to some of KDP's owned or licensed trademarks, trade names and service marks, which are referred to as the Company's brands. All of the product names included herein are either KDP registered trademarks or those of the Company's licensors.

BASIS OF PRESENTATION

For financial reporting and accounting purposes, Maple was the acquirer of DPS upon completion of the DPS Merger. The DPS Merger was completed on July 9, 2018, and periods ending subsequent to the DPS Merger include the results of DPS.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with ~~accounting principles generally accepted in the United States of America ("~~U.S. ~~GAAP")~~GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial ~~statements~~.statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with KDP's consolidated financial statements and accompanying notes, included in the Company's Annual ~~Report on Form 10-K for the year ended December 31, 2018.~~Report.

Except as otherwise specified, references to the ~~"third~~"first quarter" indicate the Company's quarterly periods ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

PRINCIPLES OF CONSOLIDATION

KDP consolidates all wholly owned subsidiaries. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes KDP's proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors or similar governing body, participation in policy-making decisions and material intercompany transactions.

The Company is also required to consolidate entities that are variable interest entities (“VIEs”) of which KDP is the primary beneficiary. Judgments are made in assessing whether KDP is the primary beneficiary, including determination of the activities that most significantly impact the VIE’s economic performance.

KDP eliminates from its financial results all intercompany transactions between entities included in the unaudited condensed consolidated financial statements.

USE OF ESTIMATES

The process of preparing ~~KDP~~'s KDP's unaudited condensed consolidatedfinancial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. These estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

RECLASSIFICATIONS

The Company reclassified the following amounts from the unaudited condensed consolidated balance sheets as of December 31, 2018 in connection with the adoption of Accounting Standards Codification ("ASC") Topic 842, ~~Leases~~ ~~("ASC 842"):~~

(in millions) Prior Presentation Revised Presentation December 31, 2018
Capital lease and financing obligations Current portion of capital lease and financing obligations Other current liabilities $ 26
Capital lease and financing obligations Capital lease and financing obligations, less current Other non-current liabilities 305

~~Refer to~~ ~~Recently Adopted Provisions of U.S. GAAP~~ below for further information about the adoption of ASC 842. Refer to Note 3 for information about the Company's leases and Note 12 for disclosure of the components of other current liabilities and other non-current liabilities.

The Company ~~additionally~~ reclassified the following amounts in the unaudited condensed consolidated ~~statement~~Statement of ~~cash flows~~Cash Flows for the first ~~nine months~~quarter of ~~2018~~2019 in order to conform to current year presentation:

(in millions) Prior Presentation Revised Presentation First Nine Months of 2018
Net cash provided by operating activities:
Equity in loss of unconsolidated affiliates Other, net Equity in loss of unconsolidated affiliates $ 12
Net cash provided by (used in) investing activities:
Proceeds from sales of property, plant and equipment Other, net Proceeds from sales of property, plant and equipment 1
Net cash provided by (used in) financing activities:
Proceeds from stock options exercised Proceeds from stock options exercised Other, net 3



(in millions)	Prior Presentation	Revised Presentation	First Quarter of 2019
Net cash provided by operating activities:
Amortization of intangibles	Amortization expense	Amortization of intangibles	$	31
Other amortization expense⁽¹⁾	Amortization expense	Other amortization expense	36
Amortization of deferred financing fees	Amortization expense	Other, net	4
Amortization of bond fair value	Amortization expense	Other, net	7
Equity in loss of unconsolidated affiliates	Other, net	Equity in loss of unconsolidated affiliates	15
Net cash provided by (used in) investing activities:
Proceeds from sales of property, plant and equipment	Other, net	Proceeds from sales of property, plant and equipment	18
Purchase of intangibles	Other, net	Purchases of intangibles	(2		)
Net cash provided by (used in) financing activities:
Proceeds from stock options exercised	Proceeds from stock options exercised	Other, net	8


(1)	Primarily includes amortization of customer rebates and upfront payments.

RECENTLY ISSUED ACCOUNTING STANDARDS

In ~~June 2016,~~January 2020, the ~~Financial Accounting Standards Board (the "FASB")~~FASB issued ~~Accounting Standards Update ("ASU") 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement~~ASU 2020-01. The objective of ~~Credit Losses on Financial Instruments~~ ("ASU ~~2016-13"). The standard provides~~2020-01 is to clarify the interaction of the accounting for ~~a new impairment model which requires measurement~~equity securities, investments accounted for under the equity method of accounting and ~~recognition of expected credit losses~~the accounting for ~~most financial assets held. The~~certain forward contracts and purchased options accounted under different topics in U.S. GAAP. ASU 2020-01 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, ~~2019.~~2020. The Company is currently evaluating the impact of ASU ~~2016-13~~2020-01 but expects the impact to be immaterial to KDP's consolidated financial statements.

In ~~August 2018,~~March 2020, the FASB issued ASU ~~2018-13,~~ ~~Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements~~ ~~("ASU 2018-13").~~2020-04. The objective of ASU 2020-04 is to provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04 to KDP's consolidated financial statements.

RECENTLY ADOPTED PROVISIONS OF U.S. GAAP

Credit Losses

As of January 1, 2020, the Company adopted ASU 2016-13, which replaced the incurred loss methodology with an expected loss methodology. The objective of ASU 2016-13 was to provide for a new impairment model which requires measurement and recognition of current expected credit losses (CECL) for most financial assets held. The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost, which means that results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption of ASU 2016-13 did not have an impact on the Company's unaudited condensed consolidated financial statements.

Refer to Note 13 for additional information.

Other Accounting Standards

As of January 1, 2020, the Company adopted ASU 2018-13. The objective of ASU 2018-13 is to improve the disclosures related to fair value measurement by removing, modifying, or adding disclosure requirements related to recurring and non-recurring fair value measurements. The adoption of ASU 2018-13 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company is currently assessingdid not have an impact on the ~~changes in disclosure requirements but expects the impact to be immaterial to KDP's~~Company's unaudited condensed consolidated financial statements.

~~RECENTLY ADOPTED PROVISIONS OF U.S. GAAP~~

~~Leases~~

As of January 1, 2019, the Company adopted ASC 842. ASC 842 replaced the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

2. Long-term Obligations and Borrowing Arrangements

The ~~Company elected to apply~~following table summarizes the ~~optional transition method provided by ASU 2018-11,~~ ~~Leases (Topic 842) - Targeted Improvements,~~Company ~~which allows companies to adopt~~'s long-term obligations:



(in millions)	March 31, 2020			December 31, 2019
Senior unsecured notes	$	11,559		$	11,802
Term loan	970			1,372
Subtotal	12,529			13,174
Less - current portion	(98		)	(347		)
Long-term obligations	$	12,431		$	12,827

The following table summarizes the ~~standard on a modified retrospective basis~~Company's short-term borrowings and ~~to apply the new leases standard as~~current portion of long-term obligations:



	Fair Value Hierarchy Level	March 31, 2020				December 31, 2019
(in millions)	Fair Value Hierarchy Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Commercial paper notes	2	$	859	$	859	$	1,246	$	1,246
Revolving credit facilities	2	1,000		1,000		—		—
Current portion of long-term obligations:
Senior unsecured notes	2	—		—		250		250
Term loan	2	98		98		97		97
Short-term borrowings and current portion of long-term obligations		$	1,957	$	1,957	$	1,593	$	1,593

SENIOR UNSECURED NOTES

The Company's Notes consisted of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, amounts reported in the unaudited condensed consolidated financial statements for all periods prior to January 1, 2019 have not been recast under ASC 842 and continue to be reported in accordance with ASC 840. The Company elected the package of practical expedients which allows the Company to carry forward its historical assessments of whether contracts contain leases, lease classification, and initial direct costs, for leases in existence prior to January 1, 2019.

The adoption of ASC 842 resulted in an increase to KDP's total assets of approximately $314 million, an increase to KDP's total liabilities of approximately $319 million, and an impact to KDP's retained earnings of approximately $5 million, as of January 1, 2019. Refer to Note 3 for additional information.

~~Other Accounting Standards~~

~~As of January 1, 2019, the Company adopted ASU 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~ ("ASU 2017-12") on a prospective basis. The objective of the ASU is to improve the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance. The adoption of ASU 2017-12 did not have a material impact on the Company's unaudited condensed consolidated financial statements.

~~As of January 1, 2019, the Company early adopted ASU 2018-15,~~ ~~Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~ ("ASU 2018-15"). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. The ASU was adopted on a prospective basis and did not have a material impact on the Company's unaudited condensed consolidated financial statements.

2.~~Acquisitions and Investments in Unconsolidated Affiliates~~

~~ACQUISITION OF DR PEPPER SNAPPLE GROUP, INC.~~

~~Overview and Total Consideration Exchanged~~

~~As discussed in Note 1,~~ ~~General,~~ Maple merged with DPS on July 9, 2018. The DPS Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations. Maple was considered to be the financial and accounting acquirer, and DPS was considered the legal acquirer. Under the acquisition method of accounting, total consideration exchanged was $22,482 million.

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~Allocation of Consideration~~

~~The Company~~'s allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the DPS Merger is based on estimated fair values as of July 9, 2018, and was finalized on July 9, 2019. The following is a summary of the allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the DPS Merger as of September 30, 2019:following:



(in millions)			Fair Value Hierarchy Level	March 31, 2020					December 31, 2019
Issuance	Maturity Date	Rate	Fair Value Hierarchy Level	Carrying Value			Fair Value		Carrying Value			Fair Value
2020 Notes⁽¹⁾	January 15, 2020	2.000%	2	$	—		$	—	$	250		$	250
2021 Merger Notes	May 25, 2021	3.551%	2	1,750			1,766		1,750			1,785
2021-A Notes	November 15, 2021	3.200%	2	250			250		250			254
2021-B Notes	November 15, 2021	2.530%	2	250			247		250			251
2022 Notes	November 15, 2022	2.700%	2	250			247		250			251
2023 Merger Notes	May 25, 2023	4.057%	2	2,000			2,075		2,000			2,110
2023 Notes	December 15, 2023	3.130%	2	500			504		500			514
2025 Merger Notes	May 25, 2025	4.417%	2	1,000			1,059		1,000			1,090
2025 Notes	November 15, 2025	3.400%	2	500			507		500			521
2026 Notes	September 15, 2026	2.550%	2	400			387		400			400
2027 Notes	June 15, 2027	3.430%	2	500			503		500			520
2028 Merger Notes	May 25, 2028	4.597%	2	2,000			2,184		2,000			2,253
2038 Notes	May 1, 2038	7.450%	2	125			187		125			167
2038 Merger Notes	May 25, 2038	4.985%	2	500			559		500			587
2045 Notes	November 15, 2045	4.500%	2	550			580		550			605
2046 Notes	December 15, 2046	4.420%	2	400			417		400			435
2048 Merger Notes	May 25, 2048	5.085%	2	750			886		750			905
Principal amount				$	11,725		$	12,358	$	11,975		$	12,898
Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger				(166		)			(173		)
Carrying amount				$	11,559				$	11,802

(in millions) Initial Allocation of Consideration Measurement Period Adjustments Allocation of Consideration as of September 30, 2019
Cash and cash equivalents $ 147
$ —
$ 147
Investments in unconsolidated affiliates 90
—
90
Property, plant and equipment⁽¹⁾
1,549
(74 ) 1,475
Other intangible assets 20,404
(326 ) 20,078
Long-term obligations (4,049 ) —
(4,049 )
Finance leases (214 ) 9
(205 )
Acquired assets, net of assumed liabilities⁽²⁾
107
(26 ) 81
Deferred tax liabilities, net of deferred tax assets⁽³⁾
(4,959 ) (82 ) (5,041 )
Goodwill 9,407
499
9,906
Total consideration exchanged $ 22,482
$ —
$ 22,482
Fair value of stock and replacement equity awards not converted to cash 3,643
—
3,643
Acquisition of business $ 18,839
$ —
$ 18,839

(1)

The Company valued personal property using a combination of the market approach and the cost approach, which is based upon current replacement or reproduction cost of the asset as newly adjusted for any depreciation attributable to physical, functional and economic factors. The Company assigned personal property a useful life ranging from 1 year to 24 years. We valued real property using the cost approach and land using the sales comparison approach. The Company assigned real property a useful life between 1 year and 41 years.

~~(2)~~

~~The Company used existing carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as~~On January 15, 2020, the Company ~~determined that they represented~~repaid the ~~fair value of those items as of the Merger Date. The Company valued work-in-process ("WIP") and finished goods inventory~~2020 Notes at maturity, using a net realizable value approach resulting in a step-up of $131 million which was recognized in the cost of goods sold for the third quarter of 2018 as the related inventory was sold during that period. Raw materials were carried at net book value.


~~(3)~~	~~Net deferred tax liabilities represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases.~~

The DPS Merger resulted in $9,906 million of goodwill as of September 30, 2019. The goodwill recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, direct procurement savings on overlapping materials, purchasing scale on indirect spend categories and optimization of duplicate positions and processes. The Company may also recognize revenue synergies, driven by a strong portfolio of brands with exposure to higher growth segments and the ability to leverage our collective distribution strength. The goodwill created in the DPS Merger is not deductible for tax purposes.

~~The allocation of consideration exchanged to other intangible assets acquired is as follows:~~

(in millions) Fair Value Estimated Life (in years)
Brands⁽¹⁾
$ 19,556
n/a
Contractual arrangements⁽²⁾
127
n/a
Customer relationships⁽³⁾
390
10-40
Favorable leases⁽⁴⁾
5
5-12
Total other intangible assets $ 20,078


~~(1)~~	~~The Company valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.~~


~~(2)~~	~~The Company valued contractual arrangements with bottlers and distributors utilizing the distributor method, a form of the income approach.~~


~~(3)~~	The Company identified two types of customer relationships, retail and food service. We valued retail and food service customer relationships utilizing the distributor method, a form of the income approach.


~~(4)~~	~~The Company valued favorable leases utilizing the income approach.~~commercial paper notes.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

~~Pro Forma Information~~

~~Assuming DPS had been acquired as~~The fair value amounts of ~~December 31, 2016,~~the Notes were based on current market rates available to the Company. The difference between the fair value and the ~~results of DPS had been included in operations beginning on January 1, 2017,~~carrying value represents the ~~following tables provide estimated unaudited pro forma results of operations for~~theoretical net premium or discount that would be paid or received to retire all the ~~third quarter~~Notes and ~~first nine months of 2018 under U.S. GAAP.~~

related unamortized costs to be incurred at such date. The ~~estimated pro forma net income~~carrying amount includes the ~~alignment of accounting policies,~~unamortized discounts, debt issuance costs and the ~~effect of~~ fair value ~~adjustments related to the DPS Merger, the associated tax effects and the impact of the additional debt to finance~~adjustment for the DPS Merger.

BORROWING ARRANGEMENTS

Third Quarter First Nine Months
(Unaudited, in millions) 2018 2018
Net sales $ 2,856
$ 8,207
Net income 300
834

~~Estimated unaudited pro forma information is not necessarily indicative~~The KDP Credit Agreements consisted of the ~~results that actually would have occurred had the DPS Merger been completed on the date indicated or the future operating results.~~

~~ACQUISITION OF BIG RED~~

~~Overview~~following carrying values and ~~Purchase Price~~

On July 9, 2018, KDP entered into an Agreement and Plan of Merger (the "Big Red Merger Agreement") with Big Red Group Holdings, LLC ("Big Red"), pursuant to which we agreed to acquire Big Red for an enterprise value of $300 million, subject to certain adjustments outlined in the Big Red Merger Agreement (the "Big Red Acquisition"). On August 31, 2018 (the "Big Red Merger Date"), the Company completed the Big Red Acquisition.

~~Allocation of Purchase Price~~

~~The Company's allocation of purchase price to the net tangible and intangible assets acquired and liabilities assumed in the Big Red Acquisition is based on~~ estimated fair values ~~as of the Big Red Merger Date. The allocation of purchase price was finalized on August 31, 2019.~~

~~The following is a summary of the allocation of consideration exchanged~~that are not required to ~~the estimated~~be measured at fair ~~values of assets acquired and liabilities assumed~~value in the ~~Big Red Acquisition as of September 30, 2019:~~unaudited Condensed Consolidated Balance Sheets:



(in millions)		Fair Value Hierarchy Level	March 31, 2020							December 31, 2019
Issuance	Maturity Date	Fair Value Hierarchy Level	Available Balances		Carrying Value			Fair Value		Carrying Value			Fair Value
2019 KDP Term Loan⁽¹⁾	February 2023	2	$	—	$	975		$	975	$	1,380		$	1,380
KDP Revolver⁽²⁾	February 2023	2	1,400		1,000			1,000		—			—
2019 364-Day Credit Agreement	May 2020	2	750		—			—		—			—
Principal amount					$	1,975		$	1,975	$	1,380		$	1,380
Unamortized discounts and debt issuance costs					(5		)			(8		)
Carrying amount					$	1,970				$	1,372

(in millions) Initial Allocation of Consideration Measurement Period Adjustments Allocation of Consideration as of September 30, 2019
Cash and cash equivalents $ 3
—
$ 3
Other intangible assets 240
(2 ) 238
Assumed liabilities, net of acquired assets⁽¹⁾
(28 ) (20 ) (48 )
Goodwill 89
24
113
Total consideration exchanged⁽²⁾
$ 304
$ 2
$ 306
Less: Company's previous ownership interest 22
—
22
Less: Holdback placed in escrow 15
—
15
Acquisition of business $ 267
$ 2
$ 269

(1)

The Company ~~valued WIP and finished goods inventory using~~borrowed $380 million of commercial paper to voluntarily prepay a ~~net realizable value approach, which resulted in~~portion of its outstanding obligations under the 2019 KDP Term Loan. As a ~~step-up~~result of these voluntary prepayments, the Company recorded a $2 million ~~which was recognized in~~loss on early extinguishment during the ~~cost~~first quarter of ~~goods sold for the year ended December 31, 2018 as the related inventory was sold during that period. Raw materials were carried at net book value.~~2020


(2)	The ~~Company paid $2~~KDP Revolver has $200 million ~~in additional consideration during the fourth quarter~~letters of ~~2018~~credit availability and NaN utilized as ~~a result~~ of ~~working capital adjustments determined pursuant to the terms of the Big Red Merger Agreement.~~March 31, 2020.

~~The Big Red Acquisition resulted~~As of March 31, 2020, the Company was in $113 million of goodwill. The goodwill recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, purchasing scale on various spend categories and optimization of duplicate positions and processes. The goodwill created in the Big Red Acquisition is not deductible for tax purposes.

~~The allocation of consideration exchanged to other intangible assets acquired is as follows:~~

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

(in millions) Fair Value Estimated Life (in years)
Brands⁽¹⁾
$ 220
n/a
Brands⁽¹⁾
11
5
Contractual arrangements⁽²⁾
6
12
Customer relationships⁽³⁾
1
8-40
Total other intangible assets $ 238


~~(1)~~	~~The Company valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.~~


~~(2)~~	~~The Company valued contractual arrangements with bottlers and distributors utilizing the distributor method, a form of the income approach.~~


~~(3)~~	The Company identified two types of customer relationships, retail and industrial. We valued retail and industrial customer relationships utilizing the distributor method, a form of the income approach.

~~ACQUISITION OF CORE NUTRITION, LLC~~

~~Overview and Purchase Price~~

~~On September 27, 2018, KDP entered into a definitive agreement~~compliance with Core Nutrition, LLC ("Core"), pursuant to which we agreed to acquire Core for merger consideration, which represented an enterprise value of $525 million (subject to customary post-closing working capital and other adjustments), comprised substantially of shares of common stock of KDP, subject to certain adjustments paid in cash (the "Core Acquisition"). On November 30, 2018 (the "Core Acquisition Date"), the Company completed the Core Acquisition.

~~Allocation of Purchase Price~~

~~The Company's preliminary allocation of purchase price~~all financial covenant requirements relating to the ~~net tangible and intangible assets acquired and liabilities assumed in the Core Acquisition is based on estimated fair values as of the Core Acquisition Date.~~KDP Credit Agreements.

~~The following is a summary of the preliminary allocation of purchase price to the estimated fair values of assets acquired and liabilities assumed in the Core Acquisition as of September 30, 2019:~~Commercial Paper Program

(in millions) Initial Allocation of Consideration Measurement Period Adjustments Allocation of Consideration as of September 30, 2019
Cash and cash equivalents $ 10
$ —
$ 10
Other intangible assets 273
(114 ) 159
Assumed liabilities, net of acquired assets⁽¹⁾
(12 ) (5 ) (17 )
Goodwill 236
126
362
Total purchase price $ 507
$ 7
$ 514
Company's previous ownership interest 31
—
31
Less: Holdback placed in Escrow 27
(4 ) 23
Acquisition of business $ 449
$ 11
$ 460


~~(1)~~	The Company valued WIP and finished goods inventory using a net realizable value approach resulting in a step-up of $4 million, of which $1 million and $3 million was recognized in cost of goods sold in 2018 and 2019, respectively, due to the timing of the sale of the related inventory. Raw materials were carried at net book value.

The Core Acquisition preliminarily resulted in $362 million of goodwill. The preliminary goodwill to be recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, purchasing scale on various spend categories and optimization of duplicate positions and processes. The goodwill created in the Core Acquisition is expected to be deductible for tax purposes.

~~The preliminary allocation of purchase price to other intangible assets acquired is as follows:~~

(in millions) Fair Value Estimated Life (in years)
Brands⁽¹⁾
$ 142
n/a
Contractual arrangements⁽²⁾
17
10
Total other intangible assets $ 159


~~(1)~~	~~The Company preliminarily valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.~~


~~(2)~~	~~The Company preliminarily valued contractual arrangements utilizing the distributor method, a form of the income approach.~~

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~OTHER ACQUISITIONS~~

The Company also spent an aggregate of $8 million in connection with other immaterial acquisitions during the first nine months of 2019, which resulted in the recognition of fixed assets, intangible assets and goodwill. Pro forma financial information has not been presented for these acquisitions as the impact to our unaudited condensed consolidated financial statements was not material.

~~TRANSACTION EXPENSES~~

The following table provides information about the ~~Company's transaction expenses incurred during the third quarter and first nine months of 2019 and 2018:~~Company's weighted average borrowings under its commercial paper program:

Third Quarter First Nine Months
(in millions) 2019 2018 2019 2018
DPS Merger $ 2
$ 93
$ 8
$ 167
Other transaction expenses 9
3
16
3
Total transaction expenses incurred $ 11
$ 96
$ 24
$ 170



	First Quarter
(in millions, except %)	2020			2019
Weighted average commercial paper borrowings	$	1,670		$	1,748
Weighted average borrowing rates	1.85		%	2.90		%

~~Transaction expenses primarily consisted~~Letter of ~~professional fees for advisory and consulting services and other incremental costs related~~Credit Facility

In addition to the ~~acquisitions.~~

~~INVESTMENTS IN UNCONSOLIDATED AFFILIATES~~

~~The following table summarizes investments in unconsolidated affiliates~~portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility. Under this facility, $100 million is available for the issuance of letters of credit, $44 million of which was utilized as of ~~September 30, 2019~~March 31, 2020 and ~~December 31, 2018:~~

September 30, December 31,
(in millions) Ownership Interest 2019 2018
BA Sports Nutrition, LLC ("BA") 12.5 % $ 52
$ 62
Bedford Systems, LLC 30.0 % 56
79
Dyla LLC 12.4 % 14
15
Force Holdings LLC 33.3 % 5
6
Beverage startup companies (various)
32
19
Other (various)
5
5
Investments in unconsolidated affiliates $ 164
$ 186

$56 million of which remains available for use.

3. ~~Leases~~

The Company leases certain facilities and machinery and equipment, including fleet. These leases expire at various dates through 2044. Some lease agreements contain standard renewal provisions that allow us to renew the lease at rates equivalent to fair market value at the end of the lease term. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.

Operating leases are included within other non-current assets, other current liabilities, and other non-current liabilities within our unaudited Condensed Consolidated Balance Sheets. Refer to Note 12 for further information. Finance leases are included within property, plant and equipment, net, other current liabilities, and other non-current liabilities. Leases with an initial term of 12 months or less are not recognized on the balance sheet.

Right of use assets and lease liabilities are recognized in the unaudited Condensed Consolidated Balance Sheets at the present value of future minimum lease payments over the lease term on the commencement date. As the rate implicit in the lease is generally not provided to the Company, KDP uses its incremental borrowing rate based on information available at the commencement date to determine the present value of future minimum lease payments. KDP's incremental borrowing rate is determined using a portfolio of secured borrowing rates commensurate with the term of the lease and is reassessed on a quarterly basis.

~~KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.~~

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~The following table presents the components of lease cost:~~

Third Quarter First Nine Months
(in millions) 2019 2019
Operating lease cost $ 21
$ 61
Finance lease cost
Amortization of right-of-use assets 17
37
Interest on lease liabilities 4
11
Variable lease cost⁽¹⁾
8
22
Short-term lease cost 2
5
Sublease income (1 ) (2 )
Total lease cost $ 51
$ 134


~~(1)~~	~~Variable lease cost primarily consists of common area maintenance costs, property taxes, and adjustments for inflation.~~

~~The following table presents supplemental cash flow information about the Company's leases:~~

First Nine Months
(in millions) 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 58
Operating cash flows from finance leases 11
Financing cash flows from finance leases 29

~~The following table presents information about the Company's weighted average discount rate and remaining lease term as of September 30, 2019:~~



~~Weighted average discount rate~~
~~Operating leases~~	~~4.6~~	%
~~Finance leases~~	~~5.2~~	%
~~Weighted average remaining lease term~~
~~Operating leases~~	~~8 years~~
~~Finance leases~~	~~12 years~~

~~Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:~~

(in millions) Operating Leases Finance Leases
Remainder of 2019 $ 19
$ 14
2020 71
51
2021 58
43
2022 48
38
2023 40
35
2024 38
32
Thereafter 137
181
Total future minimum lease payments 411
394
Less: imputed interest (68 ) (96 )
Present value of minimum lease payments $ 343
$ 298

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~Future minimum lease payments under non-cancellable leases as of December 31, 2018 under ASC 840 were as follows:~~

(in millions) Operating Leases Capital Leases Financing Obligations
2019 $ 58
$ 35
$ 10
2020 53
34
10
2021 44
33
10
2022 34
33
10
2023 25
30
10
Thereafter 98
189
62
Total future minimum lease payments $ 312
354
112
Less: imputed interest (98 ) (37 )
Present value of minimum lease payments $ 256
$ 75

~~SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED~~

As of September 30, 2019, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $680 million. These leases will commence between the fourth quarter of 2019 and 2021, with initial lease terms ranging from 5 years to 20 years.

4. Goodwill and Other Intangible Assets

GOODWILL

Changes in the carrying amount of goodwill by reportable segment are as follows:


(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages			Unallocated			Total		Coffee Systems			Packaged Beverages			Beverage Concentrates			Latin America Beverages			Total
Balance as of January 1, 2019	$	9,725	$	4,878	$	4,265	$	618		$	525		$	20,011
Balance as of January 1, 2020															$	9,775		$	5,301		$	4,526		$	570		$	20,172
Foreign currency translation	33		19		11		—			—			63		(74		)	(57		)	(37		)	(112		)	(280		)
Acquisitions⁽¹⁾	3		391		242		(73		)	(525		)	38		—			6			—			—			6
Balance as of September 30, 2019	$	9,761	$	5,288	$	4,518	$	545		$	—		$	20,112
Balance as of March 31, 2020															$	9,701		$	5,250		$	4,489		$	458		$	19,898


~~(1)~~	~~Amounts primarily represent measurement period adjustments for the DPS Merger, the Big Red Acquisition, and the Core Acquisition. Refer to Note 2 for additional information.~~

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

INTANGIBLE ASSETS OTHER THAN GOODWILL

The net carrying amounts of intangible assets other than goodwill with indefinite lives are as follows:


(in millions)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Brands⁽¹⁾	$	19,862	$	19,712	$	19,569	$	19,948
Trade names	2,479		2,479		2,479		2,479
Contractual arrangements	122		119		120		122
Distribution rights	3		—		19		16
Total	$	22,466	$	22,310	$	22,187	$	22,565


(1)	~~Approximately $62~~The decrease of $379 million ~~of the increase~~ in brands with indefinite lives was due to foreign currency translation during the ~~period. The remaining change represents measurement period adjustments for the DPS Merger and the Core Acquisition. Refer to Note 2 for additional information.~~first quarter of 2020.

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

The net carrying amounts of intangible assets other than goodwill with definite lives are as follows:


	September 30, 2019							December 31, 2018							March 31, 2020							December 31, 2019
(in millions)	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Acquired technology	$	1,146	$	(237	)	$	909	$	1,146	$	(182	)	$	964	$	1,146	$	(273	)	$	873	$	1,146	$	(255	)	$	891
Customer relationships	637		(93		)	544		629		(67		)	562		632		(109		)	523		638		(102		)	536
Trade names	127		(51		)	76		127		(40		)	87		126		(58		)	68		128		(55		)	73
Contractual arrangements	23		(2		)	21		26		(1		)	25		24		(4		)	20		24		(3		)	21
Brands	11		(2		)	9		9		—			9		15		(2		)	13		10		(2		)	8
Distribution rights	6		—			6		—		—			—		24		(2		)	22		24		(1		)	23
Favorable leases⁽¹⁾	—		—			—		13		(3		)	10
Total	$	1,950	$	(385	)	$	1,565	$	1,950	$	(293	)	$	1,657	$	1,967	$	(448	)	$	1,519	$	1,970	$	(418	)	$	1,552


~~(1)~~	Amounts recorded as favorable lease intangible assets were reclassified to operating lease right-of-use assets in connection with the adoption of ASC 842 as of January 1, 2019. Refer to Note 3 for additional information regarding the adoption of ASC 842.

Amortization expense for intangible assets with definite lives was as follows:


	Third Quarter				First Nine Months				First Quarter
(in millions)	2019		2018		2019		2018		2020		2019
Amortization expense for intangible assets with definite lives	$	31	$	31	$	94	$	90	$	33	$	31

Amortization expense of these intangible assets over the remainder of ~~2019~~2020 and the next five years is expected to be as follows:


	Remainder of 2019		For the Years Ending December 31,										Remainder of 2020		For the Years Ending December 31,
(in millions)	Remainder of 2019		2020		2021		2022		2023		2024		Remainder of 2020		2021		2022		2023		2024		2025
Expected amortization expense for intangible assets with definite lives	$	32	$	126	$	126	$	126	$	126	$	121	$	100	$	133	$	133	$	132	$	123	$	111

IMPAIRMENT TESTING

KDP conducts impairment tests on goodwill and all indefinite lived intangible assets annually, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. The Company did not identify any circumstances, which included the recent COVID-19 pandemic, that indicated that the carrying amount of any goodwill or any ~~indefinite lived~~ intangible asset may not be recoverable as of ~~September 30, 2019.~~March 31, 2020.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

4.Investments in Unconsolidated Affiliates

The following table summarizes investments in unconsolidated affiliates as of March 31, 2020 and December 31, 2019:



			March 31,		December 31,
(in millions)	Ownership Interest		2020		2019
BodyArmor	12.5	%	$	51	$	52
Bedford	30.0	%	1		46
Dyla LLC	12.4	%	13		13
Force Holdings LLC	33.3	%	5		5
Beverage startup companies	(various)		30		30
Other	(various)		5		5
Investments in unconsolidated affiliates			$	105	$	151

Impairment of Bedford Investment and Related Party Note Receivable

The Company and ABI, in conjunction with the creation of Bedford, had executed a line of credit agreement with Bedford on March 3, 2017, which was amended on December 7, 2018 to increase the line of credit. The Company committed and funded the $51 million capacity, which incurs a fixed interest rate of 8.1% per annum. The credit agreement with Bedford matures on March 3, 2024.

During the first quarter of 2020, the Company reduced its expectation of future operating performance for Bedford based on COVID-19 and a new revised five-year projection during the first quarter of 2020 from the management of Bedford that projected the possibility of profitability two years later than previously anticipated. As a result of these indicators of impairment, the Company tested the Bedford investment for an other-than-temporary impairment using a discounted cash flow framework with multiple scenarios, including the conversion of the note receivable into equity. The results of its analysis indicated that the note receivable of $55 million was fully impaired and the investment in unconsolidated affiliates was impaired by $31 million on the impairment on investment line in the Condensed Consolidated Statements of Income. As a result of the other-than-temporary impairment, the Company has placed the note receivable in non-accrual status.

5. Restructuring and Integration Costs

The Company implements restructuring programs from time to time and incurs costs that are designed to improve operating effectiveness and lower costs. When the Company implements these programs, the Company incurs expenses, such as employee separations, lease terminations and other direct exit costs, that qualify as exit and disposal costs under U.S. GAAP.

The Company also incurs expenses that are an integral component of, and directly attributable to, its restructuring activities, which do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments, implementation costs and other incremental costs. These costs are recorded within SG&A expenses on the income statement and are held primarily within unallocated corporate costs.

Restructuring and integration charges incurred on the defined programs were as follows:


	Third Quarter				First Nine Months				First Quarter
(in millions)	2019		2018		2019		2018		2020		2019
Keurig 2.0 exit	$	—	$	—	$	1	$	12	$	—	$	1
Integration program	76		47		168		71
Other restructuring programs	—		—		—		3
DPS integration program									53		60
Total restructuring and integration charges	$	76	$	47	$	169	$	86	$	53	$	61

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Restructuring liabilities that qualify as exit and disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements. Restructuring liabilities as of ~~September 30, 2019 and December~~March 31, ~~2018~~2020 along with charges to expense, cash payments and non-cash charges for the period specific to the Integration Program were as follows:



(in millions)	Workforce Reduction Costs
Balance as of January 1, 2020	$	15
Charges to expense	12
Cash payments	(2		)
Non-cash adjustment items	(2		)
Balance as of March 31, 2020	$	23

(in millions) Workforce Reduction Costs
Other⁽¹⁾
Total
Balance as of December 31, 2018 $ 28
$ 1
$ 29
Charges to expense 26
—
26
Cash payments (39 ) —
(39 )
Non-cash adjustment items —
(1 ) (1 )
Balance as of September 30, 2019 $ 15
$ —
$ 15


~~(1)~~	~~Primarily reflects activities associated with the closure of certain facilities, excluding contract termination costs, which include any associated asset write-downs and accelerated depreciation.~~

RESTRUCTURING PROGRAMS

DPS Integration Program

As part of the DPS Merger, the ~~Company established a transformation management office to enable integration and maximize value capture. The~~ Company developed a program to deliver $600 million in synergies over a three-year period through supply chain optimization, reduction of indirect spend through new economies of scale, elimination of duplicative support functions and advertising and promotion optimization. The Company expects to incur total cash expenditures of $750 million, comprised of both capital expenditures and expense, and expects to complete the program by 2021. The restructuring and integration program resulted in cumulative pre-tax charges of approximately ~~$323~~$440 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through ~~September 30, 2019.~~March 31, 2020.

6. Income Taxes

The effective tax rates for the ~~third~~first quarter of 2020 and 2019 were 23.9% and ~~2018 were 26.4% and 23.6%~~27.0%, respectively. For the ~~third~~first quarter of ~~2019,~~2020, the provision for income taxes was ~~higher~~lower than the ~~third~~first quarter of ~~2018~~2019 primarily due to the benefit received from the revaluation of the Company’s deferred tax liabilities inand the ~~third quarter~~decrease of ~~2018, partially offset by increasing the valuation allowance on the realizability of foreign~~income tax ~~credit carryforwards in the third quarter of 2018.~~

~~The effective tax rates for the first nine months of 2019 and 2018 were 25.9% and 25.4%, respectively. The increase in our effective tax rate was primarily~~reserves due to the ~~revaluation~~lapse in statute of the Company's deferred tax liabilities offset by the exclusion of DPS Merger-related non-deductible transaction costs, increasing the valuation allowance on the realizability of foreign tax credit carryforwards, and the impact related to the legislation commonly known as the Tax Cuts and Jobs Act (the "TCJA"), which was enacted on December 22, 2017. The TCJA had various impacts for the Company, which were primarily due to the elimination of the domestic manufacturing deduction, which was partially offset by the reduction in the U.S. federal tax rate from 24.5% to 21.0%. Guidance under the TCJA for non-calendar year filers resulted in a 24.5% federal statutory rate for companies with a September tax year-end for the period ended September 30, 2018.limitations.

7. ~~Long-term Obligations and Borrowing Arrangements~~

~~The following table summarizes the Company's long-term obligations:~~

(in millions) September 30, 2019 December 31, 2018
Senior unsecured notes $ 11,794
$ 12,019
Term loans 1,699
2,561
Subtotal 13,493
14,580
Less - current portion (346 ) (379 )
Long-term obligations $ 13,147
$ 14,201

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~The following table summarizes the Company's short-term borrowings and current portion of long-term obligations:~~

Fair Value Hierarchy Level September 30, 2019 December 31, 2018
(in millions) Carrying Value Fair Value Carrying Value Fair Value
Commercial paper 2 $ 1,415
$ 1,415
$ 1,079
$ 1,079
Current portion of long-term obligations:
Senior unsecured notes 2 249
250
250
250
Term loans 2 97
97
129
129
Short-term borrowings and current portion of long-term obligations $ 1,761
$ 1,762
$ 1,458
$ 1,458

~~SENIOR UNSECURED NOTES~~

~~The~~ ~~Company's senior unsecured notes (collectively, the "Notes") consisted of the following:~~

(in millions) Fair Value Hierarchy Level September 30, 2019 December 31, 2018
Issuance Maturity Date Rate Carrying Value Fair Value Carrying Value Fair Value
2019 Notes⁽¹⁾
January 15, 2019 2.600% 2 $ —
$ —
$ 250
$ 250
2020 Notes January 15, 2020 2.000% 2 250
250
250
245
2021 Merger Notes May 25, 2021 3.551% 2 1,750
1,778
1,750
1,742
2021-A Notes November 15, 2021 3.200% 2 250
252
250
244
2021-B Notes November 15, 2021 2.530% 2 250
250
250
240
2022 Notes November 15, 2022 2.700% 2 250
249
250
237
2023 Merger Notes May 25, 2023 4.057% 2 2,000
2,078
2,000
1,988
2023 Notes December 15, 2023 3.130% 2 500
512
500
474
2025 Merger Notes May 25, 2025 4.417% 2 1,000
1,075
1,000
999
2025 Notes November 15, 2025 3.400% 2 500
517
500
467
2026 Notes September 15, 2026 2.550% 2 400
392
400
346
2027 Notes June 15, 2027 3.430% 2 500
515
500
458
2028 Merger Notes May 25, 2028 4.597% 2 2,000
2,148
2,000
1,981
2038 Notes May 1, 2038 7.450% 2 125
169
125
151
2038 Merger Notes May 25, 2038 4.985% 2 500
533
500
483
2045 Notes November 15, 2045 4.500% 2 550
590
550
478
2046 Notes December 15, 2046 4.420% 2 400
424
400
342
2048 Merger Notes May 25, 2048 5.085% 2 750
888
750
716
Principal amount $ 11,975
$ 12,620
$ 12,225
$ 11,841
Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger (181 ) (206 )
Carrying amount $ 11,794
$ 12,019


~~(1)~~	~~On January 15, 2019, the Company repaid the 2019 Notes at maturity, using Commercial Paper.~~

~~The fair value amounts of the Notes were based on current market rates available to the~~ ~~Company~~. The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all the Notes and related unamortized costs to be incurred at such date. The carrying amount includes the unamortized discounts, debt issuance costs and the fair value adjustment for the DPS Merger.

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~BORROWING ARRANGEMENTS~~

~~Term Loan Agreements~~

On February 8, 2019, the Company terminated its term loan executed in conjunction with the DPS Merger ("KDP Term Loan") and entered into a new term loan agreement among the Company ("New KDP Term Loan"), the lenders party thereto (the "New Term Lenders"), and JP Morgan, as administrative agent (the "2019 New Term Loan Agreement"), pursuant to which the New Term Lenders provided $2 billion of the New KDP Term Loan to refinance the KDP Term Loan in order to achieve a more favorable interest rate. As a result of the extinguishment of the KDP Term Loan, the Company recorded approximately $3 million of loss on early extinguishment during the first nine months of 2019.

The interest rate applicable to the 2019 Term Loan Agreement ranges from a rate equal to LIBOR plus a margin of 0.75% to 1.25% or a base rate plus a margin of 0.00% to 0.25%, depending on the rating of certain indexed debt of KDP. Under the 2019 New Term Loan Agreement, KDP must repay the unpaid principal amount quarterly commencing on March 29, 2019 in an amount equal to 1.25% of the aggregate principal amount made on the effective date of the New KDP Term Loan, resulting in annual mandatory repayments of $100 million. The 2019 Term Loan Agreement matures on February 8, 2023.

~~364-Day Credit Agreement~~

The Company entered into a new credit agreement on May 29, 2019 (the "364-Day Credit Agreement") among the Company, the banks party thereto and JP Morgan, as administrative agent, pursuant to which the Company obtained a $750 million commitment. The 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes. Under this credit agreement, $750 million is available for issuance, NaN of which was utilized as of September 30, 2019.

The interest rate applicable to borrowings under the 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 1.000% to 1.625% or a base rate plus a margin of 0.000% to 0.625%, depending on the rating of certain index debt of the Company. The 364-Day Credit Agreement will mature on May 27, 2020, subject to the Company’s option to extend the maturity date by one year so long as certain customary conditions are satisfied.

~~KDP Revolving Credit Facility~~

~~The following table provides amounts utilized and available under the~~ ~~Company's revolving credit facilities ("KDP Revolver") as of September 30, 2019:~~

(in millions) Amount Utilized Balances Available
KDP Revolver $ —
$ 2,400
Letters of credit —
200

~~The~~ ~~Company~~'s KDP Revolver, 364-Day Credit Agreement and term loans, collectively the ("KDP Credit Agreements"), consisted of the following carrying values and estimated fair values that are not required to be measured at fair value in the unaudited Condensed Consolidated Balance Sheets:

(in millions) Fair Value Hierarchy Level September 30, 2019 December 31, 2018
Issuance Maturity Date Carrying Value Fair Value Carrying Value Fair Value
KDP Term Loan⁽¹⁾
February 2023 2 $ —
$ —
$ 2,583
$ 2,583
New KDP Term Loan⁽²⁾
February 2023 2 1,710
1,710
—
—
KDP Revolver February 2023 2 —
—
—
—
364-Day Credit Agreement May 2020 2 —
—
—
—
Principal amount $ 1,710
$ 1,710
$ 2,583
$ 2,583
Unamortized discounts and debt issuance costs (11 ) (22 )
Carrying amount $ 1,699
$ 2,561


~~(1)~~	In January 2019, the Company borrowed $583 million of Commercial Paper to voluntarily prepay a portion of its outstanding obligations under the KDP Term Loan. As a result of these voluntary prepayments, the Company recorded a $5 million loss on early extinguishment during the first nine months of 2019. This KDP Term Loan was refinanced with the New KDP Term Loan in February 2019.

~~(2)~~

The Company borrowed $215 million of Commercial Paper during the the first nine months of 2019 to voluntarily prepay a portion of its outstanding obligations under the 2019 New Term Loan Agreement. As a result of these voluntary prepayments, the Company recorded 0 loss on extinguishment of debt during the third quarter of 2019 and $1 million of loss on early extinguishment during the first nine months of 2019.

~~As of September 30, 2019, the~~ ~~Company~~ ~~was in compliance with all financial covenant requirements relating to the KDP Credit Agreements.~~

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~Commercial Paper Program~~

~~The following table provides information about the~~ ~~Company's weighted average borrowings under its commercial paper program:~~

Third Quarter First Nine Months
(in millions, except %) 2019 2018 2019
2018⁽¹⁾
Weighted average commercial paper borrowings $ 1,726
$ 1,395
$ 1,746
$ 1,395
Weighted average borrowing rates 2.48 % 2.37 % 2.73 % 2.37 %


~~(1)~~	The Company assumed the Commercial Paper Program as a result of the DPS Merger on July 9, 2018. As a result the first nine months of weighted average commercial paper borrowings and weighted average borrowing rates are weighted from the assumption of the Commercial Paper Program through the end of the prior year period.

~~Letter of Credit Facility~~

In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility. Under this facility, $100 million is available for the issuance of letters of credit, $48 million of which was utilized as of ~~September 30, 2019~~ ~~and $52 million of which remains available for use.~~

8. Derivatives

KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and ~~foreign exchange ("FX")~~FX rates.

KDP manages these risks through a variety of strategies, including the use of interest rate contracts, FX forward contracts, commodity forward, future, swap and option contracts and supplier pricing agreements. KDP does not designate these contracts as hedges for accounting purposes, and KDP does not hold or issue derivative financial instruments for trading or speculative purposes.

INTEREST RATES

The Company is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate swaps to provide predictability in the ~~Company's~~Company's overall cost structure, including both receive-fixed, pay-variable and receive-variable, pay-fixed swaps. A natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in interest expense in the unaudited Condensed Consolidated Statements of Income. ~~These~~As of March 31, 2020, all interest rate swap contracts ~~have maturities between approximately 2 years and 19 years as of September 30, 2019.~~will mature in March 2025.

FOREIGN EXCHANGE

The Company's Canadian and Mexican businesses purchase certain inventory under extended payment terms in most cases through transactions denominated and settled in U.S. dollars, a currency different from the functional currency of those businesses. The Company additionally has a subsidiary in Canada with intercompany notes denominated and settled in U.S. dollars, a currency different from the functional currency of the Canadian business. ~~These~~The accounts payable related to the inventory purchases and the intercompany notes are subject to exposure from movements in exchange rates. During the ~~third~~first quarter of 2020 and ~~first nine months of~~ 2019, ~~and 2018,~~ the Company held FX forward contracts to economically manage the exposures resulting from changes in these ~~foreign currency~~FX exchange rates. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same caption of the unaudited Condensed Consolidated Statements of Income as the associated risk. These FX contracts have maturities ranging from ~~less than 1 month~~April 2020 to ~~approximately 5 years~~September 2024 as of ~~September 30, 2019.~~March 31, 2020.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

COMMODITIES

KDP centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. The intent of these contracts is to provide a certain level of predictability in the Company's overall cost structure. During the ~~third~~first quarter of 2020 and ~~first nine months of~~ 2019, ~~and 2018,~~ the Company held forward, future, swap and option contracts that economically hedged certain of its risks. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations. These commodity contracts have maturities ranging from ~~less than 1 month~~April 2020 to ~~approximately 5 years~~June 2022 as of ~~September 30, 2019.~~March 31, 2020.

NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS

The following table presents the notional amounts of the Company's outstanding derivative instruments by type:


	September 30,		December 31,		March 31,		December 31,
(in millions)	2019		2018		2020		2019
Interest rate contracts
Receive-fixed, pay-variable interest rate swaps⁽¹⁾	$	50	$	1,070	$	—	$	50
Receive-variable, pay-fixed interest rate swaps⁽²⁾	575		2,125		450		575
FX contracts	467		348		471		523
Commodity contracts	272		296		317		150


(1)	During the first ~~nine months~~quarter of ~~2019,~~2020, the Company elected to terminate ~~$920~~$50 million notional amount of receive-fixed, pay-variable interest rate swaps and received cash of $2$18 million.


(2)	During the first ~~nine months~~quarter of ~~2019,~~2020, the Company elected to terminate ~~$1,400~~$575 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of ~~$38~~$2 million.

FAIR VALUE OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

The following table summarizes the fair value hierarchy and the location of the fair value of the Company's derivative instruments not designated as hedging instruments within the unaudited Condensed Consolidated Balance ~~Sheets as of September 30, 2019 and December 31, 2018:~~Sheets:


(in millions)	Fair Value Hierarchy Level	Balance Sheet Location	September 30, 2019		December 31, 2018		Fair Value Hierarchy Level	Balance Sheet Location	March 31, 2020		December 31, 2019
Assets:
Interest rate contracts	2	Prepaid expenses and other current assets	$	1	$	2	2	Prepaid expenses and other current assets	$	—	$	1
FX contracts	2	Prepaid expenses and other current assets	2		4		2	Prepaid expenses and other current assets	19		—
Commodity contracts	2	Prepaid expenses and other current assets	8		3		2	Prepaid expenses and other current assets	7		30
Interest rate contracts	2	Other non-current assets	20		77		2	Other non-current assets	—		18
FX contracts	2	Other non-current assets	—		15		2	Other non-current assets	14		—
Commodity contracts	2	Other non-current assets	3		3		2	Other non-current assets	6		1

Liabilities:
Interest rate contracts	2	Other current liabilities	$	—	$	7	2	Other current liabilities	$	2	$	—
FX contracts							2	Other current liabilities	—		2
Commodity contracts	2	Other current liabilities	33		27		2	Other current liabilities	37		10
Interest rate contracts	2	Other non-current liabilities	—		6		2	Other non-current liabilities	3		—
FX contracts	2	Other non-current liabilities	1		—		2	Other non-current liabilities	—		3
Commodity contracts	2	Other non-current liabilities	5		10		2	Other non-current liabilities	13		1

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

The fair values of commodity contracts, interest rate contracts and FX forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the reporting date. Interest rate contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the Company's contracts and credit risk of the counterparties. The fair value of FX forward contracts are valued using quoted forward FX prices at the reporting date. Therefore, the Company has categorized these contracts as Level 2.

IMPACT OF ~~ECONOMIC HEDGES~~DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

The following table presents the amount of (gains) losses recognized in the unaudited Condensed Consolidated Statements of Income related to derivative instruments not designated as hedging instruments under U.S. GAAP during the periods presented. Amounts include both realized and unrealized gains and losses.


		Third Quarter						First Nine Months							First Quarter
(in millions)	Income Statement Location	2019			2018			2019			2018			Income Statement Location	2020			2019
Interest rate contracts	Interest expense	$	—		$	3		$	4		$	(27	)	Interest expense	$	4		$	2
FX contracts	Cost of sales	(2		)	—			1			—			Cost of sales	(23		)	2
FX contracts	Other expense (income), net	10			5			16			(9		)	Other expense, net	(17		)	6
Commodity contracts	Cost of sales	17			31			29			35			Cost of sales	17			15
Commodity contracts	SG&A expenses	3			(6		)	(9		)	(6		)	SG&A expenses	45			(14		)
Total		$	28		$	33		$	41		$	(7	)		$	26		$	11

The Company has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically, the Company has not experienced material credit losses as a result of counterparty nonperformance. The Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines and monitors the market position of the programs upon execution of a hedging transaction and at least on a quarterly basis.

~~9. Earnings Per Share~~8. Leases

~~Basic earnings per share ("EPS") is computed by dividing net income by~~The Company leases certain facilities and machinery and equipment, including fleet. These leases expire at various dates through 2044. Some lease agreements contain standard renewal provisions that allow the ~~weighted average number of common shares outstanding for~~Company to renew the ~~period. Diluted EPS reflects~~lease at rates equivalent to fair market value at the ~~assumed conversion of all dilutive securities.~~

~~As a result~~end of the ~~DPS Merger, all historical per share data~~lease term. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants, except for leases of certain manufacturing properties that contain a residual value guarantee at the end of the term. KDP has lease agreements with lease and ~~number of shares and numbers of equity awards were retroactively adjusted.~~ non-lease components, which are generally accounted for as a single lease component.

The following table presents the ~~Company's basic and diluted EPS and shares outstanding:~~components of lease cost:

Third Quarter First Nine Months
(in millions, except per share data) 2019 2018 2019 2018
Basic EPS:
Net income attributable to KDP $ 304
$ 149
$ 848
$ 320
Weighted average common shares outstanding 1,406.8
1,361.8
1,406.6
983.0
Earnings per common share — basic $ 0.22
$ 0.11
$ 0.60
$ 0.33
Diluted EPS:
Net income attributable to KDP $ 304
$ 149
$ 848
$ 320
Weighted average common shares outstanding 1,406.8
1,361.8
1,406.6
983.0
Effect of dilutive securities:
Stock options 0.5
0.9
0.6
0.6
RSUs 12.1
10.9
11.6
10.5
Weighted average common shares outstanding and common stock equivalents 1,419.4
1,373.6
1,418.8
994.1
Earnings per common share — diluted $ 0.21
$ 0.11
$ 0.60
$ 0.32

Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation —
0.8
0.2
0.3



	First Quarter
(in millions)	2020			2019
Operating lease cost	$	28		$	20
Finance lease cost
Amortization of right-of-use assets	11			10
Interest on lease liabilities	4			4
Variable lease cost⁽¹⁾	6			6
Short-term lease cost	—			1
Sublease income	(1		)	—
Total lease cost	$	48		$	41


(1)	Variable lease cost primarily consists of common area maintenance costs, property taxes, and adjustments for inflation.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

The following table presents supplemental cash flow information about the Company's leases:



	First Quarter
(in millions)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	26	$	18
Operating cash flows from finance leases	4		4
Financing cash flows from finance leases	13		10

The following table presents information about the Company's weighted average discount rate and remaining lease term:



	March 31, 2020		December 31, 2019
Weighted average discount rate
Operating leases	4.7	%	4.6	%
Finance leases	5.0	%	5.4	%
Weighted average remaining lease term
Operating leases	11 years		8 years
Finance leases	12 years		12 years

Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows:



(in millions)	Operating Leases			Finance Leases
Remainder of 2020	$	60		$	41
2021	85			44
2022	74			39
2023	66			38
2024	64			36
2025	57			32
Thereafter	326			165
Total future minimum lease payments	732			395
Less: imputed interest	(157		)	(89		)
Present value of minimum lease payments	$	575		$	306

SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED

As of March 31, 2020, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $610 million. These leases are expected to commence between the second quarter of 2020 and second quarter of 2021, with initial lease terms ranging from 7 years to 20 years.

ASSET SALE-LEASEBACK TRANSACTIONS

On January 6, 2020, the Company closed an asset sale-leaseback transaction on two manufacturing properties as the buyer obtained control. The Company received proceeds of approximately $150 million, net of selling costs for the properties, which had a carrying value of $131 million, and resulted in an approximately $19 million gain on the sale transaction. The initial term of the leaseback is expected to end during 2034 and has two 10-year renewal options. The renewal options are not reasonably assured as (i) the Company's position that the dynamic environment in which it operates precludes the Company's ability to be reasonably certain of exercising the renewal options in the distant future and (ii) the options are contingent as the Company must remain investment grade and a change-in-control has not occurred as of the end of the lease term. The leaseback has a residual value guarantee; however, the Company concluded it was not probable that the Company will owe an amount at the end of the lease term and will record the lease obligation excluding the residual value guarantee.

On January 10, 2020, the Company closed the asset sale-leaseback transaction on two distribution properties as the buyer obtained control. The Company received proceeds of approximately $50 million, net of selling costs for the properties, which had a carrying value of $27 million, and resulted in an approximately $23 million gain on the sale transaction. The term of the leaseback is expected to end in 2025 and has two three-year renewals.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

9. Earnings Per Share

The following table presents the Company's basic and diluted EPS and shares outstanding:



	First Quarter
(in millions, except per share data)	2020		2019
Basic EPS:
Net income	$	156	$	230
Weighted average common shares outstanding	1,407.0		1,406.3
Earnings per common share — basic	$	0.11	$	0.16
Diluted EPS:
Net income	$	156	$	230
Weighted average common shares outstanding	1,407.0		1,406.3
Effect of dilutive securities:
Stock options	0.4		0.8
RSUs	12.7		10.6
Weighted average common shares outstanding and common stock equivalents	1,420.1		1,417.7
Earnings per common share — diluted	$	0.11	$	0.16

Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation	0.3		—

10. Stock-Based Compensation

Stock-based compensation expense is primarily recorded in SG&A expenses in the unaudited Condensed Consolidated Statements of Income. The components of stock-based compensation expense are presented below:


	Third Quarter						First Nine Months						First Quarter
(in millions)	2019			2018			2019			2018			2020			2019
Total stock-based compensation expense	$	13		$	8		$	47		$	26		$	19		$	14
Income tax benefit recognized in the Statements of Income	(3		)	(2		)	(10		)	(5		)	(4		)	(3		)
Stock-based compensation expense, net of tax	$	10		$	6		$	37		$	21		$	15		$	11

RESTRICTED STOCK UNITS

The table below summarizes RSU activity:


	RSUs		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)		RSUs		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2018	18,625,898		$	15.68	3.5	$	478
Outstanding as of December 31, 2019								21,492,786		$	18.14	2.6	$	622
Granted	5,563,276		26.33					5,597,154		22.99
Vested and released	(21,338	)	17.69			1		(25,082	)	24.80			1
Forfeited	(2,535,933	)	19.05					(390,712	)	21.63
Outstanding as of September 30, 2019	21,631,903		$	18.02	2.8	$	591
Outstanding as of March 31, 2020								26,674,146		$	19.10	2.6	$	647

As of ~~September 30, 2019,~~March 31, 2020, there was ~~$267~~$351 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of ~~3.8~~3.97 years.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

11. Accumulated Other Comprehensive Income (Loss)

The following table provides a summary of changes in ~~Accumulated Other Comprehensive Income (Loss),~~AOCI, net of taxes:

(in millions) Foreign Currency Translation Adjustments Pension and PRMB Liabilities Accumulated Other Comprehensive Income (Loss)
Balance as of July 1, 2019 $ 55
$ (4 ) $ 51
Other comprehensive income (loss) (82 ) 5
(77 )
Amounts reclassified from accumulated other comprehensive income⁽¹⁾
—
(1 ) (1 )
Net current period other comprehensive income (loss) (82 ) 4
(78 )
Balance as of September 30, 2019 $ (27 ) $ —
$ (27 )

Balance as of January 1, 2019 $ (126 ) $ (4 ) $ (130 )
Other comprehensive income 99
5
104
Amounts reclassified from accumulated other comprehensive income⁽¹⁾
—
(1 ) (1 )
Net current period other comprehensive income 99
4
103
Balance as of September 30, 2019 $ (27 ) $ —
$ (27 )

Balance as of July 1, 2018 $ 59
$ —
$ 59
Other comprehensive income 78
—
78
Balance as of September 30, 2018 $ 137
$ —
$ 137

Balance as of January 1, 2018 $ 99
$ —
$ 99
Other comprehensive income 38
—
38
Balance as of September 30, 2018 $ 137
$ —
$ 137



(in millions)	Foreign Currency Translation Adjustments			Pension and PRMB Liabilities			Accumulated Other Comprehensive Income (Loss)
Balance as of January 1, 2020	$	104		$	—		$	104
Other comprehensive loss	(583		)	(1		)	(584		)
Balance as of March 31, 2020	$	(479	)	$	(1	)	$	(480	)

Balance as of January 1, 2019	$	(126	)	$	(4	)	$	(130	)
Other comprehensive income	93			—			93
Balance as of March 31, 2019	$	(33	)	$	(4	)	$	(37	)

12. Supplemental Cash Flow Information

The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the unaudited Condensed Consolidated Balance Sheets to the total of the same amounts shown in the unaudited Condensed Consolidated Statements of Cash Flows:



(in millions)	March 31, 2020		December 31, 2019
Cash and cash equivalents	$	197	$	75
Restricted cash and restricted cash equivalents⁽¹⁾	26		26
Non-current restricted cash and restricted cash equivalents included in Other non-current assets	—		10
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows	$	223	$	111


(1)	Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the Core Acquisition, Bai Acquisition and Big Red Acquisition. Amounts ~~reclassified from accumulated other comprehensive income during~~held in escrow are expected to be released within one year.

The carrying value of cash, cash equivalents, restricted cash and restricted cash equivalents is valued as of the balance sheet date equating fair value and classified as Level 1.

The following table provides supplemental cash flow disclosures:



	First Quarter
(in millions)	2020		2019
Supplemental cash flow disclosures of non-cash investing activities:
Measurement period adjustment of Core purchase price	$	—	$	(11	)
Capital expenditures included in accounts payable and accrued expenses	177		154
Supplemental cash flow disclosures of non-cash financing activities:
Dividends declared but not yet paid	211		211
Finance lease additions	10		7
Supplemental cash flow disclosures:
Cash paid for interest⁽¹⁾	—		64
Cash paid for income taxes	81		25


(1)	Cash paid for interest includes amounts paid and received related to the ~~period represent settlement losses, which are recorded~~Company's interest rate swap contracts and the termination of such contracts. Refer to ~~SG&A expenses within the unaudited Condensed Consolidated Statements of Income.~~Note 7 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

~~12.~~13. Trade Accounts Receivable, Net

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.

The Company is exposed to potential credit risks associated with its accounts receivable, as it generally does not require collateral on its accounts receivable. The Company determines the required allowance for expected credit losses using information such as its customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions such as the impacts of COVID-19 in the first quarter of 2020. Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies or expectations of any such events in a future period when reasonable and supportable. Historical information is utilized beyond reasonable and supportable forecast periods. Amounts are charged against the allowance when it is determined that expected credit losses may occur.

Activity in the allowance for expected credit loss accounts during the Periods was as follows:



(in millions)	Allowance for Expected Credit Loss
Balance as of January 1, 2019	$	8
Charges to bad debt expense	2
Write-offs and adjustments	(1		)
Balance as of December 31, 2019	$	9
Charges to bad debt expense	10
Write-offs and adjustments	—
Balance as of March 31, 2020	$	19

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

14. Other Financial Information

The tables below provide selected financial information from the unaudited Condensed Consolidated Balance Sheets:


	September 30,		December 31,		March 31,			December 31,
(in millions)	2019		2018		2020			2019
Trade accounts receivable, net:
Trade and other accounts receivable					$	1,056		$	1,124
Allowance for expected credit losses					(19		)	(9		)
Total trade accounts receivable, net					$	1,037		$	1,115
Inventories:
Raw materials	$	213	$	204	$	215		$	215
Work in process	7		7
WIP					6			8
Finished goods	531		415		478			447
Total inventories	$	751	$	626
Total					699			670
Allowance for excess and obsolete inventories					(17		)	(16		)
Total Inventories					$	682		$	654
Prepaid expenses and other current assets:
Other receivables	$	54	$	51	$	53		$	65
Customer incentive programs	52		12		78			12
Derivative instruments	11		9		26			31
Prepaid marketing	39		29		30			17
Spare parts	47		43		50			49
Assets held for sale⁽¹⁾	60		8		3			165
Income tax receivable	5		22		7			4
Other	58		80		88			60
Total prepaid expenses and other current assets	$	326	$	254	$	335		$	403
Other non-current assets:
Customer incentive programs	$	32	$	34	$	77		$	33
Marketable securities - trading⁽²⁾	38		44		31			40
Operating lease right-of-use assets⁽³⁾	346		—
Operating lease right-of-use assets					576			497
Derivative instruments	23		95		20			19
Equity securities without readily determinable fair values	1		1		1			1
Non-current restricted cash and restricted cash equivalents	10		10		—			10
Related party notes receivable⁽⁴⁾	39		17
Related party notes receivable⁽³⁾					1			50
Other	72		58		105			98
Total other non-current assets	$	561	$	259	$	811		$	748


(1)	~~Assets held~~The decrease was due to the assets included in sale-leaseback transactions that closed during the period. Refer to Note 8 for ~~sale as~~additional information about the transactions. Remainder of ~~September 30, 2019 and December 31, 2018~~amounts were comprised of property, plant and equipment expected to be sold within the next twelve months.


(2)	Fair values of marketable securities are determined using quoted market prices from daily exchange traded markets, based on the closing price as of the balance sheet date, and are classified as Level 1. The fair value of marketable securities was ~~$38~~$31 million and ~~$44~~$40 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.


(3)	Refer to ~~Notes 1 and 3 for additional information.~~


~~(4)~~	~~Refer to~~ Note 154 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)


	September 30,		December 31,		March 31,		December 31,
(in millions)	2019		2018		2020		2019
Accrued expenses:
Customer rebates & incentives	$	360	$	342	$	304	$	362
Accrued compensation	176		214		130		183
Insurance reserve	39		37		36		39
Accrued interest	170		77		164		54
Accrued professional fees	34		113		37		31
Other accrued expenses	287		229		289		270
Total accrued expenses	$	1,066	$	1,012	$	960	$	939
Other current liabilities:
Dividends payable	$	210	$	209	$	211	$	212
Income taxes payable	27		60		46		75
Operating lease liability⁽¹⁾	60		—		73		69
Finance lease liability⁽²⁾	39		26		42		41
Derivative instruments	33		34		39		12
Holdback liabilities	29		44		25		25
Other	11		33		9		11
Total other current liabilities	$	409	$	406	$	445	$	445
Other non-current liabilities:
Pension and post-retirement liability	$	24	$	30	$	27	$	29
Insurance reserves	66		57		69		66
Operating lease liability⁽¹⁾	283		—		501		427
Finance lease liability⁽²⁾	259		305		264		269
Derivative instruments	6		16		16		4
Deferred compensation liability	38		44		31		40
Other	91		107		89		95
Total other non-current liabilities	$	767	$	559	$	997	$	930


~~(1)~~	~~Refer to Notes 1 and 3 for additional information.~~


~~(2)~~	~~Amounts as of December 31, 2018 include capital leases and financing obligations reported under ASC 840. Refer to Notes 1 and 3 for additional information.~~

ACCOUNTS PAYABLE

KDP entered into an agreement with a third party administrator to allow participating suppliers to track payments from KDP, and if voluntarily elected by the supplier, sell payment obligations from KDP to financial institutions. Suppliers can sell one or more of KDP's payment obligations at their sole discretion and the rights and obligations of KDP to its suppliers are not impacted. KDP has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. KDP's obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, $1,912~~2019, $2,322 million and ~~$1,438~~$2,097 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~13. Supplemental Cash Flow Information~~

Fair Value Hierarchy Level September 30, 2019 December 31, 2018
(in millions) Carrying Value Fair Value Carrying Value Fair Value
Cash and cash equivalents 1 $ 74
$ 74
$ 83
$ 83
Restricted cash and restricted cash equivalents⁽¹⁾
1 28
28
46
46
Non-current restricted cash and restricted cash equivalents included in Other non-current assets 1 10
10
10
10
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows $ 112
$ 112
$ 139
$ 139


~~(1)~~	~~Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the Big Red Acquisition and the Core Acquisition.~~

~~The following table provides supplemental cash flow disclosures:~~

First Nine Months
(in millions) 2019 2018
Supplemental cash flow disclosures of non-cash investing activities:
Measurement period adjustment of Core purchase price $ (11 ) $ —
Capital expenditures included in accounts payable and accrued expenses 236
80
Fair value of replacement equity awards not converted to cash —
(3,643 )
Purchases of intangibles 2
—
Supplemental cash flow disclosures of non-cash financing activities:
Dividends declared but not yet paid 210
208
Capitalization of related party debt into additional paid-in-capital —
(1,815 )
Finance lease additions 49
24
Supplemental cash flow disclosures:
Cash paid for interest 273
96
Cash paid for related party interest —
51
Cash paid for income taxes 313
195

~~14.~~15. Commitments and Contingencies

LEGAL MATTERS

The Company is involved from time to time in various claims, proceedings, and ~~litigation, including those described below. We establish~~litigation. The Company establishes reserves for specific legal proceedings when ~~we determine~~the Company determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. ~~Management~~The Company has also identified certain other legal matters where ~~we believe~~the Company believes an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made.

~~Proposition 65 Litigation~~

On May 9, 2011, an organization named Council for Education and Research on Toxics ("CERT") filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against Keurig. The lawsuit is Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182. CERT alleges that Keurig, in addition to nearly 100 other defendants who manufacture, package, distribute, or sell coffee, failed to warn persons in California that Keurig's coffee products (the "Products") expose persons to the chemical acrylamide in violation of California's Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code section 25249.5, et seq. ("Proposition 65"). CERT seeks equitable relief, including providing warnings to consumers, as well as civil penalties in the amount of the statutory maximum of $2,500 per day per violation of Proposition 65. CERT asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Keurig, as part of a joint defense group organized to defend against the lawsuit, disputes the claims of the Plaintiff. Acrylamide is not added to coffee, but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. Keurig has asserted multiple affirmative defenses. The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees beginning on October 15, 2018, however on October 12, 2018, the California Court of Appeal granted the defendants' request for a stay of the third phase trial.

The Court of Appeal’s stay order was prompted by a notice published on June 15, 2018 by California’s Office of Environmental Health Hazard Assessment (“OEHHA”) proposing a new Proposition 65 regulation clarifying that cancer warnings are not required for Proposition 65 chemicals, such as acrylamide, that are present in coffee as a result of roasting coffee beans. After two rounds of public comments, the regulation was finalized, adopted and approved by the Office of Administrative Law on June 3, 2019. It took effect on October 1, 2019. The Court of Appeal has lifted its 2018 stay order. Further litigation is anticipated based on CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims.

At this stage of the proceedings, prior to a trial on remedies issues, Keurig is unable to reasonably estimate the potential loss or effect on Keurig or its operations that could be associated with the lawsuit. The trial court has discretion to impose zero penalties against Keurig or to impose significant statutory penalties. Significant labeling or warning requirements that could potentially be imposed by the trial court may increase Keurig's costs and adversely affect sales of coffee products. We can provide no assurances as to the outcome of any litigation.

~~15.~~16. Related Parties

IDENTIFICATION OF RELATED PARTIES

The Company is indirectly controlled by a single stockholder, JAB, ~~Holding Company S.a.r.l ("JAB"),~~ a privately held investor group. JAB has ownership control over certain investments that create the following related party transaction types:

Coffee Transactions include transactions with Peet's Coffee, ~~("Peet's"),~~ Caribou Coffee, ~~("Caribou"),~~ Panera Bread ~~("Panera"), Einstein Bros Bagels ("Einstein Bros")~~ and Krispy Kreme ~~Doughnuts ("Krispy Kreme").~~Doughnuts. The Company manufactures portion packs containing a selection of coffee and tea varieties under Peet’s Coffee brands for sale in the U.S. and Canada. As part of this agreement, Peet’s Coffee issues purchase orders to the Company for portion packs to be supplied to Peet’s Coffee and sold in select channels. In turn, the Company places purchase orders for Peet’s Coffee raw materials to manufacture portion packs for sale by the Company in select channels. The Company licenses the Caribou Coffee, Panera Bread and Krispy Kreme Doughnuts trademarks for use in the Keurig system in the Company owned channels.

Additionally, the Company manufactures and distributes Peet's RTD Coffee in the U.S. and pays Peet's Coffee a royalty for use of the brand name.

Restaurant Transactions include transactions with Caribou Coffee, Panera ~~Peet's, Caribou,~~Bread, Einstein Bros Bagels and Krispy ~~Kreme.~~Kreme Doughnuts. The Company sells various beverage concentrates and packaged beverages to these companies.

The Company also has rights in certain territories to bottle and/or distribute various brands that the Company does not own. The Company holds investments in certain brand ownership companies. Refer to Note 24 for additional information about the Company's investments in unconsolidated affiliates. The Company purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S. Additionally, any transactions with significant partners in these investments, such as ~~Anheuser-Busch InBev ("ABI"),~~ABI, are considered related party transactions. ABI purchases Clamato from the Company and pays the Company a royalty for use of the brand name.

~~LINE OF CREDIT WITH BEDFORD~~

The Company and ABI executed a line of credit agreement with Bedford on March 3, 2017, in conjunction with the creation of the joint venture ("Bedford Credit Agreement"), which was amended on December 7, 2018 to increase the line of credit (the credit agreement, as amended, the "Bedford Credit Agreement"). Under the Bedford Credit Agreement, the Company has committed to provide up to $51 million capacity with a fixed interest rate of 8.1% per annum. The Bedford Credit Agreement matures on March 3, 2024. The Company has outstanding receivable balances on the Bedford Credit Agreement of $39 million and $17 million as of September 30, 2019 and December 31, 2018, respectively.

~~LIABILITY TO MONDELĒZ~~

Prior to the DPS Merger, DPS had a Tax Sharing and Indemnification Agreement with Mondelēz International, Inc. ("Mondelēz"). The final payment under the agreement of $16 million was made during the third quarter of 2019, with 0 remaining liability outstanding as of September 30, 2019.

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~16.~~17. Segments

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 and for the ~~third~~first quarter of 2020 and ~~first nine months of~~ 2019, ~~and 2018,~~ the Company's operating structure consisted of the following four reportable segments:

The Coffee Systems segment reflects sales in the U.S. and Canada of the manufacture and distribution of finished goods relating to the Company's coffee system, K-Cup pods and brewers.

The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third-party brands, through both the ~~Direct Store Delivery~~DSD system and the ~~Warehouse Direct~~WD system.

The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third-party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands.

The Latin America Beverages segment reflects sales in Mexico, the Caribbean, and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.

Segment results are based on management reports. Net sales and income from operations are the significant financial measures used to assess the operating performance of the Company's operating segments. Intersegment sales are recorded at cost and are eliminated in the unaudited Condensed Consolidated Statements of Income. “Unallocated corporate costs” are excluded from the Company's measurement of segment performance and include unrealized commodity derivative gains and losses, and certain general corporate expenses.

Information about the Company's operations by reportable segment is as follows:

Third Quarter First Nine Months
(in millions) 2019 2018 2019 2018
Segment Results – Net sales
Coffee Systems $ 1,065
$ 1,053
$ 3,023
$ 2,950
Packaged Beverages 1,307
1,238
3,734
1,238
Beverage Concentrates 360
317
1,034
317
Latin America Beverages 138
124
395
124
Net sales $ 2,870
$ 2,732
$ 8,186
$ 4,629


	Third Quarter				First Nine Months				First Quarter
(in millions)	2019		2018		2019		2018		2020		2019
Segment Results – Income from operations
Segment Results – Net sales
Coffee Systems	$	310	$	334	$	890	$	865	$	973	$	968
Packaged Beverages	196		61		531		61		1,217		1,116
Beverage Concentrates	245		193		690		193		306		304
Latin America Beverages	25		15		62		15		117		116
Total income from operations - segments	776		603		2,173		1,134
Unallocated corporate costs	196		258		508		444
Income from operations	$	580	$	345	$	1,665	$	690
Net sales									$	2,613	$	2,504

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)



	First Quarter
(in millions)	2020			2019
Segment Results – Income from operations
Coffee Systems	$	272		$	293
Packaged Beverages	189			149
Beverage Concentrates	197			201
Latin America Beverages	27			11
Unallocated corporate costs	(219		)	(156		)
Income from operations	$	466		$	498

~~17.~~

18. Revenue Recognition

The Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include ~~CSDs, NCBs,~~CSD, NCB, K-Cup pods and appliances, occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. Sales taxes and other similar taxes are excluded from revenue. Costs associated with shipping and handling activities, such as merchandising, are included in SG&A expenses as revenue is recognized.

The following table disaggregates the Company's revenue by portfolio for the ~~third~~first quarter of 2020 and ~~first nine months of 2019 and 2018:~~2019:


(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total		Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total
For the third quarter of 2019:
For the first quarter of 2020:
CSD⁽¹⁾	$	—	$	577	$	352	$	100	$	1,029	$	—	$	563	$	302	$	82	$	947
NCB⁽¹⁾	—		626		4		37		667		—		562		2		35		599
Pods⁽²⁾	824		—		—		—		824
K-Cup pods⁽²⁾											791		—		—		—		791
Appliances	187		—		—		—		187		127		—		—		—		127
Other	54		104		4		1		163		55		92		2		—		149
Net sales	$	1,065	$	1,307	$	360	$	138	$	2,870	$	973	$	1,217	$	306	$	117	$	2,613

For the first nine months of 2019:
For the first quarter of 2019:
CSD⁽¹⁾	$	—	$	1,640	$	1,012	$	282	$	2,934	$	—	$	522	$	298	$	80	$	900
NCB⁽¹⁾	—		1,789		9		111		1,909		—		501		2		36		539
Pods⁽²⁾	2,400		—		—		—		2,400
K-Cup pods⁽²⁾											793		—		—		—		793
Appliances	464		—		—		—		464		123		—		—		—		123
Other	159		305		13		2		479		52		93		4		—		149
Net sales	$	3,023	$	3,734	$	1,034	$	395	$	8,186	$	968	$	1,116	$	304	$	116	$	2,504

For the third quarter of 2018:
CSD⁽¹⁾	$	—	$	505	$	311	$	88	$	904
NCB⁽¹⁾	—		649		2		35		686
Pods⁽²⁾	831		—		—		—		831
Appliances	171		—		—		—		171
Other	51		84		4		1		140
Net sales	$	1,053	$	1,238	$	317	$	124	$	2,732

For the first nine months of 2018:
CSD⁽¹⁾	$	—	$	505	$	311	$	88	$	904
NCB⁽¹⁾	—		649		2		35		686
Pods⁽²⁾	2,387		—		—		—		2,387
Appliances	403		—		—		—		403
Other	160		84		4		1		249
Net sales	$	2,950	$	1,238	$	317	$	124	$	4,629

(1) Represents net sales of owned and Allied Brands within our portfolio.


(2)	Represents net sales from owned brands, partner brands and private label owners. Net sales for partner brands and private label owners are contractual and long term in nature.

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~18. Guarantor and Non-Guarantor Financial Information~~19. Subsequent Events

~~The Notes are fully and unconditionally guaranteed by certain direct and indirect subsidiaries of~~SENIOR UNSECURED NOTES

On April 13, 2020, the Company ~~(the "Guarantors"), as defined in~~completed the ~~indentures governing~~issuance of $1,500 million aggregate principal amount of senior unsecured notes consisting of $750 million aggregate principal amount of 3.20% senior unsecured notes due May 1, 2030 and $750 million aggregate principal amount of 3.80% senior unsecured notes due May 1, 2050. The discount associated with the ~~Notes.~~2030 Notes and 2050 Notes was approximately $6 million. The ~~Guarantors are 100% owned either directly or indirectly by~~net proceeds from the ~~Company and jointly and severally guarantee, subject~~issuance were used to ~~the release provisions described below, the Company's obligations~~repay approximately $1,000 million of outstanding borrowings under the ~~Notes. None~~KDP Revolver and approximately $481 million of the Company's subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries held by Maple prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of other indebtedness of the Company, the Company's exercise of its legal defeasance option with respect to the Notes and the discharge of the Company's obligations under the applicable indenture. The DPS Merger was accounted for under the acquisition method of accounting, using pushdown accounting for the purposes of presenting the following guarantor and non-guarantor financial information.

The following schedules present the financial information for Keurig Dr Pepper Inc. (the "Parent"), Guarantors and Non-Guarantors. The consolidating schedules are provided in accordance with the reporting requirements of Rule 3-10 under SEC Regulation S-X for guarantor subsidiaries.

~~REVISION OF THE GUARANTOR AND NON-GUARANTOR STATEMENT OF CASH FLOWS~~

Subsequent to the filing of the third quarter September 30, 2018 Form 10-Q, management discovered a mechanical error in the Condensed Consolidated Statement of Cash Flows for the first nine months of 2018 related to the presentation of the DPS Merger in the guarantor and non-guarantor financial information. The previously reported amounts have been revised to reflect the correct balance. Our presentation of the twelve months of 2018 in our Annual Report on Form 10-K reflected the revised statement. Through quantitative and qualitative assessment, the Company concluded that the effect of this correction was not material to the consolidated financial statements.commercial paper notes.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

BORROWING ARRANGEMENTS

On April 14, 2020, the Company terminated the 2019 364-Day Credit Agreement and replaced it with the 2020 364-Day Credit Agreement in order to increase the commitment from $750 million to $1,500 million. The ~~following table represents~~2020 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes.

The interest rate applicable to borrowings under the ~~effects~~2020 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 2.250% to 2.750% or a base rate plus a margin of 1.250% to 1.750%, depending on the rating of certain index debt of the ~~revision within the Condensed Consolidated Statement of Cash Flows for the first nine months of 2018:~~

For the First Nine Months of 2018
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Operating Activities
Net cash provided by operating activities
Previously reported $ (29,645 ) $ 25,450
$ 5,160
$ 98
$ 1,063
Adjustment 29,818
(25,075 ) (4,610 ) (133 ) —
Revised $ 173
$ 375
$ 550
$ (35 ) $ 1,063
Investing Activities
Acquisitions of businesses
Previously reported $ 10,642
$ (25,208 ) $ (21,674 ) $ 17,116
$ (19,124 )
Adjustment (29,766 ) 25,208
21,674
(17,116 ) —
Revised $ (19,124 ) $ —
$ —
$ —
$ (19,124 )
Net cash used in investing activities
Previously reported $ 8,037
$ (25,555 ) $ (21,770 ) $ 20,218
$ (19,070 )
Adjustment (29,766 ) 25,208
21,674
(17,116 ) —
Revised $ (21,729 ) $ (347 ) $ (96 ) $ 3,102
$ (19,070 )
Financing Activities
Inter-company contributions
Previously reported $ 9,162
$ —
$ —
$ (9,162 ) $ —
Adjustment 8,000
—
(17,116 ) 9,116
—
Revised $ 17,162
$ —
$ (17,116 ) $ (46 ) $ —
Proceeds from senior unsecured notes
Previously reported $ 8,000
$ —
$ 8,000
$ (8,000 ) $ 8,000
Adjustment (8,000 ) —
—
8,000
—
Revised $ —
$ —
$ 8,000
$ —
$ 8,000
Proceeds from structured payables
Previously reported $ —
$ 133
$ 432
$ (133 ) $ 432
Adjustment —
(133 ) —
133
—
Revised $ —
$ —
$ 432
$ —
$ 432
Net cash provided by (used in) financing activities
Previously reported $ 21,623
$ 126
$ 16,651
$ (20,316 ) $ 18,084
Adjustment —
(133 ) (17,116 ) 17,249
—
Revised $ 21,623
$ (7 ) $ (465 ) $ (3,067 ) $ 18,084
Effect of exchange rate changes on cash and cash equivalents
Previously reported $ —
$ —
$ (50 ) $ —
$ (50 )
Adjustment (52 ) —
52
—
—
Revised $ (52 ) $ —
$ 2
$ —
$ (50 )

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

~~GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION~~

Condensed Consolidating Statements of Income
For the Third Quarter of 2019
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Net sales $ —
$ 1,648
$ 1,256
$ (34 ) $ 2,870
Cost of sales —
656
623
(34 ) 1,245
Gross profit —
992
633
—
1,625
Selling, general and administrative expenses —
660
352
—
1,012
Other operating expense (income), net —
4
29
—
33
Income from operations —
328
252
—
580
Interest expense 289
98
18
(247 ) 158
Interest expense - related party —
—
—
—
—
Loss on early extinguishment of debt —
—
—
—
—
Other expense (income), net (99 ) (137 ) (2 ) 247
9
Income before provision for income taxes (190 ) 367
236
—
413
Provision for income taxes (53 ) 93
69
—
109
Income before equity in earnings of consolidated subsidiaries (137 ) 274
167
—
304
Equity in earnings of consolidated subsidiaries 441
26
—
(467 ) —
Net income 304
300
167
(467 ) 304
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards —
—
—
—
—
Net income attributable to KDP $ 304
$ 300
$ 167
$ (467 ) $ 304

Condensed Consolidating Statements of Income
For the Third Quarter of 2018
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Net sales $ —
$ 1,540
$ 1,225
$ (33 ) $ 2,732
Cost of sales —
774
626
(33 ) 1,367
Gross profit —
766
599
—
1,365
Selling, general and administrative expenses 1
590
437
—
1,028
Other operating expense, net (6 ) —
(2 ) —
(8 )
Income from operations 5
176
164
—
345
Interest expense 220
31
31
(110 ) 172
Interest expense - related party —
—
—
—
—
Loss on early extinguishment of debt —
—
11
—
11
Other expense (income), net (46 ) (84 ) (13 ) 110
(33 )
Income before provision for income taxes (169 ) 229
135
—
195
Provision for income taxes (46 ) 68
24
—
46
Income before equity in earnings of consolidated subsidiaries (123 ) 161
111
—
149
Equity in earnings of consolidated subsidiaries 271
16
—
(287 ) —
Net income 148
177
111
(287 ) 149
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards —
—
—
—
—
Net income attributable to KDP $ 148
$ 177
$ 111
$ (287 ) $ 149

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

Condensed Consolidating Statements of Income
For the First Nine Months of 2019
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Net sales $ —
$ 4,718
$ 3,601
$ (133 ) $ 8,186
Cost of sales —
1,888
1,782
(133 ) 3,537
Gross profit —
2,830
1,819
—
4,649
Selling, general and administrative expenses 5
1,890
1,056
—
2,951
Other operating expense (income), net —
(6 ) 39
—
33
Income from operations (5 ) 946
724
—
1,665
Interest expense 687
105
75
(370 ) 497
Interest expense - related party —
—
—
—
—
Loss on early extinguishment of debt 9
—
—
—
9
Other (income) expense, net (350 ) 10
(15 ) 370
15
Income before provision for income taxes (351 ) 831
664
—
1,144
Provision for income taxes (107 ) 219
184
—
296
Income before equity in earnings of consolidated subsidiaries (244 ) 612
480
—
848
Equity in earnings of consolidated subsidiaries 1,092
40
—
(1,132 ) —
Net income 848
652
480
(1,132 ) 848
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards —
—
—
—
—
Net income attributable to KDP $ 848
$ 652
$ 480
$ (1,132 ) $ 848

Condensed Consolidating Statements of Income
For the First Nine Months of 2018
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Net sales $ —
$ 1,540
$ 3,122
$ (33 ) $ 4,629
Cost of sales —
774
1,551
(33 ) 2,292
Gross profit —
766
1,571
—
2,337
Selling, general and administrative expenses 1
590
1,058
—
1,649
Other operating expense, net (6 ) —
4
—
(2 )
Income from operations 5
176
509
—
690
Interest expense 220
31
80
(110 ) 221
Interest expense - related party —
—
51
—
51
Loss on early extinguishment of debt —
—
13
—
13
Other (income) expense, net (46 ) (84 ) (8 ) 110
(28 )
Income before provision for income taxes (169 ) 229
373
—
433
Provision for income taxes (46 ) 68
88
—
110
Income before equity in earnings of consolidated subsidiaries (123 ) 161
285
—
323
Equity in earnings of consolidated subsidiaries 443
16
—
(459 ) —
Net income 320
177
285
(459 ) 323
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards —
—
3
—
3
Net income attributable to KDP $ 320
$ 177
$ 282
$ (459 ) $ 320

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

Condensed Consolidating Statements of Comprehensive Income
For the Third Quarter of 2019
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Comprehensive income $ 226
$ 232
$ 85
$ (317 ) $ 226

Condensed Consolidating Statements of Comprehensive Income
For the Third Quarter of 2018
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Comprehensive income $ 227
$ 239
$ 188
$ (427 ) $ 227

Company. The 2020 364-Day Credit Agreement will mature on April 13, 2021.

Condensed Consolidating Statements of Comprehensive Income
For the First Nine Months of 2019
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Comprehensive income $ 951
$ 729
$ 580
$ (1,309 ) $ 951

Condensed Consolidating Statements of Comprehensive Income
For the First Nine Months of 2018
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Comprehensive income $ 358
$ 239
$ 323
$ (559 ) $ 361

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

Condensed Consolidating Balance Sheets
As of September 30, 2019
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Current assets:
Cash and cash equivalents $ —
$ 21
$ 53
$ —
$ 74
Restricted cash and restricted cash equivalents 25
—
3
—
28
Trade accounts receivable, net —
594
496
—
1,090
Related party receivable 137
176
14
(327 ) —
Inventories —
247
504
—
751
Prepaid expenses and other current assets 661
207
117
(659 ) 326
Total current assets 823
1,245
1,187
(986 ) 2,269
Property, plant and equipment, net —
1,252
984
—
2,236
Investments in consolidated subsidiaries 41,372
4,888
—
(46,260 ) —
Investments in unconsolidated affiliates —
68
96
—
164
Goodwill —
8,239
11,873
—
20,112
Other intangible assets, net —
16,855
7,176
—
24,031
Long-term receivable, related parties 5,160
9,068
—
(14,228 ) —
Other non-current assets 62
248
251
—
561
Deferred tax assets —
—
27
—
27
Total assets $ 47,417
$ 41,863
$ 21,594
$ (61,474 ) $ 49,400

Current liabilities:
Accounts payable $ —
$ 1,046
$ 1,930
$ —
$ 2,976
Accrued expenses 170
650
246
—
1,066
Structured payables —
158
180
—
338
Related party payable 74
44
209
(327 ) —
Short-term borrowings and current portion of long-term obligations 1,761
—
—
—
1,761
Other current liabilities 235
611
222
(659 ) 409
Total current liabilities 2,240
2,509
2,787
(986 ) 6,550
Long-term obligations to third parties 13,147
—
—
—
13,147
Long-term obligations to related parties 9,037
3,471
1,720
(14,228 ) —
Deferred tax liabilities 41
4,118
1,863
—
6,022
Other non-current liabilities 38
502
227
—
767
Total liabilities 24,503
10,600
6,597
(15,214 ) 26,486
Total stockholders' equity 22,914
31,263
14,997
(46,260 ) 22,914
Total liabilities and stockholders' equity $ 47,417
$ 41,863
$ 21,594
$ (61,474 ) $ 49,400

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

Condensed Consolidating Balance Sheets
As of December 31, 2018
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Current assets:
Cash and cash equivalents $ —
$ 18
$ 65
$ —
$ 83
Restricted cash and restricted cash equivalents 42
3
1
—
46
Trade accounts receivable, net —
596
554
—
1,150
Related party receivable 189
71
76
(336 ) —
Inventories —
226
400
—
626
Prepaid expenses and other current assets 569
110
132
(557 ) 254
Total current assets 800
1,024
1,228
(893 ) 2,159
Property, plant and equipment, net —
1,351
959
—
2,310
Investments in consolidated subsidiaries 40,119
4,882
—
(45,001 ) —
Investments in unconsolidated affiliates —
63
123
—
186
Goodwill 50
8,371
11,590
—
20,011
Other intangible assets, net —
16,583
7,384
—
23,967
Long-term receivable, related parties 5,503
7,827
—
(13,330 ) —
Other non-current assets 64
41
154
—
259
Deferred tax assets —
—
26
—
26
Total assets $ 46,536
$ 40,142
$ 21,464
$ (59,224 ) $ 48,918

Current liabilities:
Accounts payable $ —
$ 497
$ 1,803
$ —
$ 2,300
Accrued expenses 78
610
324
—
1,012
Structured payables —
47
479
—
526
Related party payable 65
106
165
(336 ) —
Short-term borrowings and current portion of long-term obligations 1,458
—
—
—
1,458
Other current liabilities 278
626
59
(557 ) 406
Total current liabilities 1,879
1,886
2,830
(893 ) 5,702
Long-term obligations to third parties 14,201
—
—
—
14,201
Long-term obligations to related parties 7,827
3,369
2,134
(13,330 ) —
Deferred tax liabilities 46
4,075
1,802
—
5,923
Other non-current liabilities 50
337
172
—
559
Total liabilities 24,003
9,667
6,938
(14,223 ) 26,385
Total stockholders' equity 22,533
30,475
14,526
(45,001 ) 22,533
Total liabilities and stockholders' equity $ 46,536
$ 40,142
$ 21,464
$ (59,224 ) $ 48,918

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

Condensed Consolidating Statements of Cash Flows
For the First Nine Months of 2019
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Operating activities:
Net cash (used in) provided by operating activities $ (298 ) $ 1,183
$ 957
$ (39 ) $ 1,803
Investing activities:
Acquisitions of businesses —
(3 ) (5 ) —
(8 )
Collections on (issuances of) related party notes receivable 471
(1,233 ) (22 ) 762
(22 )
Investments in unconsolidated affiliates —
(16 ) —
—
(16 )
Purchases of property, plant and equipment —
(76 ) (132 ) —
(208 )
Proceeds from sales of property, plant and equipment —
10
9
—
19
Purchases of intangibles —
(4 ) —
—
(4 )
Return of capital from investments in consolidated subsidiaries —
44
—
(44 ) —
Other, net 12
—
11
—
23
Net cash provided by (used in) investing activities 483
(1,278 ) (139 ) 718
(216 )
Financing activities:
Proceeds from (payments of) related party notes 1,211
—
(449 ) (762 ) —
Proceeds from term loan 2,000
—
—
—
2,000
Net issuance of commercial paper 335
—
—
—
335
Proceeds from structured payables —
113
133
—
246
Payments on structured payables —
—
(432 ) —
(432 )
Payments on senior unsecured notes (250 ) —
—
—
(250 )
Repayment of term loan (2,873 ) —
—
—
(2,873 )
Payments on finance leases —
(16 ) (13 ) —
(29 )
Cash dividends paid (633 ) —
(83 ) 83
(633 )
Other, net 8
(2 ) 4
—
10
Net cash used in financing activities (202 ) 95
(840 ) (679 ) (1,626 )
Cash and cash equivalents — net change from:

Operating, investing and financing activities (17 ) —
(22 ) —
(39 )
Effect of exchange rate changes on cash and cash equivalents —
—
12
—
12
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period 42
31
66
—
139
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 25
$ 31
$ 56
$ —
$ 112

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited, Continued)~~

Condensed Consolidating Statements of Cash Flows
For the First Nine Months of 2018
(Revised)
(in millions) Parent Guarantors Non-Guarantors Eliminations Total
Operating activities:
Net cash provided by operating activities $ 173
$ 375
$ 550
$ (35 ) 1,063
Investing activities:
Acquisitions of businesses (19,124 ) —
—
—
(19,124 )
Cash acquired in acquisitions —
116
34
—
150
Issuance of related party note receivable (2,606 ) (461 ) (6 ) 3,067
(6 )
Investments in unconsolidated affiliates —
(1 ) (22 ) —
(23 )
Proceeds from capital distributions from investments in unconsolidated and consolidated affiliates —
36
(35 ) 35
36
Purchases of property, plant and equipment —
(37 ) (67 ) —
(104 )
Proceeds from sales of property, plant and equipment 1
—
—
—
1
Net cash used in investing activities (21,729 ) (347 ) (96 ) 3,102
(19,070 )
Financing activities:
Proceeds from (payments of) related party notes 461
—
2,606
(3,067 ) —
Proceeds from issuance of common stock private placement —
—
9,000
—
9,000
Inter-company contributions 17,162
—
(17,116 ) (46 ) —
Proceeds from unsecured credit facility 1,900
—
—
—
1,900
Proceeds from senior unsecured notes —
—
8,000
—
8,000
Proceeds from term loan 2,700
—
—
—
2,700
Net issuance of commercial paper 1,386
—
—
—
1,386
Proceeds from structured payables —
—
432
—
432
Repayment of unsecured credit facility (1,900 ) —
—
—
(1,900 )
Repayment of term loan (34 ) —
(3,329 ) —
(3,363 )
Payments on finance leases —
(6 ) (14 ) —
(20 )
Deferred financing charges paid (55 ) —
(40 ) 46
(49 )
Cash contributions from redeemable non-controlling interest shareholders —
—
19
—
19
Cash dividends paid —
—
(23 ) —
(23 )
Other, net 3
(1 ) —
—
2
Net cash provided by (used in) financing activities 21,623
(7 ) (465 ) (3,067 ) 18,084
Cash and cash equivalents — net change from:

Operating, investing and financing activities 67
21
(11 ) —
77
Effect of exchange rate changes on cash and cash equivalents (52 ) —
2
—
(50 )
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period —
—
95
—
95
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 15
$ 21
$ 86
$ —
$ 122

~~Table of Contents~~

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto in our Form 10-K, as filed on February ~~28, 2019.~~27, 2020.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the ~~Securities~~ Exchange Act, ~~of 1934, as amended (the "Exchange Act"),~~ including, in particular, statements about anticipated benefits and expenses of the DPS Merger and other transactions, including estimated synergies, deleveraging and associated cash management, and cost savings, the impact of COVID-19, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend" or the negative of these terms or similar expressions in this Quarterly Report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report ~~on Form 10-K for the year ended December 31, 2018 (the "Annual Report")~~ and our subsequent filings with the SEC. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them, after the date of this Quarterly Report on Form 10-Q, except to the extent required by applicable securities laws.

This Quarterly Report on Form 10-Q contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands. All of the product names included in this Quarterly Report on Form 10-Q are either our registered trademarks or those of our licensors.

~~DR PEPPER SNAPPLE GROUP, INC. MERGER~~

On January 29, 2018, Dr Pepper Snapple Group, Inc. ("DPS") entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among DPS, Maple Parent Holdings Corp. (“Maple”) and Salt Merger Sub, Inc. (“Merger Sub”), whereby Merger Sub would be merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS (the “DPS Merger”). The DPS Merger was consummated on July 9, 2018 (the "Merger Date"), at which time DPS changed its name to "Keurig Dr Pepper Inc.".

Maple owns Keurig, a leader in specialty coffee and innovative single serve brewing systems. The combined businesses created Keurig Dr Pepper Inc. ("KDP"), a new beverage company of scale with a portfolio of iconic consumer brands and expanded distribution capability to reach virtually every point-of-sale in North America.

~~See Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information related to the DPS Merger.~~

OVERVIEW

KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including water (enhanced and flavored), ready-to-drink ~~teas~~tea and coffee, ~~juices,~~juice, juice drinks, ~~water and~~ mixers and specialty coffee, and is a leading producer of innovative ~~single-serve~~single serve brewing systems. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountain and The Original Donut Shop. KDP has some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. KDP offers more than 125 owned, licensed, partner and ~~partner~~allied brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S., according to IRi, available nearly everywhere people shop and consume beverages.

KDP operates as an integrated brand owner, manufacturer and distributor. We believe our integrated business model strengthens our route-to-market and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our DSD system and our WD delivery system. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, pure-play e-commerce retailers, and office superstores; to restaurants, hotel chains, office product and coffee distributors, and partner brand owners; and directly to consumers through its websites. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.

The beverage market is subject to some seasonal variations. Our cold beverage sales are generally higher during the warmer months, while hot beverage sales are generally higher during the cooler months. Overall beverage sales can be influenced by the timing of holidays and weather fluctuations. Sales of brewing systems and related accessories are generally higher during the second half of the year due to the holiday shopping season.

Table of Contents

COFFEE SYSTEMS

Our Coffee Systems segment is primarily a producer of innovative ~~single-serve~~single serve brewing systems and specialty coffee in the U.S. and Canada. ~~The multi-brand~~Our brewing ~~system is~~systems are aimed at changing the way consumers prepare and enjoy coffee and other beverages, both at home and away from home in places such as offices, restaurants, cafeterias, convenience stores and hotels. We develop and sell a variety of Keurig brewers, brewer accessories and inother coffee-related equipment. In addition to coffee, we produce and sell a variety of other specialty beverages in K-Cup pods (including hot and iced teas, hot cocoa and other beverages) for use with Keurig brewing systems. We also ~~develop and sell brewer accessories, including pod storage racks, baskets, brewer carrying cases and other coffee-related equipment and accessories. We also~~ offer traditional whole bean and ground coffee in other package types, including bags, fractional packages and cans.

Our Coffee Systems segment ~~offers~~manufactures over 75% of the pods ~~primarily~~ in the single-serve K-Cup pod ~~format.~~format in the U.S. We manufacture and sell 100% of the K-Cup pods of our own brands, such as Green Mountain Coffee Roasters, The Original Donut Shop, ~~Van Houtte,~~ Laughing Man, REVV, and ~~REVV.~~Van Houtte. We have licensing and manufacturing agreements with our partner brands, ~~to manufacture approximately 80% of the K-Cup pods in the U.S. and Canada,~~ including brands such as Starbucks, ~~Peet's,~~ Dunkin' Donuts, Folgers, Newman’s Own Organics, McCafé, Peet's Coffee, Caribou Coffee, Eight O’Clock, ~~Folgers,~~ Maxwell House, ~~Newman’s Own Organics~~ and Tim Hortons, and private label arrangements. Our Coffee Systems segment also has agreements for manufacturing, distributing, and selling K-Cup pods for tea under brands such as Celestial Seasonings, Lipton and Tazo in addition to K-Cup pods of our own brand, Snapple. We also produce and sell K-Cup pods for cocoa, including through a licensing agreement for the Swiss Miss brand, and hot apple cider.

Our Coffee Systems segment manufactures its K-Cup pods in facilities in North America that include specialty designed proprietary high-speed packaging lines using freshly roasted and ground coffee as well as tea, cocoa and other products. We offer high-quality coffee including certified single-origin, organic, flavored, limited edition and proprietary blends. We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences. We engineer and design ~~all~~most of our ~~single-serve~~single serve brewing systems, where we then utilize third-party contract manufacturers located in various countries in Asia for brewer appliance manufacturing. We distribute our Coffee Systems products using third-party distributors, retail partners and ~~retail partners.~~through e-commerce, including our website at www.keurig.com.

PACKAGED BEVERAGES

Our Packaged Beverages segment is principally a brand ownership, manufacturing and distribution business. In this segment, we primarily manufacture and distribute packaged beverages of our brands. Additionally, in order to maximize the size and scale of our manufacturing and distribution operations, we also distribute packaged beverages for our ~~Allied Brands~~allied brands and manufacture packaged beverages for ~~certain private label beverages~~other third parties in the U.S. and Canada.

Our larger NCB brands in this segment include Snapple, Mott's, Bai, Clamato, Hawaiian Punch, ~~Mott's, Clamato, Bai,~~Core, Yoo-Hoo, ~~Deja Blue, Core,~~ ReaLemon, ~~Mistic,~~ Vita Coco coconut water, ~~and~~evian water, Mr and Mrs T ~~mixers.~~mixers, and Forto Coffee. Our larger CSD brands in this segment include Dr Pepper, ~~7UP,~~ Canada Dry, 7UP, A&W, Sunkist soda, Squirt, Big Red, RC Cola, ~~Big Red,~~Vernors and ~~Vernors.~~A Shoc.

Approximately ~~90%~~95% of our ~~2018~~2019 Packaged Beverages net sales ~~came~~come from the manufacturing and distribution of our own brands and the contract manufacturing of certain private label and emerging brand beverages. The remaining portion of our ~~2018~~2019 Packaged Beverages net sales came from the distribution of our ~~partner~~allied brands such as Vita Coco coconut water, evian water, Neuro drinks, High Brew ~~evian,~~RTD Coffee, Forto Coffee shots, A Shoc energy drinks, Peet's RTD Coffee and ~~Forto Coffee shots. Although the majority of our Packaged Beverages net sales relate to our brands, we also~~Runa energy drinks. We provide a route-to-market for ~~these~~ third party brand owners seeking effective distribution for their new and emerging brands. These brands give us exposure in certain markets to fast growing segments of the beverage industry with minimal capital investment.

Our Packaged Beverages products are manufactured in multiple facilities across the U.S. and are sold or distributed to retailers and their warehouses by our own distribution network or by third party distributors.

We sell our Packaged Beverages products through our DSD and our WD systems, both of which include sales to all major retail channels, including supermarkets, fountains, mass merchandisers, club stores, e-commerce, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.

BEVERAGE CONCENTRATES

Our Beverage Concentrates segment is principally a brand ownership business where we manufacture and sell beverage concentrates in the U.S. and Canada. Most of the brands in this segment are CSD brands. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, Sun Drop, Sunkist soda, ~~7UP,~~ A&W, ~~Sun Drop,~~7UP, Squirt, Big Red, RC Cola and ~~the concentrate form of~~ Hawaiian Punch. Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri.

Beverage concentrates are shipped to third party bottlers, as well as to our own manufacturing systems, who combine them with carbonation, water, sweeteners and other ingredients, package the combined product in aluminum cans, PET containers and glass bottles, ~~and aluminum cans,~~ and sell them as a finished beverage to retailers. Beverage concentrates are also manufactured into syrup, which is shipped to fountain customers, such as fast food restaurants, who mix the syrup with water and carbonation to create a finished beverage at the point of sale to consumers. Dr Pepper represents most of our fountain channel volume.

Table of Contents

Our Beverage Concentrates brands are sold by our bottlers through all major retail channels including supermarkets, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.

~~Table of Contents~~

LATIN AMERICA BEVERAGES

Our Latin America Beverages segment is a brand ownership, manufacturing and distribution business, with operations in Mexico representing approximately 90% of ~~segment~~the segment's 2019 net ~~sales in 2018.~~sales. This segment participates mainly in ~~the~~ carbonated mineral water, flavored CSD, bottled water and vegetable juice, ~~categories,~~ with particular strength in carbonated mineral water, vegetable juice categories and grapefruit flavored CSDs. The largest brands include Peñafiel, Squirt, Clamato, Aguafiel ~~Clamato~~ and Crush.

In Mexico, we manufacture and distribute our products through our bottling operations and third party bottlers and distributors. We sell our finished beverages through all major Mexican retail channels, including small outlets, supermarkets, hypermarkets, convenience stores and on-premise channels. In the Caribbean, we distribute our products through third party bottlers and distributors. We have also begun to distribute certain products in other international jurisdictions through various third party bottlers and distributors.

VOLUME

In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, K-Cup pods or brewers.

Beverage Concentrates Sales Volume

In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales. The unit of measurement for concentrate case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.

Concentrate case sales represent units of measurement for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases.

Packaged Beverages and Latin America Beverages Sales Volume

In our Packaged Beverages and Latin America Beverages segments, we measure volume as case sales to customers. A case sale represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case sales include both our owned brands and certain brands licensed to and/or distributed by us.

~~Appliance~~Coffee Systems K-Cup Pod and ~~Pod~~Appliance Sales Volume

In our Coffee Systems segments, we measure our sales volume as the number of appliances and the number of individual K-Cup pods sold to our customers.

COMPARABLE RESULTS OF OPERATIONS

As a result of the DPS Merger, in order for management to discuss our results on a comparable basis, we prepared unaudited pro forma condensed combined financial information for the third quarter and first nine months of 2018 to illustrate the estimated effects of the DPS Merger, which was consummated on July 9, 2018, based on the historical results of operations of DPS and Maple. See ~~Supplemental Unaudited Pro Forma Condensed Combined Financial Information~~ ~~section at the end of Management's Discussion and Analysis for further information on the assumptions used in the preparation of the financial information.~~

~~Furthermore, management~~Management believes that there are certain non-GAAP financial measures that allow management to evaluate our results, trends and ongoing performance on a comparable basis. In order to derive the adjusted financial information, we adjust certain financial statement captions and metrics prepared under U.S. GAAP for ~~2019 and on a pro forma basis for 2018 for~~ certain items affecting comparability. See Non-GAAP Financial Measures for further information on the certain items affecting comparability used in the preparation of the financial information. These items are referred to within ~~the~~ ~~Adjusted Results of Operations~~ ~~section, within~~ Management's Discussion and Analysis discussion as Adjusted ~~net sales, Adjusted pro forma net sales, Adjusted~~ income from operations, Adjusted ~~pro forma income from operations, Adjusted interest expense, Adjusted pro forma~~ interest expense, Adjusted provision for income taxes, Adjusted ~~pro forma provision for income taxes, Adjusted~~ net income ~~Adjusted pro forma net income, Adjusted diluted EPS~~ and Adjusted ~~pro forma~~ diluted EPS.

Table of Contents

EXECUTIVE SUMMARY

Financial Overview

~~•The following table details~~Net income decreased $74 million to $156 million for the first quarter of 2020 as compared to $230 million in the prior year period, driven primarily by a non-cash impairment charge of $86 million associated with our ~~net income, diluted EPS,~~ Bedford investment.

Adjusted net income ~~and Adjusted diluted EPS for the third quarter of 2019 and 2018:~~

Third Quarter Dollar Percent
(in millions, except per share data) 2019 2018 Change Change
Net income attributable to KDP $ 304
$ 149
$ 155
104.0 %
Diluted EPS 0.21
0.11
0.10
90.9
Adjusted net income⁽¹⁾
451
417
34
8.2
Adjusted diluted EPS⁽¹⁾
0.32
0.30
0.02
6.7


~~(1)~~	Adjusted net income and Adjusted diluted EPS are non-GAAP financial measures. For the third quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

~~Net income attributable~~increased 12.7% to ~~KDP increased $155 million to $304~~$408 million for the ~~third~~first quarter of ~~2019~~2020 as compared to Adjusted net income of $362 million in the prior year period, driven primarily ~~driven~~ by productivity and merger synergies and strong volume/mix growth, which reflected particular strength in the ~~favorable comparison to~~Packaged Beverages segment, which included a benefit from the ~~$132 million~~ impact of ~~the inventory step-up associated with the DPS Merger and the transaction costs recorded~~COVID-19 late in the ~~third~~ quarter, partially offset by a slowdown in the Beverages Concentrates and Coffee Systems segments, both of ~~2018 for~~which experienced a modest unfavorable impact from COVID-19 late in the ~~DPS Merger.~~ quarter.

Diluted EPS ~~increased 90.9%~~decreased 31.3% to ~~$0.21~~$0.11 per diluted share as compared to ~~$0.11 in the prior year.~~

Adjusted net income increased 8.2% to $451 million for the third quarter of 2019 as compared to Adjusted pro forma net income of $417 million in the prior period. This performance was driven by growth in Adjusted income from operations, primarily attributable to productivity and merger synergies, as well as lower Adjusted interest expense, primarily due to lower indebtedness, and lower other expense (income) due to gains on a cash distribution from BA and on the Big Red Merger$0.16 in the prior year period.

Adjusted diluted EPS increased ~~6.7%~~16.0% to ~~$0.32~~$0.29 per diluted share as compared to Adjusted ~~pro forma~~ diluted EPS of ~~$0.30~~$0.25 per diluted share in the prior ~~year.~~year period.

During the first ~~nine months~~quarter of ~~2019,~~2020, we made net repayments of ~~approximately $788~~$42 million related to our commercial paper notes, KDP Revolver, 2019 ~~Notes,~~KDP Term Loan and our ~~term loans~~2020 Notes. Additionally, we repaid $107 million and ~~Commercial Paper.~~

~~During the first nine months of 2019, we made repayments of approximately $432~~added $44 million of structured ~~payables.~~payables during the first quarter of 2020.

~~Recent Developments~~

~~Our Board~~In April 2020, we completed a strategic refinancing that extended our debt maturities and enhanced our liquidity profile, including a $1.5 billion senior unsecured notes issuance and the refinancing and upsizing of ~~Directors declared~~our 2019 364-Day Credit Agreement. The proactive refinancing, which did not change our total debt balance or deleveraging commitments, increased our excess liquidity to a ~~quarterly dividend of $0.15 per share on September 16, 2019, which was paid on October 18, 2019 to shareholders of record on October 4, 2019.~~

~~On September 26, 2019, the Company, together with McDonald's USA, announced a long-term master licensing and distribution agreement for McCafé packaged coffee~~level that we believe will exceed our liquidity needs, even in the ~~U.S. Under the agreement, the Company will continue to be the exclusive manufacturer~~event of McCafé K-Cup pods in the U.S. and will also take on responsibility for coffee sourcing, distribution, and marketing of the McCafé brand in K-Cup pods and bagged and canned coffee formats, beginning in the second half of 2020.a protracted downturn.

RESULTS OF OPERATIONS

We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees.

References in the financial tables to percentage changes that are not meaningful are denoted by "NM" ~~and basis point changes are denoted as "bps"~~.

Table of Contents

~~Third~~First Quarter of ~~2019~~2020 Compared to ~~Third~~First Quarter of ~~2018~~2019

Consolidated Operations

The following table sets forth our unaudited condensed consolidated results of operations for the ~~third~~first quarter of ~~2019~~2020 and ~~2018:~~2019:


	Third Quarter
	2019					2018					Dollar			Percentage		First Quarter						Dollar			Percentage
($ in millions, except per share amounts)	Dollars			Percent		Dollars			Percent		Change			Change		2020			2019			Change			Change
Net sales	$	2,870		100.0	%	$	2,732		100.0	%	$	138		5	%	$	2,613		$	2,504		$	109		4.4	%
Cost of sales	1,245			43.4		1,367			50.0		(122		)	(9	)	1,161			1,106			55			5.0
Gross profit	1,625			56.6		1,365			50.0		260			19		1,452			1,398			54			3.9
Selling, general and administrative expenses	1,012			35.3		1,028			37.6		(16		)	(2	)	1,028			911			117			12.8
Other operating expense (income), net	33			1.1		(8		)	(0.2	)	41			NM
Other operating income, net																(42		)	(11		)	(31		)	NM
Income from operations	580			20.2		345			12.6		235			68		466			498			(32		)	(6.4	)
Interest expense	158			5.5		172			6.3		(14		)	(8	)	153			169			(16		)	(9.5	)
Loss on early extinguishment of debt	—			—		11			0.4		(11		)	NM		2			9			(7		)	(77.8	)
Other expense (income), net	9			0.3		(33		)	(1.2	)	42			NM
Impairment on investment and note receivable																86			—			86			NM
Other expense, net																20			5			15			NM
Income before provision for income taxes	413			14.4		195			7.1		218			112		205			315			(110		)	(34.9	)
Provision for income taxes	109			3.8		46			1.6		63			137		49			85			(36		)	(42.4	)
Net income	$	304		10.6	%	$	149		5.5	%	$	155		104	%	$	156		$	230		(74		)	(32.2	)

Earnings per common share:
Basic	$	0.22				$	0.11				$	0.11		100.0	%	$	0.11		$	0.16		$	(0.05	)	(31.3	)%
Diluted	0.21					0.11					0.10			90.9		0.11			0.16			(0.05		)	(31.3	)
Weighted average common shares outstanding:
Basic	1,406.8					1,361.8
Diluted	1,419.4					1,373.6

Gross margin																55.6		%	55.8		%				(20 bps)
Operating margin																17.8		%	19.9		%				(210 bps)
Effective tax rate	26.4		%			23.6		%								23.9		%	27.0		%				(310 bps)

Sales volume.The following table sets forth changes in sales volume for the first quarter of 2020 compared to the prior year period:



	Increase / (Decrease)
K-Cup pod volume	5.6	%
Brewer volume	(2.4	)
CSD sales volume	0.3
NCB sales volume	5.5

Net Sales. Net sales increased ~~$138~~$109 million, or 4.4%, to $2,613 million for the ~~third~~first quarter of ~~2019~~2020 compared ~~with~~to $2,504 million in the ~~third quarter~~prior year period. This performance reflected higher volume/mix of ~~2018. The primary driver of~~5.0% driven by strong volume/mix growth, which reflected particular strength in the ~~increase in net sales was~~Packaged Beverage segment, which included a benefit from the impact of ~~an additional eight days of operations~~COVID-19 late in the ~~current period given the timing of the DPS Merger~~quarter, partially offset by a slowdown in the ~~prior period.~~Beverages Concentrates and Coffee Systems segments, both of which experienced a modest unfavorable impact from COVID-19 late in the quarter. The volume/mix growth was partially offset by lower net price realization of 0.5% and unfavorable foreign currency translation, which also impacted the period by 0.1%.

Gross Profit. Gross profit increased ~~$260~~$54 million, or 3.9%, to $1,452 million for the ~~third~~first quarter of ~~2019 compared with the third quarter of 2018. Gross margin of 56.6% for the third quarter of 2019 was significantly improved~~2020 compared to ~~the 50.0% gross margin for the third quarter of 2018. The primary drivers of the change in gross profit were driven by the favorable comparison to the $131~~$1,398 million ~~impact of the inventory step-up associated with the DPS Merger~~ in the ~~third quarter of 2018, strong productivity and synergies and~~prior year period. This performance primarily reflected the impact of ~~an additional eight days of DPS operations~~higher volume/mix and productivity and merger synergies, partially offset by tariffs, unfavorable net price realization and inflation in input costs, led by packaging. Gross margin decreased 20 bps to 55.6% in the ~~current period.~~first quarter of 2020.

Selling, General and Administrative Expenses.~~Selling, general and administrative ("~~SG~~&A")~~&A expenses ~~decreased $16~~increased $117 million, or 12.8%, to $1,028 million for the ~~third~~first quarter of ~~2019~~2020 compared ~~with the third quarter of 2018. The primary drivers of the decrease in SG&A expenses were the favorable comparison~~ to ~~the transaction costs recorded~~$911 million in the prior year ~~for~~period. The increase was driven by the ~~DPS Merger,~~unfavorable change in commodity mark-to-market impacts, expenses associated with productivity and integration projects, higher operating costs associated with the increased shipment volume and an increase in other operating costs. These increases were partially offset by strong productivity and merger synergies.

Table of Contents

Other Operating Income, net. Other operating income, net increased $31 million to $42 million for the ~~incremental impact~~first quarter of ~~an additional eight days~~2020 compared to $11 million in the prior year period due to the network optimization program gain of ~~DPS operations~~$42 million on the asset sale-leaseback of four facilities in the current ~~period.~~

~~Other Operating Expense (Income), Net.Other operating expense (income),~~year versus a $10 million net ~~had an unfavorable change~~gain on a renegotiation of ~~$41 million for~~a manufacturing contract in the ~~third quarter of 2019 compared with the third quarter of 2018, as a result of integration expenses, which were driven by unfavorable fair value adjustments on real estate assets held for sale.~~prior year period.

Income from Operations. Income from operations ~~increased $235~~decreased $32 million, or 6.4%, to ~~$580~~$466 million for the ~~third~~first quarter of ~~2019~~2020 compared to $498 million in the prior year period due to the increase ~~in gross profit and decrease~~ in SG&A expenses partially offset by ~~the unfavorable change~~an increase in gross profit and other operating ~~expense (income),~~income, net. Operating margin ~~was 20.2% for~~declined 210 bps to 17.8% in the ~~third~~first quarter of ~~2019~~2020 as compared ~~with 12.6% for~~to the ~~third quarter of 2018.~~prior year period.

Interest Expense. Interest expense decreased ~~$14~~$16 million, or 9.5%, to $153 million for the ~~third~~first quarter of ~~2019~~2020 compared ~~with~~to $169 million for the ~~third quarter of 2018 which~~prior year period. This change was primarily the result of the benefit of lower indebtedness due to continued deleveraging.

~~Table~~Impairment on Investment and Note Receivable. Impairment on investment and note receivable reflected a non-cash impairment charge of ~~Contents~~

~~Other Non-operating Expense (Income), Net.~~ ~~Other non-operating expense had an unfavorable change of $42~~$86 million for the ~~third~~first quarter of ~~2019 compared~~2020 associated with our Bedford investment. Refer to Note 4 for additional information regarding the ~~third~~impairment charge.

Other Expense, net.Other expense, net increased $15 million to $20 million for the first quarter of ~~2018,~~2020 compared to $5 million in the prior year period primarily driven by ~~the unfavorable comparison~~losses related to ~~the gain on a cash distribution from BODYARMOR~~our deferred compensation plan in the ~~third quarter of 2018.~~current year versus gains recorded in the prior year period. The deferred compensation plan activity is fully offset by the same amount in SG&A expenses.

Effective Tax Rate. The effective tax rates for the ~~third~~first quarter of 2020 and 2019 were 23.9% and ~~2018 were 26.4% and 23.6%~~27.0%, respectively. For the ~~third~~first quarter of ~~2019,~~2020, the provision for income taxes was ~~higher~~lower than the ~~third quarter of 2018~~prior year period primarily due to the benefit received from the revaluation of the ~~Company’s~~Company's deferred tax liabilities and the decrease of income tax reserves due to the lapse in statute of limitations.

Net Income. Net income decreased $74 million to $156 million for ~~an updated deferred state tax rate~~the first quarter of 2020 as compared to $230 million in the ~~third quarter~~prior year period. This performance was primarily driven by a non-cash impairment charge of ~~2018, partially offset by increasing the valuation allowance on the realizability of foreign tax credit carryforwards~~$86 million associated with our Bedford investment.

Diluted EPS. Diluted EPS decreased 31.3% to $0.11 per diluted share as compared to $0.16 in the ~~third quarter of 2018.~~prior year period.

Adjusted Results of Operations

The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the ~~third~~first quarter of ~~2019~~2020 and ~~2018:~~2019:

Third Quarter Dollar Percent
(in millions, except per share amounts) 2019 2018 Change Change
Adjusted net sales⁽¹⁾
$ 2,870
$ 2,856
$ 14
0.5 %
Adjusted income from operations⁽¹⁾
754
698
56
8.0
Adjusted interest expense⁽¹⁾
145
162
(17 ) (10.5 )
Adjusted provision for income taxes⁽¹⁾
149
155
(6 ) (3.9 )
Adjusted net income⁽¹⁾
451
417
34
8.2
Adjusted diluted EPS⁽¹⁾
0.32
0.30
0.02
6.7

Adjusted diluted weighted average shares⁽¹⁾
1,419.4
1,400.7

Adjusted operating margin⁽¹⁾
26.3 % 24.4 % 190 bps
Adjusted effective tax rate⁽¹⁾
24.8 % 27.1 % (230 bps)


~~(1)~~	These adjusted measures are non-GAAP financial measures. For the third quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of this term and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

~~Adjusted Net Sales.~~ Adjusted net sales increased $14 million, or 0.5%, to $2,870 million for the third quarter of 2019 as compared to Adjusted pro forma net sales of $2,856 million for the third quarter of 2018. This performance reflected strong underlying net sales growth of 3.1%, driven by higher volume/mix of 1.5% and net price realization of 1.6%, as well as a 0.3% benefit from one more shipping day this year in the third quarter. Partially offsetting these positive drivers was the expected unfavorable impacts of 2.7% related to changes in our Allied Brands portfolio. Unfavorable foreign currency translation also impacted the period by 0.2%.



	First Quarter						Dollar			Percent
(in millions, except per share amounts)	2020			2019			Change			Change
Adjusted income from operations	$	684		$	621		$	63		10.1
Adjusted interest expense	120			124			(4		)	(3.2	)
Adjusted provision for income taxes	136			128			8			6.3
Adjusted net income	408			362			46			12.7
Adjusted diluted EPS	0.29			0.25			0.04			16.0

Adjusted operating margin	26.2		%	24.8		%				140 bps
Adjusted effective tax rate	25.0		%	26.1		%				(110 bps)

Adjusted Income from Operations. Adjusted income from operations increased ~~$56~~$63 million, or ~~8.0%~~10.1%, to ~~$754~~$684 million for the ~~third~~first quarter of ~~2019 as~~2020 compared to Adjusted ~~pro forma~~ income from operations of ~~$698~~$621 million in the ~~third quarter of 2018.~~prior year period. Driving ~~the~~this performance in the quarter were ~~strong~~ productivity and merger synergies, ~~both of~~ which ~~benefitted~~impacted both SG&A and cost of sales, ~~and~~the strong growth in ~~underlying~~ net sales ~~partially offset by~~and a network optimization program gain of $42 million on the asset-sale leaseback of four facilities. Partially offsetting these positive drivers were inflation in input costs, led by packaging, ~~as well as~~and logistics, higher operating costs associated with the increased shipment volume, tariffs and the unfavorable comparison to a $6$10 million net gain ~~in connection with the acquisition~~on a renegotiation of ~~Big Red~~a manufacturing contract in the ~~third quarter of 2018.~~prior year period. Adjusted operating margin grew ~~190~~140 bps to ~~26.3%~~26.2% in the ~~third~~first quarter of ~~2019.~~2020.

Adjusted Interest Expense. Adjusted interest expense decreased ~~$17~~$4 million, or ~~10.5%~~3.2%, to ~~$145~~$120 million for the ~~third~~first quarter of ~~2019~~2020 compared to Adjusted ~~pro forma~~ interest expense of ~~$162~~$124 million in the prior ~~year.~~year period. This change was ~~primarily~~ the result of the benefit of lower indebtedness due to continued ~~deleveraging.~~deleveraging and the $20 million benefit of unwinding several interest rate swap contracts. Partially offsetting these factors was a $27 million benefit of unwinding several interest rate swap contracts in the prior year period.

Table of Contents

Adjusted Effective Tax Rate. The Adjusted effective tax rate decreased ~~230~~110 bps to ~~24.8%~~25.0% for the ~~third~~first quarter of ~~2019,~~2020, compared to the Adjusted ~~pro forma~~ effective tax rate of ~~27.1%~~26.1% in the prior ~~year.~~year period. This decrease in our ~~Adjusted~~adjusted effective tax rate was primarily due to ~~a reduction~~the benefit received from the revaluation of the Company's deferred tax liabilities and the decrease of income tax reserves due to the lapse in statute of limitations during the first quarter of 2020.

Adjusted Net Income.Adjusted net income increased 12.7% to $408 million for the first quarter of 2020 as compared to Adjusted net income of $362 million in the ~~U.S. federal~~prior year period. This performance was driven primarily by strong growth in Adjusted income from operations, a lower Adjusted effective tax rate ~~from 24.5%~~and lower Adjusted interest expense.

Adjusted Diluted EPS.Adjusted diluted EPS increased 16.0% to ~~21.0%, partially offset by~~$0.29 per diluted share as compared to Adjusted diluted EPS of $0.25 per diluted share in the ~~loss of tax benefits associated with the U.S. domestic manufacturing deduction in 2019.~~

~~Table of Contents~~prior year period.

Results of Operations by Segment

The following tables set forth net sales and income from operations for our segments for the ~~third~~first quarter of ~~2019~~2020 and ~~2018,~~2019, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:


	Third Quarter
(in millions)	2019		2018		First Quarter
Segment Results — Net sales					2020			2019
Coffee Systems	$	1,065	$	1,053	$	973		$	968
Packaged Beverages	1,307		1,238		1,217			1,116
Beverage Concentrates	360		317		306			304
Latin America Beverages	138		124		117			116
Net sales	$	2,870	$	2,732	$	2,613		$	2,504

	Third Quarter				First Quarter
(in millions)	2019		2018		2020			2019
Segment Results — Income from Operations
Coffee Systems	$	310	$	334	$	272		$	293
Packaged Beverages	196		61		189			149
Beverage Concentrates	245		193		197			201
Latin America Beverages	25		15		27			11
Total income from operations	776		603
Unallocated corporate costs	196		258		(219		)	(156		)
Income from operations	$	580	$	345	$	466		$	498

COFFEE SYSTEMS

The following table details our Coffee Systems segment's net sales, income from operations, operating margin, Adjusted income from operations and Adjusted operating margin for the ~~third~~first quarter of ~~2019~~2020 and ~~2018:~~2019:


	Third Quarter						Dollar			Percent		First Quarter						Dollar			Percent
(in millions)	2019			2018			Change			Change		2020			2019			Change			Change
Net sales	$	1,065		$	1,053		$	12		1.1	%	$	973		$	968		$	5		0.5	%
Income from operations	310			334			(24		)	(7.2	)	272			293			(21		)	(7.2	)
Operating margin	29.1		%	31.7		%				(260 bps)		28.0		%	30.3		%				(230 bps)
Adjusted income from operations⁽¹⁾	$	367		$	380		(13		)	(3.4	)	347			335			12			3.6
Adjusted operating margin⁽¹⁾	34.5		%	36.1		%				(160 bps)		35.7		%	34.6		%				110 bps


~~(1)~~	Adjusted income from operations is a non-GAAP financial measure. For the third quarter of 2018, this financial measure was prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

Sales Volume. The ~~volume/mix~~volume growth in the first quarter of 2020 compared to the prior year period for the Coffee Systems segment ~~was driven by a 6.1% increase in~~reflected strong K-Cup pod volume ~~and an 8.0% increase in brewer volume~~growth of 5.6% despite a significant decline late in the ~~third~~ quarter in the away-from-home coffee business due to both office closures and hospitality slowdown caused by COVID-19. Brewer volume declined 2.4% in the quarter, reflecting comparison to the double-digit growth recorded in the prior year period, as well as the expected shift of ~~2019.~~brewer shipments from the first quarter to later in the year as a result of the timing impact of COVID-19 on brewer supply from certain regions in Asia.

Table of Contents

Net Sales. Net sales increased ~~1.1%~~$5 million, or 0.5%, to ~~$1,065~~$973 million for the ~~third~~first quarter of ~~2019~~2020 compared to ~~net sales of $1,053~~$968 million infor the ~~third quarter of 2018~~prior year period due to volume/mix growth of ~~3.1%~~3.7%, ~~which was~~ driven by ~~sales~~the increase in K-Cup pod volume ~~growth~~and partially offset by unfavorable pod sales mix. This growth was partially offset by lower net price realization of ~~1.9%~~3.3%. ~~Unfavorable~~Favorable foreign currency translation also impacted the period by 0.1%.

Income from Operations. Income from operations decreased ~~$24~~$21 million, or 7.2%, to ~~$310~~$272 million for the ~~third~~first quarter of ~~2019,~~2020, compared ~~with~~to $293 million in the ~~third quarter of 2018,~~prior year period, driven by ~~unfavorable pod mix, lower net price realization,~~ expenses associated with productivity projects ~~inflation in input costs, led by packaging, as well as logistics,~~ and ~~higher brewer investments, which~~strategic pricing. These impacts were partially offset by strong productivity and merger synergies, which impacted both SG&A and cost of sales, a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility and strong growth in K-Cup pod ~~volume growth and productivity.~~volume. Operating margin declined ~~260~~230 bps to ~~29.1% for~~28.0% during the ~~third~~first quarter of ~~2019.~~2020.

~~Table of Contents~~

Adjusted Income from Operations. Adjusted income from operations ~~decreased $13~~increased $12 million, or ~~3.4%~~3.6%, to ~~$367~~$347 million for the ~~third~~first quarter of ~~2019,~~2020, compared ~~with Adjusted pro forma income from operations of $380~~to $335 million ~~for~~in the ~~third quarter of 2018,~~prior year period, driven by ~~unfavorable~~continued productivity and merger synergies, which impacted both SG&A and cost of sales, a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility and strong growth in K-Cup pod ~~mix, lower net price realization, inflation~~volume. Partially offsetting these factors was strategic pricing, tariffs and an increase in ~~input costs, led by packaging, as well as logistics, and higher brewer investments, which were partially offset by strong pod volume growth and productivity.~~other operating costs. Adjusted operating margin ~~was lower by 160~~grew 110 bps versus the year ago period to ~~34.5%~~35.7%.

PACKAGED BEVERAGES

The following table details our Packaged Beverages segment's net sales, income from operations, operating margin, Adjusted ~~net sales, Adjusted~~ income from operations and Adjusted operating margin for the ~~third~~first quarter of ~~2019~~2020 and ~~2018:~~2019:


	Third Quarter						Dollar			Percent		First Quarter						Dollar		Percent
(in millions)	2019			2018			Change			Change		2020			2019			Change		Change
Net sales	$	1,307		$	1,238		$	69		5.6	%	$	1,217		$	1,116		$	101	9.1	%
Income from operations	196			61			135			NM		189			149			40		26.8
Operating margin	15.0		%	4.9		%				NM		15.5		%	13.4		%			210 bps
Adjusted net sales⁽¹⁾	$	1,307		$	1,336		(29		)	(2.2	)
Adjusted income from operations⁽¹⁾	201			164			37			22.6
Adjusted operating margin⁽¹⁾	15.4		%	12.3		%				310 bps
Adjusted income from operations												203			160			43		26.9
Adjusted operating margin												16.7		%	14.3		%			240 bps


~~(1)~~	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the third quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

Sales Volume. Sales volume for the ~~third~~first quarter of ~~2019~~2020 compared to the prior year period increased ~~approximately 5.4%,~~7.0% due to higher water sales, led by evian and Core Hydration, higher CSD volume, and growth in Mott's. The increase in volume in the quarter was partially driven by ~~the impact of an additional eight days of DPS operations~~heightened consumer demand due to stock-up behavior late in the ~~current period, growth of Core Hydration and higher volume from contract manufacturing, partially offset by the net unfavorable impact of changes in our Allied Brands portfolio and lower CSD volume.~~

~~Adjusted Sales Volume.~~ ~~Adjusted sales volume for the third~~ quarter ~~of 2019 declined 2.2% due~~related to ~~the net unfavorable impact of changes in our Allied Brands portfolio and lower CSD volume, partially offset by growth of Core Hydration and higher volume from contract manufacturing.~~COVID-19.

Net Sales. Net sales increased ~~5.6%~~$101 million, or 9.1%, to ~~$1,307~~$1,217 million for the ~~third~~first quarter of ~~2019,~~2020 compared with net sales of $1,238 million in the third quarter of 2018, reflecting the impact of an additional eight days of DPS operations in the current period partially offset by the expected unfavorable impact from changes in the Allied Brands portfolio.

~~Adjusted Net Sales.~~ ~~Adjusted net sales decreased 2.2%~~ to ~~$1,307~~$1,116 million for the ~~third quarter~~prior year period, driven by higher volume/mix of ~~2019, compared with Adjusted pro forma net sales~~8.7%, in part as a result of ~~$1,336 million in~~ the ~~third quarter of 2018, reflecting underlying net sales growth of 3.1%, driven by~~COVID-19 impact, and higher net price realization of ~~2.7% and favorable volume/mix of~~ 0.4%, as well as a 0.6% benefit from one more shipping day this year in the third quarter. More than offsetting these growth drivers was the expected unfavorable impact of 5.8% from changes in the Allied Brands portfolio and unfavorable foreign currency translation of 0.1%.

~~Income from Operations.~~Income from operations was $196 million for the third quarter of 2019, compared with $61 million for the third quarter of 2018, driven by the favorable comparison to the $105 million impact of the inventory step-up associated with the DPS Merger in the third quarter of 2018 and the impact of an additional eight days of DPS operations in the current period.

~~Adjusted Income from Operations.~~ Adjusted income from operations increased $37 million, or 22.6%, to $201 million for the third quarter of 2019, compared with Adjusted pro forma income from operations of $164 million for the third quarter of 2018, largely reflecting strong productivity and merger synergies, growth in underlying net sales and timing of marketing investments. These drivers were partially offset by inflation, primarily in packaging, ingredients, and logistics. Adjusted operating margin grew 310 bps versus the year ago period to 15.4%.

~~Table of Contents~~

~~BEVERAGE CONCENTRATES~~

The following table details our Beverage Concentrates segment's net sales, income from operations, operating margin, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the third quarter of 2019 and 2018:

Third Quarter Dollar Percent
(in millions) 2019 2018 Change Change
Net sales $ 360
$ 317
$ 43
13.6 %
Income from operations 245
193
52
26.9
Operating margin 68.1 % 60.9 % NM
Adjusted net sales⁽¹⁾
$ 360
$ 331
29
8.8
Adjusted income from operations⁽¹⁾
244
204
40
19.6
Adjusted operating margin⁽¹⁾
67.8 % 61.6 % 620 bps


~~(1)~~	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the third quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

~~Sales volume.Sales volume for the third quarter of 2019 increased approximately 7.5%, primarily driven by the impact of an additional eight days of DPS operations in the current period.~~

~~Adjusted sales volume.~~ ~~Adjusted sales volume for the third quarter of 2019 increased 1.6% driven by the performance of Dr Pepper, Canada Dry, Big Red and Sunkist soda.~~

~~Net Sales.~~Net sales increased 13.6% to $360 million for the third quarter of 2019 compared to $317 million for the third quarter of 2018, which reflects the impact of an additional eight days of DPS operations in the current period and higher net price realization.

~~Adjusted Net Sales.~~ Adjusted net sales increased 8.8% to $360 million for the third quarter of 2019, compared with Adjusted pro forma net sales of $331 million for the third quarter of 2018, driven by net price realization of 6.5% and favorable volume/mix of 2.3%.

Income from Operations. Income from operations increased $52 million, or 26.9%, to $245 million for the third quarter of 2019 compared to $193 million for the third quarter of 2018, driven by the incremental gross profit from the impact of an additional eight days of DPS operations in the current period and the favorable comparison to the $17 million impact of the inventory step-up associated with the DPS Merger in the third quarter of 2018.

~~Adjusted Income from Operations.~~ ~~Adjusted income from operations increased~~ $40 million, or ~~19.6%~~26.8%, to $244 million for the third quarter of 2019 compared with Adjusted pro forma income from operations of $204 million for the third quarter of 2018. This performance reflected the strong growth in Adjusted net sales as well as merger synergies and productivity. Adjusted operating margin grew 620 bps versus the year ago period to 67.8%.

~~LATIN AMERICA BEVERAGES~~

The following table details our Latin America Beverages segment's net sales, income from operations, operating margin, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the third quarter of 2019 and 2018:

Third Quarter Dollar Percent
(in millions) 2019 2018 Change Change
Net sales $ 138
$ 124
$ 14
11.3 %
Income from operations 25
15
10
66.7 %
Operating margin 18.1 % 12.1 % NM
Adjusted net sales⁽¹⁾
$ 138
$ 136
2
1.5 %
Adjusted income from operations⁽¹⁾
25
27
(2 ) (7.4 )%
Adjusted operating margin⁽¹⁾
18.1 % 19.9 % (180) bps


~~(1)~~	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the third quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

~~Table of Contents~~

~~Sales Volume.~~Sales volume for the third quarter of 2019 increased 3.9%, primarily driven by the impact of an additional eight days of DPS operations in the current period, which was partially offset by the exit of our Aguafiel bulk water business.

~~Adjusted Sales Volume.~~ Adjusted sales volume for the third quarter of 2019 declined 3.3%, as Aguafiel decreased 4.2% primarily due to the exit of our bulk water business, partially offset by an increase of 0.9% in the balance of the portfolio.

~~Net Sales.~~Net sales were $138 million for the third quarter of 2019 compared to $124 million for the third quarter of 2018, which reflects the impact of an additional eight days of DPS operations in the current period.

~~Adjusted Net Sales.~~ Adjusted net sales increased 1.5% to $138 million for the third quarter of 2019, compared with Adjusted pro forma net sales of $136 million for the third quarter of 2018, driven by higher net price realization of 5.2%, partially offset by unfavorable volume/mix of 1.5%. Unfavorable foreign currency translation also impacted the period by 2.2%.

~~Income from Operations~~. Income from operations increased 66.7% to $25 million for the third quarter of 2019 compared to $15 million for the third quarter of 2018, driven by incremental gross profit from the impact of an additional eight days of DPS operations in the current period and the favorable comparison to the $9 million impact of the inventory step-up associated with the DPS Merger in the third quarter of 2018, partially offset by inflation in logistics and input costs.

~~Adjusted Income from Operations.~~ Adjusted income from operations decreased $2 million, or 7.4%, to $25 million for the third quarter of 2019, compared with Adjusted pro forma income from operations of $27 million for the third quarter of 2018. This performance reflected the benefit of net sales growth and productivity, which were more than offset by inflation in logistics and ingredients and increased marketing investments. Adjusted operating margin declined 180 bps versus the year ago period to 18.1%.

~~Table of Contents~~

~~First Nine Months of 2019 Compared to First Nine Months of 2018~~

~~Consolidated Operations~~

~~The following table sets forth our unaudited condensed consolidated results of operations for the first nine months of 2019 and 2018:~~

First Nine Months
2019 2018 Dollar Percentage
($ in millions, except per share amounts) Dollars Percent Dollars Percent Change Change
Net sales $ 8,186
100.0 % $ 4,629
100.0 % $ 3,557
76.8 %
Cost of sales 3,537
43.2
2,292
49.5
1,245
54.3
Gross profit 4,649
56.8
2,337
50.5
2,312
99.0
Selling, general and administrative expenses 2,951
36.0
1,649
35.6
1,302
79.0
Other operating expense (income), net 33
0.5
(2 ) —
35
NM
Income from operations 1,665
20.3
690
14.9
975
141.0
Interest expense 497
6.1
221
4.8
276
NM
Interest expense - related party —
—
51
1.1
(51 ) NM
Loss on early extinguishment of debt 9
0.1
13
0.3
(4 ) NM
Other expense (income), net 15
0.1
(28 ) (0.5 ) 43
NM
Income before provision for income taxes 1,144
14.0
433
9.4
711
164.0
Provision for income taxes 296
3.6
110
2.4
186
169.0
Net income 848
10.4
323
7.0
525
163.0
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards —
—
3
0.1
(3 ) NM
Net income attributable to KDP $ 848
10.4 % $ 320
6.9 % $ 528
165.0 %

Earnings per common share:
Basic $ 0.60
$ 0.33
$ 0.27
82.0 %
Diluted 0.60
0.32
0.28
88.0
Weighted average common shares outstanding:
Basic 1,406.6
983.0

Diluted 1,418.8
994.1

Effective tax rate 25.9 % 25.4 %

~~Net Sales.~~Net sales increased $3,557 million, or approximately 76.8%, for the first nine months of 2019 compared with the first nine months of 2018. The primary factor of the increase in net sales was the impact of the additional days of operations from the DPS Merger in the current year.

~~Gross Profit.Gross profit increased $2,312~~$189 million for the first ~~nine months~~quarter of ~~2019~~2020 compared with the first nine months of 2018. The primary driver of the change was the incremental gross profit we acquired as a result of the consummation of the DPS Merger. Gross margin of 56.8% for the first nine months of 2019 significantly improved from the 50.5% gross margin for the first nine months of 2018.

~~Selling, General and Administrative Expenses.SG&A expenses increased $1,302~~to $149 million for the first nine months of 2019 compared with the first nine months of 2018. The primary driver of the increase in SG&A expenses was the impact of the DPS Merger, which includes acquired operating costs and restructuring expenses associated with the integration of DPS and Keurig.

~~Income from Operations.~~ Income from operations increased $975 million to $1,665 million for the first nine months of 2019 due to the increase in gross profit partially offset by an increase in SG&A expenses, driven by the DPS Merger.

~~Interest Expense.~~Interest expense increased $276 million for the first nine months of 2019 compared with the first nine months of 2018 due primarily to the increased borrowings and assumption of the existing senior unsecured notes as a result of the DPS Merger and the impact of our interest rate derivative instruments, which was partially offset by the impact of the net repayments related to our 2019 Notes, our term loans and Commercial Paper.

~~Table of Contents~~

~~Interest Expense - Related Party.~~Interest expense - related party decreased $51 million for the first nine months of 2019 compared with the first nine months of 2018 as a result of the capitalization of the related party term loans into additional paid in capital during the DPS Merger.

~~Effective Tax Rate.~~The effective tax rates for the first nine months of 2019 and 2018 were 25.9% and 25.4%, respectively. The increase in our effective tax rate was primarily due to the revaluation of the Company's deferred tax liabilities for a new blended state rate and the elimination of the domestic manufacturing deduction, offset by the reduction in the U.S. federal tax rate from 24.5% to 21.0%, the exclusion of DPS Merger-related non-deductible transaction costs, and increasing the valuation allowance on the realizability of foreign tax credit carryforwards in the third quarter of 2018.

~~Adjusted Results of Operations~~

~~The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the first nine months of 2019 and 2018:~~

For the First Nine Months Dollar Percent
(in millions, except per share amounts) 2019 2018 Change Change
Adjusted net sales⁽¹⁾
$ 8,186
$ 8,211
$ (25 ) (0.3 )%
Adjusted income from operations⁽¹⁾
2,077
1,898
179
9.4
Adjusted interest expense⁽¹⁾
407
501
(94 ) (18.8 )
Adjusted provision for income taxes⁽¹⁾
419
372
47
12.6
Adjusted net income⁽¹⁾
1,236
1,030
206
20.0
Adjusted diluted EPS⁽¹⁾
0.87
0.74
0.13
17.6

Adjusted diluted weighted average shares⁽¹⁾
1,418.8
1,400.0

Adjusted operating margin⁽¹⁾
25.4 % 23.1 % 230 bps
Adjusted effective tax rate⁽¹⁾
25.3 % 26.5 % (120 bps)


~~(1)~~	These adjusted measures are non-GAAP financial measures. For the first nine months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of this term and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

~~Adjusted Net Sales.~~ Adjusted net sales decreased $25 million, or 0.3%, to $8,186 million for the first nine months of 2019 as compared to Adjusted pro forma net sales of $8,211 million for the first nine months of 2018. This performance reflectedprior year period, reflecting strong ~~underlying~~ net sales growth, of 2.8%, driven by higher volume/mix of 1.7% and net price realization of 1.1%, which was fully offset by the expected unfavorable impacts related to changes in our Allied Brands portfolio of 2.8%. Unfavorable foreign currency translation also impacted the period by 0.3%.

~~Adjusted Income from Operations.~~ Adjusted income from operations increased $179 million, or 9.4%, to $2,077 million compared to Adjusted pro forma income from operations of $1,898 million in the prior year. This performance primarily reflected strongcontinued productivity and merger synergies ~~both~~and a network optimization program gain of ~~which benefitted SG&A and cost~~$26 million on the asset sale-leaseback of ~~sales, as well as favorable timing in marketing spending. Partially offsetting these~~three facilities. These growth drivers were partially offset by higher operating costs associated with the surge in consumer demand late in the quarter, inflation in input costs, ~~led by~~primarily in packaging, ~~as well as~~and labor and logistics, ~~and~~ the unfavorable comparison to a ~~$22~~$10 million net gain on a renegotiation of a manufacturing contract in the prior year ~~from the remeasurement of our equity investment in Big Red~~period and ~~a $5 million one-time reimbursement from a resin supplier. Adjusted operating margin grew 230 bps to 25.4% in the first nine months of 2019.~~

~~Adjusted Interest Expense.~~Adjusted interest expense decreased $94 million, or 18.8%, to $407 million for the first nine months of 2019 compared to Adjusted pro forma interest expense of $501 million in the prior year. This change was primarily the result of the benefit of lower indebtedness due to continued deleveraging, realized gains associated with the termination of certain interest rate swaps and the benefit of lower interest rates as a result of our existing interest rate swaps.

~~Adjusted Effective Tax Rate.~~The Adjusted effective tax rate decreased 120 bps to 25.3% for the first nine months of 2019 compared to Adjusted pro forma effective tax rate of 26.5% in the prior year. This decrease in our Adjusted effective tax rate was primarily due to a reduction in the U.S. federal tax rate from 24.5% to 21.0%, partially offset by the loss of tax benefits associated with the U.S. domestic manufacturing deduction in 2019.

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~~Results of Operations by Segment~~

The following tables set forth net sales and income from operations for our segments for the first nine months of 2019 and 2018, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:

(in millions) First Nine Months
Segment Results — Net sales 2019 2018
Coffee Systems $ 3,023
$ 2,950
Packaged Beverages 3,734
1,238
Beverage Concentrates 1,034
317
Latin America Beverages 395
124
Net sales $ 8,186
$ 4,629

First Nine Months
(in millions) 2019 2018
Segment Results — Income from Operations
Coffee Systems $ 890
$ 865
Packaged Beverages 531
61
Beverage Concentrates 690
193
Latin America Beverages 62
15
Total income from operations 2,173
1,134
Unallocated corporate costs 508
444
Income from operations $ 1,665
$ 690

~~COFFEE SYSTEMS~~

The following table details our Coffee Systems segment's net sales, income from operations, operating margin, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the first nine months of 2019 and 2018:

For the First Nine Months Dollar Percent
(in millions) 2019 2018 Change Change
Net sales $ 3,023
$ 2,950
$ 73
2.5 %
Income from operations 890
865
25
2.9
Operating margin 29.4 % 29.3 % 10 bps
Adjusted net sales⁽¹⁾
$ 3,023
$ 2,954
69
2.3
Adjusted income from operations⁽¹⁾
1,033
996
37
3.7
Adjusted operating margin⁽¹⁾
34.2 % 33.7 % 50 bps


~~(1)~~	~~Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first nine months of 2018, these financial measures were prepared on~~ an ~~adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see~~ ~~Non-GAAP Financial Measures~~ ~~below.~~

~~Sales Volume.~~ ~~The volume/mix growth for the Coffee Systems segment reflected a 8.5%~~ increase in ~~K-Cup pod volume and a 12.7% increase in brewer volume in the first nine months of 2019.~~

~~Net Sales.~~ Net sales increased 2.5% to $3,023 million for the first nine months of 2019 compared to the first nine months of 2018 due to volume/mix growth of 5.5%, which was driven by sales volume growth partially offset by unfavorable pod sales mix. This growth was partially offset by lower net price realization of 2.5%. Unfavorable foreign currency translation also impacted the period by 0.5%.

~~Adjusted Net Sales.~~ Adjusted net sales increased 2.3% to $3,023 million for the first nine months of 2019 compared to the first nine months of 2018 due to volume/mix growth of 5.4%, partially offset by lower net price realization of 2.6% and unfavorable foreign currency translation of 0.5%.

~~Income from Operations.~~Income from operations increased $25 million for the first nine months of 2019, compared with the first nine months of 2018, driven by strong pod volume growth and productivity which was partially offset by unfavorable pod mix, lower net price realization, inflation in input costs, led by packaging, as well as logistics, expenses associated with productivity projects, and higher brewer investments.other operating costs. Operating margin grew ~~10 bps to 29.4%.~~

~~Table of Contents~~

~~Adjusted Income from Operations.~~Adjusted income from operations increased $37 million, or 3.7%, to $1,033 million for the first nine months of 2019, compared with Adjusted pro forma income from operations of $996 million for the first nine months of 2018, primarily reflecting the benefits of strong pod volume growth and productivity which was partially offset by unfavorable pod mix, lower net price realization, inflation in input costs, led by packaging, as well as logistics, and higher brewer investments. Adjusted operating margin grew 50210 bps versus the prior year ~~ago~~ period to ~~34.2%~~15.5%.

~~PACKAGED BEVERAGES~~

The following table details our Packaged Beverages segment's net sales, income from operations, operating margin, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the first nine months of 2019 and 2018:

For the First Nine Months Dollar Percent
(in millions) 2019 2018 Change Change
Net sales $ 3,734
$ 1,238
$ 2,496
NM
Income from operations 531
61
470
NM
Operating margin 14.2 % 4.9 %

930 bps
Adjusted net sales⁽¹⁾
$ 3,734
$ 3,892
(158 ) (4.1 )%
Adjusted income from operations⁽¹⁾
551
485
66
13.6
Adjusted operating margin⁽¹⁾
14.8 % 12.5 % 230 bps


~~(1)~~	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first nine months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

~~Sales Volume.~~ ~~Sales volume for the first nine months of 2019 were primarily driven by the incremental impact of the DPS Merger in the current period.~~

~~Adjusted Sales Volume.~~ Adjusted sales volume for the first nine months of 2019 declined 3.8% due to the net unfavorable impact of 3.3% related to changes in our Allied Brands portfolio and lower CSD volume, partially offset by growth of Core Hydration and higher volume from contract manufacturing.

~~Net Sales.~~Net sales were $3,734 million for the first nine months of 2019 compared to $1,238 million for the first nine months of 2018, primarily driven by the incremental impact of the DPS Merger in the current period.

~~Adjusted Net Sales.~~ Adjusted net sales decreased 4.1% to $3,734 million for the first nine months of 2019 compared with Adjusted pro forma net sales of $3,892 million for the first nine months of 2018, reflecting underlying net sales growth of 1.8%, driven by higher net price realization of 2.3% from pricing actions taken late in 2018 partially offset by lower volume/mix of 0.5%. More than offsetting the underlying net sales growth were the expected unfavorable impact of 5.8% from changes in the Allied Brands portfolio. Unfavorable foreign currency translation also impacted the period by 0.1%.

~~Income from Operations.~~Income from operations was $531 million for the first nine months of 2019 compared with $61 million for the first nine months of 2018, driven by the incremental impact of the DPS Merger in the current period, the favorable comparison to the $105 million impact of the inventory step-up associated with the DPS Merger in the third quarter of 2018 and strong productivity and merger savings.

Adjusted Income from Operations. Adjusted income from operations increased ~~$66~~$43 million, or ~~13.6%~~26.9%, to ~~$551~~$203 million for the first ~~nine months~~quarter of ~~2019~~2020 compared ~~with Adjusted pro forma income from operations of $485~~to $160 million for the ~~first nine months~~prior year period, largely driven by strong volume/mix, partially driven by increased shipment volume as a result of ~~2018, largely reflecting strong~~COVID-19. Other favorable drivers included productivity and merger synergies ~~growth in underlying net sales~~ and ~~timing~~a network optimization program gain of ~~marketing investments.~~$26 million on the asset sale-leaseback of three facilities. These drivers were partially offset by higher operating costs associated with the surge in consumer demand late in the quarter, inflation in input costs, primarily in packaging, ~~ingredients,~~ and ~~logistics.~~labor and logistics, the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period and an increase in other operating costs. Adjusted operating margin grew ~~230~~240 bps versus the year ago period to ~~14.8%~~16.7%.

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BEVERAGE CONCENTRATES

The following table details our Beverage Concentrates segment's net sales, income from operations, operating margin, Adjusted ~~net sales, Adjusted~~ income from operations and Adjusted operating margin for the first ~~nine months~~quarter of ~~2019~~2020 and ~~2018:~~2019:


	For the First Nine Months						Dollar		Percent		First Quarter						Dollar			Percent
(in millions)	2019			2018			Change		Change		2020			2019			Change			Change
Net sales	$	1,034		$	317		$	717	NM		$	306		$	304		$	2		0.7	%
Income from operations	690			193			497		NM		197			201			(4		)	(2.0	)
Operating margin	66.7		%	60.9		%			580 bps		64.4		%	66.1		%				(170 bps)
Adjusted net sales⁽¹⁾	$	1,034		$	979		55		5.6	%
Adjusted income from operations⁽¹⁾	691			619			72		11.6
Adjusted operating margin⁽¹⁾	66.8		%	63.2		%			360 bps
Adjusted income from operations											197			201			(4		)	(2.0	)
Adjusted operating margin											64.4		%	66.1		%				(170 bps)


~~(1)~~	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first nine months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

Sales Volume. Sales volume for the first ~~nine months~~quarter of ~~2019 were primarily driven by~~2020 as compared to the ~~incremental~~prior year period declined 2.4% reflecting an immediate impact of COVID-19 on the ~~DPS Merger~~fountain foodservice business late in the ~~current period.~~

~~Adjusted Sales Volume.~~ ~~Adjusted sales~~quarter, partially offset by growth in the concentrate shipment volume for ~~the first nine months of 2019 declined 0.6% due to CSD category volume declines.~~retail product.

Net Sales. Net sales ~~were $1,034~~increased $2 million, or 0.7%, to $306 million for the first ~~nine months~~quarter of ~~2019~~2020 compared ~~with $317~~to $304 million ~~for the first nine months of 2018, primarily driven by the incremental impact of the DPS Merger~~ in the ~~current period.~~

~~Adjusted Net Sales.~~ ~~Adjusted net sales increased 5.6% to $1,034 million for the first nine months of 2019 compared with Adjusted pro forma net sales of $979 million for the first nine months of 2018,~~prior year period, driven by net price realization of ~~5.9%~~2.4%, partially offset by ~~lower~~unfavorable volume/mix of ~~0.1%. Unfavorable foreign currency translation also impacted~~1.7% reflecting a significant channel shift away from on-premise business, which is shipped directly, as demand dropped off quickly late in the ~~period~~quarter due to COVID-19, partially offset by ~~0.2%.~~a slower build of the at-home business, as inventories in our partner bottling network were worked down.

Income from Operations. Income from operations ~~was $690~~decreased $4 million, or 2.0%, to $197 million for the first ~~nine months~~quarter of ~~2019,~~2020 compared ~~with $193~~to $201 million ~~for~~in the ~~first nine months of 2018, driven by~~prior year period. This performance reflected the ~~incremental impact~~benefit of the ~~DPS Merger in~~net sales growth, which was more than offset by increased marketing investment. Operating margin declined 170 bps versus the ~~current~~year ago period ~~and the favorable comparison~~ to ~~the $17 million impact of the inventory step-up associated with the DPS Merger in 2018.~~64.4%.

Adjusted Income from Operations. ~~Adjusted income~~Income from operations ~~increased $72~~decreased $4 million, or ~~11.6%~~2.0%, to ~~$691~~$197 million for the first ~~nine months~~quarter of ~~2019~~2020 compared ~~with Adjusted pro forma income from operations of $619~~to $201 million ~~for~~in the ~~first nine months of 2018.~~prior year period. This performance reflected the ~~growth in Adjusted~~benefit of the net sales ~~as well as timing of~~growth, which was more than offset by increased marketing ~~investments. Adjusted operating~~investment. Operating margin ~~grew 360~~declined 170 bps versus the year ago period to ~~66.8%~~64.4%.

LATIN AMERICA BEVERAGES

The following table details our Latin America Beverages segment's net sales, income from operations, operating margin, Adjusted ~~net sales, Adjusted~~ income from operations and Adjusted operating margin for the first ~~nine months~~quarter of ~~2019~~2020 and ~~2018:~~2019:

For the First Nine Months Dollar Percent
(in millions) 2019 2018 Change Change
Net sales $ 395
$ 124
$ 271
NM
Income from operations 62
15
47
NM
Operating margin 15.7 % 12.1 % NM
Adjusted net sales⁽¹⁾
$ 395
$ 386
9
2.3 %
Adjusted income from operations⁽¹⁾
57
65
(8 ) (12.3 )
Adjusted operating margin⁽¹⁾
14.4 % 16.8 % (240 bps)


~~(1)~~	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first nine months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see ~~Non-GAAP Financial Measures~~ ~~below.~~

~~Table of Contents~~



	First Quarter						Dollar		Percent
(in millions)	2020			2019			Change		Change
Net sales	$	117		$	116		$	1	0.9	%
Income from operations	27			11			16		145.5
Operating margin	23.1		%	9.5		%			1,360 bps
Adjusted income from operations	27			12			15		125.0
Adjusted operating margin	23.1		%	10.3		%			1,280 bps

Sales Volume. Sales volume for the first ~~nine months~~quarter of ~~2019 were primarily~~2020 as compared to the prior year period increased 1.5%, driven by ~~the incremental impact of the DPS Merger in the current period.~~

~~Adjusted Sales Volume.~~ Adjusted sales volume for the first nine months of 2019 declined 4.4%, as Aguafiel decreased 4.5% primarily due to the exit of our bulk water business, partially offset by an increase of 0.1% in the balance of the portfolio.Squirt.

Net Sales. Net sales ~~were $395~~increased $1 million, or 0.9%, to $117 million for the first ~~nine months~~quarter of ~~2019~~2020 compared ~~with $124~~to $116 million ~~for the first nine months of 2018, primarily driven by the incremental impact of the DPS Merger~~ in the ~~current period.~~

~~Adjusted Net Sales.~~ ~~Adjusted net sales increased 2.3% to $395 million for the first nine months of 2019 compared with Adjusted pro forma net sales of $386 million for the first nine months of 2018,~~prior year period, driven by higher net price realization of ~~4.4%~~5.9%, partially offset by unfavorable volume/mix of ~~1.0%~~0.7%. Unfavorable foreign currency translation also impacted the period by ~~1.1%~~4.3%.

Income from Operations. Income from operations ~~was $62~~increased $16 million, or 145.5%, to $27 million for the first ~~nine months~~quarter of ~~2019~~2020 compared ~~with $15~~to $11 million ~~for~~in the ~~first nine months of 2018,~~prior year period, driven by a favorable F/X transaction impact, net sales growth and continued productivity. These benefits were partially offset by inflation in input costs, manufacturing and logistics. Operating margin increased 1,360 bps versus the ~~incremental impact of the DPS Merger in the current~~year ago period ~~and the favorable comparison~~ to ~~the $9 million impact of the inventory step-up associated with the DPS Merger in 2018.~~23.1%.

Adjusted Income from Operations. Adjusted income from operations ~~decreased $8~~increased $15 million, or ~~12.3%~~125.0%, to ~~$57~~$27 million in the first ~~nine months~~quarter of ~~2019~~2020 compared ~~with Adjusted pro forma income from operations of $65~~to $12 million in the ~~first nine months of 2018.~~prior year period. This performance reflected ~~the benefit of~~a favorable F/X transaction impact, net sales growth and continued productivity, which was ~~more than~~partially offset by inflation on ~~ingredients, logistics~~input costs, manufacturing, and ~~energy, a comparison to a $5 million benefit in 2018 related to a previous reimbursement by a resin supplier and unfavorable foreign currency impacts.~~logistics. Adjusted operating margin ~~declined 240~~grew 1,280 bps versus the year ago period to ~~14.4%~~23.1%.

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UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS

We believe the North American beverage market is influenced by certain key trends and uncertainties. Some of these items, such as the recent outbreak of COVID-19, increased health consciousness and changes in consumer preferences and economic factors, have previously created and may continue in the future to create category headwinds for a number of our products. Refer to Item 1A, "Risk Factors", of our Annual Report and this Quarterly Report on Form 10-Q, combined with the Uncertainties and Trends Affecting Liquidity section below, for more information about risks and uncertainties facing us.

The impacts and volatility of COVID-19 are expected to be significant in 2020, and the timing and pacing of re-opening the economy and ultimately transitioning into what is likely to be a new normal are highly uncertain. Nevertheless, given our broad portfolio and unmatched distribution network that spans seven distinct routes to market, we are reaffirming our guidance for 2020.

Specifically, for the full-year 2020, we expect constant currency net sales growth in the range of 3% to 4%, with performance likely at the low end of the range. We expect full-year 2020 Adjusted diluted EPS growth in the range of 13% to 15%, or $1.38 to $1.40 per diluted share, given the significant visibility and control we maintain over our cost structure, including aggressive cost management, productivity programs and merger synergies. As such, we continue to expect our management leverage ratio in the range of 3.5x to 3.8x at year end 2020 and our management leverage ratio to be below 3.0x in two to three years from the July 2018 merger closing.

COVID-19 Pandemic Disclosures

Our priorities during the COVID-19 pandemic are protecting the health and safety of our employees, maximizing the availability of our products for our consumers and Fueling the Frontline to provide our products to first responders who are fighting the COVID-19 pandemic. Because we sell products that are essential to the daily lives of consumers, the COVID-19 pandemic has not had a material net impact to our consolidated operating results for the first quarter of 2020. However, the pandemic is having offsetting impacts within our business. For example, we experienced a significant increase in demand and consumption of our products in our at-home business caused in part by changing consumer habits and pantry stocking in response to COVID-19, contributing to increases in net sales. At the same time, we experienced declines in our away-from-home business due to office closures and the slowdown of hospitality and fountain foodservice. In the future, the economic effects of the pandemic, including higher levels of unemployment, lower wages or a recessionary environment, may cause reduced demand for our products. It could also lead to volatility in demand due to government actions, such as shelter-in-place notices, which impact consumers’ movements and access to our products.

While we believe that there will continue to be strong long-term demand for our products, the timing and extent of economic recovery, and the uncertainties in short-term demand trends, make it difficult to predict the overall effects of the pandemic on our business. We expect that there will be heightened volatility in net sales during and subsequent to the duration of the pandemic that may impact interim periods.

Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our critical frontline employees and our supply chain. As food and agriculture is deemed part of the critical infrastructure by the Department of Homeland Security, our frontline employees have been identified as critical workers in maintaining the U.S. food and beverage supply. As a result, we have strived to follow recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our manufacturing and distribution facilities, which also includes additional incentive pay programs and benefits. We intend to continue to work with government authorities and implement our employee safety measures; however, disruptions to our supply chain, measures taken to protect employees or other local effects of the pandemic could impact our operations. For our corporate employees, participating in a remote work environment is familiar to us as we work in a multi-location environment, and we do not believe that the remote work environment has had any significant impact on our internal controls over financial reporting.

The pandemic has not materially impacted our liquidity position. We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets enabled by our debt ratings. Refer to Uncertainties and Trends Affecting Liquidity and Capital Resources for more information.

We do not believe our operating and intangible assets are impaired as a result of COVID-19.

For additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-Q.

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CRITICAL ACCOUNTING ESTIMATES

The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. These critical accounting estimates are discussed in greater detail in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

LIQUIDITY AND CAPITAL RESOURCES

~~Trends~~Overview and ~~Uncertainties Affecting Liquidity~~Our Financing Arrangements

~~Customer~~Our financial condition and ~~consumer demand~~liquidity remain strong. Net cash provided by operations was $414 million for the first quarter of 2020 compared to $591 million for the prior year period. Although there is uncertainty related to the anticipated impact of the recent COVID-19 pandemic on our ~~products may be impacted by~~future results, we believe we are uniquely positioned, with our broad portfolio and unmatched distribution network, to successfully navigate through this pandemic and the recent steps we have taken to strengthen our balance sheet leave us well positioned to manage our business as the crisis continues to unfold. We continue to manage all ~~risk factors discussed under "Risk Factors" in Part 1, Item 1A~~aspects of our ~~Annual Report on Form 10-K for~~business, including, but not limited to, monitoring the ~~year ended December 31, 2018 and subsequent filings with the SEC, that could have a material effect on production, delivery and consumption~~financial health of our products in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume. Similarly, disruptions in financial and credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and ~~creditors. These disruptions could~~other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth.

Our principal sources of liquidity are our existing cash and cash equivalents, as well as cash generated from operations and borrowing capacity currently available under our existing KDP Revolver and 2019 364-Day Credit Agreement. Additionally, we have ~~a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials.~~

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~~We believe that the following events, trends and uncertainties may also impact liquidity:~~

~~Our intention to drive significant cash flow generation to enable rapid deleveraging within two to three years from the DPS Merger;~~

~~Our ability to~~an uncommitted commercial paper program where we can issue unsecured commercial paper notes ~~("Commercial Paper")~~ on a private placement ~~basis up to a maximum aggregate amount outstanding at any time of $2,400 million;~~

~~Our ability to access our other financing arrangements, including the KDP Revolver and 364-Day Credit Agreement, which have availability of $3,150 million as of September 30, 2019;~~

~~Our continued integration of DPS;~~

~~A significant downgrade in our credit ratings could impact our accounts payable program;~~

~~Our continued capital expenditures;~~

~~Our continued payment of dividends;~~

~~Seasonality of our operating cash flows, which could impact short-term liquidity;~~

~~Fluctuations in our tax obligations;~~

~~Future equity investments; and~~

~~Future mergers or acquisitions of brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.~~

~~Financing Arrangements~~

basis. Refer to Note 72 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of these financing arrangements.

During March 2020, as a result of market stress and a dislocation in the commercial paper market driven by the COVID-19 pandemic, we chose to repay $1,000 million of commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver. In April 2020, we took steps to further strengthen our balance sheet by increasing excess liquidity in order to better position us to navigate the uncertainty of the COVID-19 pandemic. On April 13, 2020, we issued $1,500 million of senior unsecured notes and used the net proceeds from these senior unsecured notes to repay $1,000 million on our KDP Revolver and $481 million towards commercial paper notes, effectively refinancing short-term borrowings with efficient long-term bonds to free up excess short-term liquidity. On April 14, 2020, we terminated the 2019 364-Day Credit Agreement and replaced it with the new 2020 364-Day Credit Agreement and increased total commitments under the facility from $750 million to $1,500 million. As a result of these two actions, we have increased our liquidity to a level that we believe enables us to more than meet our commitments, even in a prolonged economic downturn, as we continue to exercise financial discipline to ensure our long-term financial health. Refer to Note 19 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of these new financing arrangements.

As of March 31, 2020, we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.

~~Liquidity~~Cash Flows

Based on our current and anticipated level of operations, we believe that our operating cash flows will be sufficient to meet our anticipated obligations for the next twelve months. To the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may utilize cash on hand or amounts available under our financing arrangements, if necessary.

The following table summarizes our cash activity for the first ~~nine months~~quarter of ~~2019~~2020 and ~~2018:~~2019:


	First Nine Months						First Quarter
(in millions)	2019			2018			2020			2019
Net cash provided by operating activities	$	1,803		$	1,063		$	414		$	591
Net cash used in investing activities	(216		)	(19,070		)
Net cash (used in) provided by financing activities	(1,626		)	18,084
Net cash provided by (used in) investing activities							34			(45		)
Net cash used in financing activities							(328		)	(556		)

NET CASH PROVIDED BY OPERATING ACTIVITIES

Net cash provided by operating activities ~~increased $740~~decreased $177 million for the first ~~nine months~~quarter of ~~2019,~~2020, as compared to the first ~~nine months~~quarter of ~~2018, primarily due to additional cash flows from operations generated as a result of the DPS Merger. The increase in net cash provided by operating activities was~~2019, driven by the decline in working capital primarily driven by the payment and deferral of customer incentives, offset by the slight increase in net income adjusted for non-cash ~~items and the improvement in working capital primarily driven by extended payment terms with our suppliers, partially offset by the payment and deferral of customer incentives.~~

~~As of September 30, 2019, the Company deferred estimated tax payments of $85 million, which were paid in October 2019, as compared to no deferral of estimated tax payments as of September 30, 2018.~~items.

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Cash Conversion Cycle

Our cash conversion cycle is defined as ~~days inventory outstanding ("DIO")~~DIO and ~~days sales outstanding ("DSO")~~DSO less ~~days of payables outstanding ("DPO").~~DPO. The calculation of each component of the cash conversion cycle is provided below:



Component		Calculation (on a trailing twelve month basis)
DIO		(Average inventory divided by cost of sales) * Number of days in the period
DSO		(Accounts receivable divided by net sales) * Number of days in the period
DPO		(Accounts payable * Number of days in the period) divided by cost of sales and SG&A expenses

Our cash conversion cycle ~~increased 35~~declined 12 days to approximately ~~(36)~~(47) days as of ~~September 30, 2019~~March 31, 2020 as compared to ~~(71)~~(35) days in the prior year period. The change was primarily driven by a ~~reduction~~increase of 438 days in our DPO as the DPS operations had significantly shorter terms than the legacy KGM ~~business.~~business, which have been steadily increasing as we continue to focus on our accounts payable program. DIO ~~improved 7 days as a result of the DPS Merger.~~and DSO ~~was~~were relatively consistent as compared to the prior year period.



	March 31,
	2020		2019
DIO	52		53
DSO	34		37
DPO	133		125
Cash conversion cycle	(47	)	(35	)

In future periods, DPO ~~will~~is expected to continue to have a positive impact on our cash conversion cycle as a result of our supplier terms initiative, which has set our customary terms as we integrate our legacy businesses.

Accounts payable program

As part of our ongoing efforts to improve our cash flow and related liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. Excluding our suppliers who require cash at date of purchase or sale, our current payment terms with our suppliers generally range from 10 to 360 days. We also entered into an agreement with a third party administrator to allow participating suppliers to track payment obligations from us, and if voluntarily elected by the supplier, sell payment obligations from us to financial institutions. Suppliers can sell one or more of our payment obligations at their sole discretion and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, $1,912~~2019, $2,322 million and ~~$1,438~~$2,097 million, respectively, of our outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions. The amounts settled through the program and paid to the financial institutions were ~~$1,208~~$557 million and ~~$1,085~~$352 million for the first ~~nine months~~quarter of 2020 and 2019, ~~and 2018,~~ respectively.

A significant downgrade in our credit ratings could limit a financial institution's willingness to participate in the accounts payable program. In addition, a significant downgrade in our credit ratings could also reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions.

NET CASH ~~USED IN~~PROVIDED BY (USED IN) INVESTING ACTIVITIES

Cash provided by investing activities for the first quarter of 2020 consisted primarily of proceeds of $201 million from sales of property, plant and equipment, primarily driven by our asset sale-leaseback transactions, partially offset by purchases of property, plant and equipment of $151 million.

Cash used in investing activities for the first ~~nine months~~quarter of 2019 consisted primarily of purchases of property, plant and equipment of ~~$208~~$62 million.

Cash used in investing activities for the first nine months of 2018 consisted primarily of our acquisitions of DPS and Big Red of $19,124 million and purchases of property, plant and equipment of $104 million, respectively.

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

Cash used in financing activities for the first ~~nine months~~quarter of 2020 consisted primarily of the net repayment of $387 million for commercial paper notes, which was primarily a result of the decision to repay $1,000 million of commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver. Additionally we made voluntary and mandatory repayments on the term loan facility of $405 million, repayment of the 2020 Notes of $250 million, dividend payments of $212 million and net payments on structured payables of $63 million.

Net cash used in financing activities for the first quarter of 2019 consisted primarily of the voluntary and mandatory repayments on the term loan facility of ~~$873~~$758 million, repayment of the 2019 Notes of $250 million ~~repayments of structured payables of $432 million~~ and dividend payments of ~~$633~~$211 million. These cash outflows from financing activities were partially offset by net issuance of commercial paper notes of ~~$335~~$594 million and net proceeds from structured payables of ~~$246~~$69 million.

~~Net~~

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Uncertainties and Trends Affecting Liquidity

Disruptions in financial and credit markets, including those caused by the COVID-19 pandemic, may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash ~~provided~~flow, or the ability of our vendors to timely supply materials.

Customer and consumer demand for our products may also be impacted by all risk factors discussed under "Risk Factors" in Part 1, Item 1A of our Annual Report and subsequent filings with the SEC, that could have a material effect on production, delivery and consumption of our products in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume.

We believe that the following events, trends and uncertainties may also impact liquidity:

Our ability to access our committed financing ~~activities for the first nine months~~arrangements, including our KDP Revolver and our 2020 364-Day Credit Agreement, which have availability of ~~2018 consisted primarily~~$3,900 million as of ~~proceeds~~April 30, 2020;

Our ability to issue unsecured uncommitted commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $2,400 million;

Our intention to drive significant cash flow generation to enable rapid deleveraging within three years from the ~~issuance~~DPS Merger;


•	A significant downgrade in our credit ratingscould limit a financial institution's willingness to participate in our accounts payable program and reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions, which could impact our accounts payable program;

Our continued integration of ~~common stock~~DPS;

Our continued capital expenditures;

Our continued payment of ~~$9,000 million, issuance~~dividends;

Seasonality of ~~senior unsecured notes~~our operating cash flows, which could impact short-term liquidity;

Fluctuations in our tax obligations;

Future equity investments; and

Future mergers or acquisitions of $8,000 million, proceeds from the term loan facility of $2,700 million and net issuance of of commercial paper of $1,386 million. These cash inflows from financing activities were partially offset by repayments on the term loan facility of $3,363 million.brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.

Debt Ratings

As of ~~September 30, 2019,~~March 31, 2020, our credit ratings were as follows:



Rating Agency	Long-Term Debt Rating	Commercial Paper Rating	Outlook	Date of Last Change
Moody's	Baa2	P-2	Negative	May 11, 2018
S&P	BBB	A-2	Stable	May 14, 2018

These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.

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Capital Expenditures

Capital expenditures were ~~$208~~$151 million and ~~$104~~$62 million for the first ~~nine months~~quarter of ~~2019~~2020 and ~~2018,~~2019, respectively.

Capital expenditures for the first ~~nine months~~quarter of ~~2019~~2020 primarily related to manufacturing equipment, our continued investment in the build-out of our ~~new~~ Spartanburg facility and ~~information technology infrastructure.~~Allentown facility, the purchase of real estate in Ireland and logistics equipment. Capital expenditures included in accounts payable and accrued expenses ~~was $236~~were $177 million for the first ~~nine months~~quarter of ~~2019,~~2020, which primarily related to our ~~continued~~ investment in the build-out of our new Allentown manufacturing facility and Spartanburg manufacturing facility.

Capital expenditures for the first ~~nine months~~quarter of ~~2018 was~~2019 primarily related to ~~portion pack manufacturing, information technology infrastructure,~~ machinery and equipment, logistics equipment, information technology infrastructure and replacement of existing cold drink equipment.

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Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents ~~decreased $27~~increased $112 million from December 31, ~~2018~~2019 to ~~September 30, 2019~~March 31, 2020 due to the Company's focus on ~~utilizing cash for debt repayment.~~preserving liquidity rather than making voluntary prepayments on our term loan.

Our cash balances are used to fund working capital requirements, scheduled debt and interest payments, capital expenditures, income tax obligations, dividend payments and business combinations. Cash generated by our foreign operations is generally repatriated to the U.S. periodically as working capital funding requirements in those jurisdictions allow. Foreign cash balances were ~~$50~~$110 million and ~~$59~~$70 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019, respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.

Contractual Commitments and Obligations

We enter into various contractual obligations that impact, or could impact, our liquidity. Based on our current and anticipated level of operations, we believe that our proceeds from operating cash flows combined with cash on hand and amounts available under our financing arrangements will be sufficient to meet our anticipated obligations.

The following table summarizes our contractual obligations and contingencies, as of ~~September 30, 2019,~~March 31, 2020, that have significantly changed from the amounts disclosed in our Annual Report:


	Payments Due in Year														Payments Due in Year
(in millions)	Total		2019		2020		2021		2022		2023		After 2023		Total		2020		2021		2022		2023		2024		Thereafter
Long-term obligations⁽¹⁾	$	13,685	$	25	$	350	$	2,350	$	350	$	3,885	$	6,725	$	12,700	$	75	$	2,350	$	350	$	3,200	$	—	$	6,725
Interest payments	4,994		248		515		477		430		354		2,970		4,687		481		457		410		353		295		2,691
Finance leases⁽²⁾	320		12		50		43		38		34		143
Operating leases⁽³⁾	388		16		70		56		46		36		164
Purchase obligations⁽⁴⁾	2,852		727		964		309		295		397		160
Operating leases⁽²⁾															732		60		85		74		66		64		383
Purchase obligations⁽³⁾															1,531		1,001		158		111		93		84		84


(1)	Amounts represent payments for the senior unsecured notes issued by us and the term loan credit agreement. Refer to Note 72 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.

(2)

Amounts represent minimum rental commitments under our ~~contractual payment obligations for our lease arrangements classified as finance~~non-cancelable operating leases. These amounts exclude renewal options, which were not yet executed but were included in the lease term to determine finance lease obligation as the lease imposes a penalty on us in such amount that the renewal appeared reasonably assured at lease inception. Amounts exclude leases not yet commenced in accordance with ASC 842. Refer to Note 38 for additional information.


(3)	Amounts represent minimum contractual rental commitments under our non-cancelable operating leases. Amounts exclude leases not yet commenced in accordance with ASC 842. Amounts previously recorded as financing obligations were reclassified within operating leases as a result of the adoption of ASC 842. Refer to Note 3 for additional information.


~~(4)~~	Amounts represent payments under agreements to purchase goods or services that are legally binding and that specify all significant terms, including capital obligations and long-term contractual obligations.

Through ~~September 30, 2019,~~March 31, 2020, there have been no other material changes to the amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

OFF-BALANCE SHEET ARRANGEMENTS

There are no material changes in off-balance sheet arrangements from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 1 of the Notes to our Unaudited Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S. ~~GAAP.~~GAAP.

GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION

The Notes are fully and unconditionally guaranteed by certain of our direct and indirect subsidiaries (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by us and jointly and severally guarantee, subject to the release provisions described below, our obligations under the Notes. None of our subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries held by Maple prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of our other indebtedness, our exercise of the legal defeasance option with respect to the Notes and the discharge of our obligations under the applicable indenture.

The following schedules present the financial information for (i) the Parent and the Guarantors on a combined basis after intercompany eliminations, (ii) the Non-Guarantors and (iii) the eliminations necessary to arrive at our consolidated results. The consolidating schedules are provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.

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~~SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION~~

The following unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the DPS Merger, which was consummated on July 9, 2018, for the third quarter and first nine months of 2018, based on the historicalsummarized consolidating results of operations ~~of DPS and Maple. See Notes 1 and 2 of the Notes to our unaudited condensed consolidated financial statements for additional information on the DPS Merger.~~were as follows:



	For the First Quarter of 2020
(in millions)	Parent and Guarantors		Non-Guarantors		Eliminations			Consolidated
Net sales	$	1,523	$	1,122	$	(32	)	$	2,613
Gross profit	891		561		—			1,452
Income before equity in earnings of consolidated subsidiaries	97		108		—			205
Equity in earnings of subsidiaries, net of tax	75		81		—			156
Net income	$	156	$	81	$	(81	)	$	156

The ~~following unaudited pro forma condensed combined statements~~summarized consolidating balance sheets were as follows:



	March 31, 2020
(in millions)	Parent and Guarantors		Non-Guarantors		Eliminations			Consolidated
ASSETS
Current assets	$	1,584	$	1,175	$	(482	)	$	2,277
Non-current assets	28,059		19,752		(1,245		)	46,566
Investments in Non-Guarantors	14,824		—		(14,824		)	—
Total assets	$	44,467	$	20,927	$	(16,551	)	$	48,843

LIABILITIES AND EQUITY
Current liabilities	$	4,520	$	2,820	$	(482	)	$	6,858
Non-current liabilities	17,307		3,283		(1,245		)	19,345
Total liabilities	21,827		6,103		(1,727		)	26,203
Stockholders' equity	22,640		14,824		(14,824		)	22,640
Total liabilities and equity	$	44,467	$	20,927	$	(16,551	)	$	48,843



	December 31, 2019
(in millions)	Parent and Guarantors		Non-Guarantors		Eliminations			Consolidated
ASSETS
Current assets	$	1,404	$	1,273	$	(404	)	$	2,273
Non-current assets	28,180		20,430		(1,365		)	47,245
Investments in Non-Guarantors	15,321		—		(15,321		)	—
Total assets	$	44,905	$	21,703	$	(17,090	)	$	49,518

LIABILITIES AND EQUITY
Current liabilities	$	3,942	$	2,936	$	(404	)	$	6,474
Non-current liabilities	17,707		3,445		(1,365		)	19,787
Total liabilities	21,649		6,381		(1,769		)	26,261
Stockholders' equity	23,256		15,322		(15,321		)	23,257
Total liabilities and equity	$	44,905	$	21,703	$	(17,090	)	$	49,518

The tables above reflect $273 million and $241 million of ~~income for the third quarter and first nine months of 2018 are based on the historical financial statements of Maple and DPS after giving effect~~current intercompany receivables due to the ~~DPS Merger, related equity investments,~~Parent and Guarantors from the ~~assumptions~~Non-Guarantors as of March 31, 2020 and adjustments described in the accompanying notes to this unaudited pro forma condensed combined statement of income. The unaudited pro forma condensed combined statements of income are presented as if the DPS Merger had been consummated on December 31, ~~2016,~~2019, respectively. Additionally, the tables above reflect $22 million and ~~combine the historical results~~$20 million of ~~Maple and DPS.~~

~~The unaudited pro forma condensed combined statements of income set forth below primarily give effect~~current intercompany payables due to the ~~following assumptions~~Non-Guarantors from the Parent and ~~adjustments:~~

~~Application of the acquisition method of accounting;~~

~~The issuance of Maple common stock to JAB in connection with the equity investments;~~

~~The conversion of Maple Parent Corporation into KDP shares in accordance with the Merger Agreement;~~

~~The pre-closing Maple share conversion;~~

~~The exchange of one share of KDP common stock for each share of DPS common stock;~~

~~The change in year-end for Maple;~~Guarantors within current assets held and

~~The alignment of accounting policies.~~

The unaudited pro forma condensed combined 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 used as of ~~the completion of the acquisition. We utilized fair values at the Merger Date for the allocation of consideration to the net tangible~~March 31, 2020 and ~~intangible assets acquired and liabilities assumed.~~

The unaudited pro forma condensed combined financial information has been prepared in accordance with SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results. In addition, the accompanying unaudited pro forma condensed combined statements of income do not reflect any anticipated synergies, operating efficiencies, cost savings or any integration costs that may result from the DPS Merger.

The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma condensed combined statements of income to give effect to unaudited pro forma events that are (1) directly attributable to the DPS Merger, (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of KDP. As a result, under SEC Regulation S-X Article 11, certain expenses such as transaction costs and costs associated with the impact of the step-up of inventory are eliminated from pro forma results in all periods presented. In contrast, under the U.S. GAAP presentation in Note 2, ~~Acquisitions and Investments in Unconsolidated Affiliates, these expenses are required to be included in the pro forma results for the year ended~~ December 31, ~~2017. See Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.~~

The unaudited pro forma condensed combined financial information, including the related notes, should be read in conjunction with the historical consolidated financial statements and related notes of DPS, and with our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.2019.

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~~KEURIG DR PEPPER INC.~~

~~PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME~~

~~For the Third Quarter of 2018~~

~~(Unaudited)~~

(in millions, except per share data)
Reported KDP⁽¹⁾

DPS July 1 - July 8, 2018⁽²⁾

Pro Forma Adjustments⁽³⁾
Pro Forma Combined
Net sales $ 2,732
$ 125
$ (1 ) $ 2,856
Cost of sales 1,367
58
(127 ) 1,298
Gross profit 1,365
67
126
1,558
Selling, general and administrative expenses 1,028
237
(265 ) 1,000
Other operating expense (income), net (8 ) —
—
(8 )
Income from operations 345
(170 ) 391
566
Interest expense 172
4
2
178
Loss on early extinguishment of debt 11
—
—
11
Other income, net (33 ) (1 ) —
(34 )
Income before provision for income taxes 195
(173 ) 389
411
Provision for income taxes 46
(55 ) 120
111
Net income 149
(118 ) 269
300
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards —
—
—
—
Net income attributable to KDP $ 149
$ (118 ) $ 269
$ 300
Earnings per common share:
Basic $ 0.11

$ 0.22
Diluted 0.11

$ 0.21
Weighted average common shares outstanding:
Basic 1,361.8

27.2
1,389.0
Diluted 1,373.6

27.1
1,400.7


~~(1)~~	~~Refer to the~~ ~~Statements of Income~~.


~~(2)~~	~~Refers to DPS's activity during the three months ended September 30, 2018 prior to the Merger Date.~~


~~(3)~~	~~Refer to~~ ~~Summary of Pro Forma Adjustments~~.

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~~KEURIG DR PEPPER INC.~~

~~PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME~~

~~For the First Nine Months of 2018~~

~~(Unaudited)~~

(in millions, except per share data)
Reported KDP⁽¹⁾

DPS Jan 1 - July 8, 2018⁽²⁾

Pro Forma Adjustments⁽³⁾
Pro Forma Combined
Net sales $ 4,629
$ 3,605
$ (27 ) $ 8,207
Cost of sales 2,292
1,529
(155 ) 3,666
Gross profit 2,337
2,076
128
4,541
Selling, general and administrative expenses 1,649
1,639
(364 ) 2,924
Other operating expense (income), net (2 ) (14 ) 3
(13 )
Income from operations 690
451
489
1,630
Interest expense 221
88
184
493
Interest expense - related party 51
—
(51 ) —
Loss on early extinguishment of debt 13
—
—
13
Other (income) expense, net (28 ) 5
14
(9 )
Income before provision for income taxes 433
358
342
1,133
Provision for income taxes 110
82
107
299
Net income 323
276
235
834
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards 3
—
(3 ) —
Net income attributable to KDP $ 320
$ 276
$ 238
$ 834
Earnings per common share:
Basic $ 0.33

$ 0.60
Diluted 0.32

0.60
Weighted average common shares outstanding:
Basic 983.0

406.0
1,389.0
Diluted 994.1

405.9
1,400.0


~~(1)~~	~~Refer to the~~ ~~Statements of Income~~.


~~(2)~~	~~Refers to DPS's activity during the nine months ended September 30, 2018 prior to the Merger Date.~~


~~(3)~~	~~Refer to~~ ~~Summary of Pro Forma Adjustments~~.

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~~KEURIG DR PEPPER INC.~~

~~RECONCILIATION OF PRO FORMA SEGMENT INFORMATION~~

~~(Unaudited)~~

(in millions)
Reported KDP⁽¹⁾

DPS July 1 - July 8, 2018⁽²⁾

Pro Forma Adjustments⁽³⁾
Pro Forma Combined
For the Third Quarter of 2018
Net Sales
Coffee Systems $ 1,053
$ —
$ —
$ 1,053
Packaged Beverages 1,238
98
—
1,336
Beverage Concentrates 317
15
(1 ) 331
Latin America Beverages 124
12
—
136
Total net sales $ 2,732
$ 125
$ (1 ) $ 2,856

Income from Operations
Coffee Systems $ 334
$ —
$ —
$ 334
Packaged Beverages 61
2
99
162
Beverage Concentrates 193
(5 ) 16
204
Latin America Beverages 15
2
10
27
Unallocated corporate costs (258 ) (169 ) 266
(161 )
Total income from operations $ 345
$ (170 ) $ 391
$ 566

(in millions)
Reported KDP⁽¹⁾

DPS Jan 1 - July 8, 2018⁽²⁾

Pro Forma Adjustments⁽³⁾
Pro Forma Combined
For the First Nine Months of 2018
Net Sales
Coffee Systems $ 2,950
$ —
$ —
$ 2,950
Packaged Beverages 1,238
2,654
—
3,892
Beverage Concentrates 317
689
(27 ) 979
Latin America Beverages 124
262
—
386
Total net sales $ 4,629
$ 3,605
$ (27 ) $ 8,207

Income from Operations
Coffee Systems $ 865
$ —
$ (3 ) $ 862
Packaged Beverages 61
299
119
479
Beverage Concentrates 193
436
(11 ) 618
Latin America Beverages 15
42
8
65
Unallocated corporate costs (444 ) (326 ) 376
(394 )
Total income from operations $ 690
$ 451
$ 489
$ 1,630


~~(1)~~	~~Refer to the~~ ~~Statements of Income~~.


~~(2)~~	~~Refers to DPS's activity during the three months and nine months ended September 30, 2018 prior to the Merger Date.~~


~~(3)~~	~~Refer to~~ ~~Summary of Pro Forma Adjustments~~.

~~Table of Contents~~

~~Summary of Pro Forma Adjustments~~

~~Pro forma adjustments included in the Pro Forma Condensed Combined Statements of Income for the third quarter and first nine months of 2018 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 in connection with the DPS Merger.


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.	~~Adjustment to remove the impact of the step-up of inventory recorded in purchase price accounting.~~


d.	~~Adjustments to 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.~~


e.	~~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.~~


f.	~~A decrease to SG&A expenses for both DPS and Maple to remove non-recurring transaction costs as a result of the DPS Merger.~~


g.	~~Removal of the Interest expense - related party caption for Maple, as the related party debt was capitalized into Additional paid-in capital immediately prior to the DPS Merger.~~


h.	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.


i.	~~Adjustments to Interest expense to record incremental interest expense and amortization of deferred debt issuance costs for borrowings related to the DPS Merger.~~


j.	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 KDP.

NON-GAAP FINANCIAL MEASURES

To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented ~~in this report selected unaudited pro forma combined financial information. We also present~~ for the ~~third~~first quarter of 2020 and ~~first nine months of~~ 2019 (i) ~~Adjusted net sales, (ii)~~ Adjusted income from operations, ~~(iii)~~(ii) Adjusted net income and ~~(iv) Adjusted diluted EPS and for the third quarter and first nine months of 2018 (i) Adjusted pro forma net sales, (ii) Adjusted pro forma income from operations,~~ (iii) Adjusted ~~pro forma net income and (iv) Adjusted pro forma~~ diluted EPS, which are considered non-GAAP financial measures. ~~This pro forma financial information and~~The non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. The adjusted measures are not substitutes for their comparable U.S. GAAP financial measures, such as ~~net sales,~~ income from operations, net income, diluted EPS, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

For the ~~third~~first quarter of 2020 and ~~first nine months of~~ 2019, we define our Adjusted non-GAAP financial measures as certain financial statement captions and metrics adjusted for certain items affecting comparability, while for the third quarter and first nine months of 2018, we define our Adjusted non-GAAP financial measures as certain pro forma financial statement captions and metrics adjusted for certain items affecting comparability. The items affecting comparability are defined below.

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 ~~Maple's acquisition of~~the Keurig ~~Green Mountain, Inc. in 2016 (the "Keurig Acquisition");~~Acquisition; (iv) the amortization of the fair value adjustment of the senior unsecured notes obtained as a result of the DPS Merger; (v) stock compensation expense attributable to the matching awards made to employees who made an initial investment in the ~~Keurig Green Mountain, Inc. Executive Ownership~~EOP, the 2009 Incentive Plan or the ~~Keurig Dr Pepper Omnibus~~2019 Incentive ~~Plan of 2009;~~Plan; and (vi) other certain items that are excluded for comparison purposes to prior year periods.

Prior to the second quarter of 2019, we did not add back the amortization of the fair value adjustment of the senior unsecured debt recognized as a result of the purchase price allocation for the DPS Merger. As this item is similar to the amortization of intangibles, we changed our method of computing Adjusted ~~Pro Forma (2018)~~ results to exclude the amortization of the fair value adjustment of the senior unsecured notes in order to reflect how management views our business results on a consistent basis.

~~Table~~For the first quarter of ~~Contents~~2020, 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 for significant business combinations (completed or abandoned) excluding the DPS Merger; (iv) costs related to significant nonroutine legal matters; (v) the loss on early extinguishment of debt related to the redemption of debt; (vi) incremental costs to our operations related to risks associated with the COVID-19 pandemic and (vii) impairment recognized on equity method investment with Bedford.

Incremental costs to our operations related to risks associated with the COVID-19 pandemic include incremental expenses incurred to either maintain the health and safety of our front-line employees or temporarily increase compensation to such employees to ensure essential operations continue during the pandemic. We believe removing these costs reflects how management views our business results on a consistent basis.

For the ~~third~~first quarter ~~and first nine months~~ 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~~for significant business combinations (completed or abandoned) excluding the DPS Merger; (iv) ~~provision for~~costs related to significant nonroutine legal ~~settlements;~~matters; (v) the impact of the step-up of acquired inventory not associated with the DPS ~~Merger~~Merger; (vi) the loss on early extinguishment of debt related to the redemption of debt and (vii) the loss related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems ~~segment, as discussed in our Annual Report on Form 10-K.~~segment.

For ~~the third~~first quarter ~~and first nine months~~ of ~~2018, the other certain items excluded for comparison purposes include (i) restructuring~~2020 and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) provisions for legal settlements; (iv) the loss on early extinguishment of debt related to the redemption of debt; and (v) tax reform associated with the TCJA.

~~For the third quarter and first nine months of~~ 2019, the supplemental financial data set forth below includes reconciliations of ~~Adjusted net sales,~~ Adjusted income from operations, Adjusted net income and Adjusted diluted EPS to the applicable financial measure presented in the unaudited condensed consolidated financial statement for the same period. For the third quarter and first nine months of 2018, the supplemental financial data set forth below includes reconciliations of Adjusted pro forma net sales, Adjusted pro forma income from operations, Adjusted pro forma net income and Adjusted pro forma diluted EPS to the applicable financial measure presented in the unaudited pro forma condensed combined financial statements for the same period. For a reconciliation of the applicable financial measure presented in the unaudited pro forma condensed combined financial statement for the third quarter and first nine months of 2018 to the applicable historical financial measure presented in accordance with U.S. GAAP, please see "Supplemental Unaudited Pro Forma Condensed Combined Financial Information" above.

Table of Contents

KEURIG DR PEPPER INC.

RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS

For the ~~Third~~First Quarter of ~~2019~~2020

(Unaudited, in millions, except per share data)


	Cost of sales			Gross profit			Gross margin		Selling, general and administrative expenses			Other operating expense (income), net			Income from operations		Operating margin		Cost of sales			Gross profit		Gross margin		Selling, general and administrative expenses			Income from operations		Operating margin
Reported	$	1,245		$	1,625		56.6	%	$	1,012		$	33		$	580	20.2	%	$	1,161		$	1,452	55.6	%	$	1,028		$	466	17.8	%
Items Affecting Comparability:
Mark to market	(5		)	5					(4		)	—			9				(15		)	15				(43		)	58
Amortization of intangibles	—			—					(31		)	—			31				—			—				(33		)	33
Stock compensation	—			—					(3		)	—			3				—			—				(7		)	7
Restructuring and integration costs	1			(1		)			(54		)	(24		)	77				—			—				(52		)	52
Productivity	(10		)	10					(12		)	(13		)	35				(16		)	16				(38		)	54
Transaction costs	—			—					(7		)	—			7
Provision for settlements	—			—					(12		)	—			12
Nonroutine legal matters																			—			—				(9		)	9
COVID-19																			(1		)	1				(4		)	5
Adjusted GAAP	$	1,231		$	1,639		57.1	%	$	889		$	(4	)	$	754	26.3	%	$	1,129		$	1,484	56.8	%	$	842		$	684	26.2	%

Interest expense Income before provision for income taxes Provision for income taxes Effective tax rate Net income Weighted Average Diluted shares Diluted earnings per share
Reported $ 158
$ 413
$ 109
26.4 % $ 304
1,419.4 $ 0.21
Items Affecting Comparability:

Mark to market 1
8
—
8
0.01
Amortization of intangibles —
31
9
22
0.02
Amortization of deferred financing costs (3 ) 3
1
2
—
Amortization of fair value debt adjustment (7 ) 7
3
4
—
Stock compensation —
3
—
3
—
Restructuring and integration costs —
77
13
64
0.04
Productivity —
35
8
27
0.02
Transaction costs (4 ) 11
3
8
0.01
Provision for settlements —
12
3
9
0.01
Adjusted GAAP $ 145
$ 600
$ 149
24.8 % $ 451
1,419.4
$ 0.32

~~Diluted earnings per common share may not foot due to rounding.~~

~~Table of Contents~~

~~KEURIG DR PEPPER INC.~~

~~RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS~~

~~For the Third Quarter of 2018~~

~~(Unaudited, in millions, except per share data)~~

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Income from operations Operating margin
Pro Forma $ 1,298
$ 1,558
54.6 % $ 1,000
$ 566
19.8 %
Items Affecting Comparability:
Mark to market (27 ) 27
1
26

Amortization of intangibles —
—
(30 ) 30

Stock compensation —
—
(4 ) 4

Restructuring and integration costs —
—
(47 ) 47

Productivity (5 ) 5
(7 ) 12

Transaction costs —
—
(2 ) 2

Provision for settlements —
—
(11 ) 11

Adjusted Pro Forma $ 1,266
$ 1,590
55.7 % $ 900
$ 698
24.4 %

Interest expense Loss on early extinguishment of debt Other expense (income), net Income before provision for income taxes Provision for income taxes Effective tax rate Net income Weighted Average Diluted shares Diluted earnings per share
Pro Forma $ 178
$ 11
$ (34 ) $ 411
$ 111
27.0 % $ 300
1,400.7 $ 0.21
Items Affecting Comparability:

Mark to market (7 ) —
(2 ) 35
8
27
0.02
Amortization of intangibles —
—
—
30
8
22
0.02
Amortization of deferred financing costs (4 ) —
—
4
1
3
—
Amortization of fair value debt adjustment (6 ) —
—
6
2
4
—
Stock compensation —
—
—
4
1
3
—
Restructuring and integration costs —
—
—
47
17
30
0.02
Productivity 2
—
—
10
3
7
—
Transaction costs (1 ) —
—
3
1
2
—
Loss on early extinguishment of debt —
(11 ) —
11
3
8
0.01
Provision for settlements —
—
—
11
3
8
0.01
Tax reform —
—
—
—
(3 ) 3
—
Adjusted Pro Forma $ 162
$ —
$ (36 ) $ 572
$ 155
27.1 % $ 417
1,400.7 $ 0.30

~~Numbers may not foot due to rounding.~~

~~Table of Contents~~

~~KEURIG DR PEPPER INC.~~

~~RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS~~

~~For the First Nine Months of 2019~~

~~(Unaudited, in millions, except per share data)~~

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Other operating expense (income), net Income from operations Operating margin
Reported $ 3,537
$ 4,649
56.8 % $ 2,951
$ 33
$ 1,665
20.3 %
Items Affecting Comparability:
Mark to market (6 ) 6
5
—
1

Amortization of intangibles —
—
(94 ) —
94

Stock compensation —
—
(18 ) —
18

Restructuring and integration costs (1 ) 1
(151 ) (24 ) 176

Productivity (14 ) 14
(41 ) (22 ) 77

Transaction costs —
—
(8 ) —
8

Inventory step-up (3 ) 3
—
—
3

Provision for settlements —
—
(27 ) —
27

Malware Incident (2 ) 2
(6 ) —
8

Adjusted GAAP $ 3,511
$ 4,675
57.1 % $ 2,611
$ (13 ) $ 2,077
25.4 %


	Interest expense			Loss on early extinguishment of debt			Income before provision for income taxes		Provision for income taxes		Effective tax rate		Net income		Weighted Average Diluted shares	Diluted earnings per share		Interest expense			Loss on early extinguishment of debt			Impairment on investment and note receivable			Income before provision for income taxes		Provision for income taxes		Effective tax rate		Net income		Weighted Average Diluted shares	Diluted earnings per share
Reported	$	497		$	9		$	1,144	$	296	25.9	%	$	848	1,418.8	$	0.60	$	153		$	2		$	86		$	205	$	49	23.9	%	$	156	1,420.1	$	0.11
Items Affecting Comparability:
Mark to market	(44		)	—			45		11				34			0.02		(24		)	—			—			82		21				61			0.04
Amortization of intangibles	—			—			94		26				68			0.05		—			—			—			33		9				24			0.02
Amortization of deferred financing costs	(10		)	—			10		3				7			0.01		(3		)	—			—			3		1				2			—
Amortization of fair value debt adjustment	(20		)	—			20		5				15			0.01		(6		)	—			—			6		2				4			—
Stock compensation	—			—			18		4				14			0.01		—			—			—			7		1				6			—
Restructuring and integration costs	—			—			176		39				137			0.10		—			—			—			52		14				38			0.03
Productivity	—			—			77		17				60			0.04		—			—			—			54		15				39			0.03
Transaction costs	(16		)	—			24		6				18			0.01
Loss on early extinguishment of debt	—			(9		)	9		2				7			—		—			(2		)	—			2		—				2			—
Inventory step-up	—			—			3		1				2			—
Provision for settlements	—			—			27		7				20			0.01
Malware Incident	—			—			8		2				6			—
Investment impairment																		—			—			(86		)	86		21				65			0.05
Nonroutine legal matters																		—			—			—			9		2				7			—
COVID-19																		—			—			—			5		1				4			—
Adjusted GAAP	$	407		$	—		$	1,655	$	419	25.3	%	$	1,236	1,418.8	$	0.87	$	120		$	—		$	—		$	544	$	136	25.0	%	$	408	1,420.1	$	0.29

Diluted earnings per common share may not foot due to rounding.

Table of Contents

KEURIG DR PEPPER INC.

RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS

For the First ~~Nine Months~~Quarter of ~~2018~~2019

(Unaudited, in millions, except per share data)


	Net sales		Cost of sales			Gross profit		Gross margin		Selling, general and administrative expenses			Other operating expense (income), net			Income from operations		Operating margin		Cost of sales			Gross profit		Gross margin		Selling, general and administrative expenses			Income from operations		Operating margin
Pro Forma	$	8,207	$	3,666		$	4,541	55.3	%	$	2,924		$	(13	)	$	1,630	19.9	%
Reported																				$	1,106		$	1,398	55.8	%	$	911		$	498	19.9	%
Items Affecting Comparability:
Mark to market	—		(43		)	43				10			—			33				(12		)	12				12			—
Amortization of intangibles	—		—			—				(89		)	—			89				—			—				(31		)	31
Stock compensation	—		—			—				(16		)	—			16				—			—				(7		)	7
Restructuring and integration costs	—		—			—				(86		)	—			86				(1		)	1				(60		)	61
Productivity	—		(11		)	11				(12		)	(4		)	27				(3		)	3				(6		)	9
Transaction costs	—		—			—				(2		)	—			2
Provision for settlements	4		—			4				(11		)	—			15
Adjusted Pro Forma	$	8,211	$	3,612		$	4,599	56.0	%	$	2,718		$	(17	)	$	1,898	23.1	%
Nonroutine legal matters																				—			—				(7		)	7
Inventory step-up																				(3		)	3				—			3
Malware incident																				(2		)	2				(3		)	5
Adjusted GAAP																				$	1,085		$	1,419	56.7	%	$	809		$	621	24.8	%


	Interest expense			Loss on early extinguishment of debt			Other expense (income), net			Income before provision for income taxes			Provision for income taxes			Effective tax rate		Net income			Weighted Average Diluted shares	Diluted earnings per share		Interest expense			Loss on early extinguishment of debt			Other expense (income), net		Income before provision for income taxes		Provision for income taxes		Effective tax rate		Net income		Weighted Average Diluted shares	Diluted earnings per share
Pro Forma	$	493		$	13		$	(9	)	$	1,133		$	299		26.4	%	$	834		1,400.0	$	0.60
Reported																								$	169		$	9		$	5	$	315	$	85	27.0	%	$	230	1,417.7	$	0.16
Items Affecting Comparability:										—
Mark to market	30			—			4			(1		)	(1		)			—				—		(29		)	—			2		27		7				20			0.01
Amortization of intangibles	—			—			—			89			23					66				0.05		—			—			—		31		8				23			0.02
Amortization of deferred financing costs	(5		)	—			—			5			1					4				—		(4		)	—			—		4		1				3			—
Amortization of fair value debt adjustment	(16		)	—			—			16			4					12				0.01		(7		)	—			—		7		1				6			—
Stock compensation	—			—			—			16			3					13				0.01		—			—			—		7		2				5			—
Restructuring and integration costs	—			—			—			86			23					63				0.05		—			—			—		61		15				46			0.03
Productivity	—			—			—			27			8					19				0.01		—			—			—		9		2				7			—
Transaction costs	(1		)	—			—			3			1					2				—		(5		)	—			—		5		1				4			—
Loss on early extinguishment of debt	—			(13		)	—			13			3					10				0.01		—			(9		)	—		9		2				7			—
Provision for settlements	—			—			—			15			4					11				0.01
Tax reform	—			—			—			—			4					(4		)		—
Adjusted Pro Forma	$	501		$	—		$	(5	)	$	1,402		$	372		26.5	%	$	1,030		1,400.0	$	0.74
Nonroutine legal matters																								—			—			—		7		2				5			—
Inventory step-up																								—			—			—		3		1				2			—
Malware incident																								—			—			—		5		1				4			—
Adjusted GAAP																								$	124		$	—		$	7	$	490	$	128	26.1	%	$	362	1,417.7	$	0.25

~~Numbers~~Diluted earnings per common share may not foot due to rounding.

Table of Contents

KEURIG DR PEPPER INC.

RECONCILIATION OF SEGMENT ITEMS TO CERTAIN NON-GAAP ADJUSTED SEGMENT ITEMS

(Unaudited)


(in millions)	Reported			Items Affecting Comparability			Adjusted GAAP			Reported			Items Affecting Comparability		Adjusted GAAP
For the third quarter of 2019:
Net Sales
Coffee Systems	$	1,065		$	—		$	1,065
Packaged Beverages	1,307			—			1,307
Beverage Concentrates	360			—			360
Latin America Beverages	138			—			138
Total net sales	$	2,870		$	—		$	2,870

For the first quarter of 2020:
Income from Operations
Coffee Systems	$	310		$	57		$	367		$	272		$	75	$	347
Packaged Beverages	196			5			201			189			14		203
Beverage Concentrates	245			(1		)	244			197			—		197
Latin America Beverages	25			—			25			27			—		27
Unallocated corporate costs	(196		)	113			(83		)	(219		)	129		(90		)
Total income from operations	$	580		$	174		$	754		$	466		$	218	$	684

(in millions) Pro Forma Items Affecting Comparability Adjusted Pro Forma
For the third quarter of 2018:
Net Sales
Coffee Systems $ 1,053
$ —
$ 1,053
Packaged Beverages 1,336
—
1,336
Beverage Concentrates 331
—
331
Latin America Beverages 136
—
136
Total net sales $ 2,856
$ —
$ 2,856

Income from Operations
Coffee Systems $ 334
$ 46
$ 380
Packaged Beverages 162
2
164
Beverage Concentrates 204
—
204
Latin America Beverages 27
—
27
Unallocated corporate costs (161 ) 84
(77 )
Total income from operations $ 566
$ 132
$ 698

~~Table of Contents~~

~~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 nine months of 2019:
Net Sales
Coffee Systems $ 3,023
$ —
$ 3,023
Packaged Beverages 3,734
—
3,734
Beverage Concentrates 1,034
—
1,034
Latin America Beverages 395
—
395
Total net sales $ 8,186
$ —
$ 8,186

Income from Operations
Coffee Systems $ 890
$ 143
$ 1,033
Packaged Beverages 531
20
551
Beverage Concentrates 690
1
691
Latin America Beverages 62
(5 ) 57
Unallocated corporate costs (508 ) 253
(255 )
Total income from operations $ 1,665
$ 412
$ 2,077


(in millions)	Pro Forma			Items Affecting Comparability		Adjusted Pro Forma			Reported			Items Affecting Comparability		Adjusted GAAP
For the first nine months of 2018:
Net Sales
Coffee Systems	$	2,950		$	4	$	2,954
Packaged Beverages	3,892			—		3,892
Beverage Concentrates	979			—		979
Latin America Beverages	386			—		386
Total net sales	$	8,207		$	4	$	8,211

For the first quarter of 2019:
Income from Operations
Coffee Systems	$	862		$	134	$	996		$	293		$	42	$	335
Packaged Beverages	479			6		485			149			11		160
Beverage Concentrates	618			1		619			201			—		201
Latin America Beverages	65			—		65			11			1		12
Unallocated corporate costs	(394		)	127		(267		)	(156		)	69		(87		)
Total income from operations	$	1,630		$	268	$	1,898		$	498		$	123	$	621

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency exchange rates, interest rates and commodity prices. From time to time, we may enter into derivatives or other financial instruments to hedge or mitigate commercial risks. We do not enter into derivative instruments for speculation, investing or trading.

FOREIGN EXCHANGE RISK

The majority of our net sales, expenses and capital purchases are transacted in U.S. dollars. However, we have exposure with respect to foreign exchange rate fluctuations. Our primary exposure to foreign exchange rates is the Canadian dollar and Mexican peso against the U.S. dollar. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred. As of ~~September 30, 2019,~~March 31, 2020, the impact to our income from operations of a 10% change (up or down) in exchange rates is estimated to be an increase or decrease of approximately ~~$28~~$25 million on an annual basis.

We use derivative instruments such as foreign exchange forward contracts to manage a portion of our exposure to changes in foreign exchange rates. As of ~~September 30, 2019,~~March 31, 2020, we had derivative contracts outstanding with a notional value of ~~$467~~$471 million maturing at various dates through September 25, 2024.

INTEREST RATE RISK

We centrally manage our debt portfolio through the use of interest rate swaps and monitor our mix of fixed-rate and ~~variable rate~~variable-rate debt. As of ~~September 30, 2019,~~March 31, 2020, the carrying value of our fixed-rate debt, excluding lease obligations, was ~~$11,794~~$11,559 million and our variable-rate debt was ~~$3,114~~$2,829 million, inclusive of commercial paper.

Additionally, as of ~~September 30, 2019, the total notional value of receive-fixed, pay-variable interest rate swaps was $50 million and~~March 31, 2020, the total notional value of receive-variable, pay-fixed interest rate swaps was ~~$575~~$450 million.

The following table is an estimate of the impact to our interest rate expense based upon our variable rate debt and derivative instruments ~~and the fair value of the interest rate swaps~~ that could result from hypothetical interest rate changes during the term of the financial instruments, based on debt levels as of ~~September 30, 2019:~~March 31, 2020:




Hypothetical Change in Interest Rates⁽¹⁾		Annual Impact to Interest Expense
1-percent decrease		$2624 million decrease
1-percent increase		$2624 million increase


(1)	We pay an average floating rate, which fluctuates periodically, based on LIBOR and a credit spread, as a result of ~~certain derivative instruments and~~ variable rate debt instruments. See Notes 72 and 87 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

COMMODITY RISKS

We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. Our principal commodities risks relate to our purchases of ~~coffee beans, PET,~~ aluminum, ~~diesel fuel, corn (for high fructose corn syrup), apple juice concentrate, apples, sucrose and~~ natural gas (for use in processing and packaging)., resin, PET, corn (for high fructose corn syrup), pulp, coffee beans, diesel fuel, apple juice concentrate, apples and sucrose.

We utilize commodities derivative instruments and supplier pricing agreements to hedge the risk of adverse movements in commodity prices for limited time periods for certain commodities. As of March 31, 2020, we had derivative contracts outstanding with a notional value of $317 million maturing at various dates through June 30, 2022. The fair market value of these contracts as of ~~September 30, 2019~~March 31, 2020 was a net liability of ~~$27~~$37 million.

As of ~~September 30, 2019,~~March 31, 2020, the impact of a 10% change (up or down) in market prices for these commodities where the risk of adverse movements has not been hedged is estimated to have a $2$9 million impact to our income from operations for the remainder of the year ending December 31, ~~2019.~~2020.

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ITEM 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Based on evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange ~~Act)~~Act) our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, as of ~~September 30, 2019,~~March 31, 2020, our disclosure controls and procedures are effective to (i) provide reasonable assurance that information required to be disclosed in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified by the ~~SEC's~~SEC's rules and forms, and (ii) ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

~~CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING~~

~~As described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, the DPS Merger was completed on July 9, 2018, and represented a~~No change in internal control over financial reporting. Management continues to consolidate and integrate KDP’s system of controls. The processes and controls for significant areas including business combinations, intangibles and goodwill valuations, income taxes, treasury, consolidations and the preparation of financial statements and related disclosures, and entity level controls have been substantially impacted by the ongoing integration activities. The primary changes in these areas are related to the consolidation of process owner leadership and control owners, and where required, the modification of inputs, processes and associated systems. For all areas of change noted, management believes the control design and implementation thereof are being appropriately modified to address underlying risks. The above ongoing integration activities to KDP’sour internal control over financial reporting ~~are reasonably likely to materially affect KDP’s internal control over financial reporting~~(as defined in ~~2019.~~

~~In addition,~~Rule 13a-15(f) of the Company adopted ASC 842 as of January 1, 2019. The Company implemented a new IT system and internal controls related to the process of gathering, recording, accounting for and disclosing leases under the new standard.

~~There were no other changes~~Exchange Act) occurred during the quarter ended ~~September 30, 2019~~March 31, 2020 that ~~have~~ materially affected, or is reasonably likely to materially affect, our internal ~~controls~~control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

We are occasionally subject to litigation or other legal proceedings relating to our business.

See Note 1415 of the Notes to our Unaudited Condensed Consolidated Financial Statements for more information related to commitments and contingencies, which is incorporated herein by reference.

~~BA SPORTS NUTRITION LITIGATION~~

~~On March 6, 2019, The American Bottling Company ("ABC"), a subsidiary~~There have been no other material changes that we are aware of ~~KDP, filed suit against BA and Mike Repole~~from the legal proceedings set forth in ~~the Superior Court~~Item 3 of our Annual Report on Form 10-K for the State of Delaware. The complaint asserts claims for breach of contract and promissory estoppel against BA and asserts a claim for tortious interference against Mr. Repole, in each case in connection with BA's attempted early termination of the distribution contract between BA and ABC. The complaint seeks monetary damages, attorneys' fees and costs. ABC intends to vigorously prosecute the action. The Company is unable to predict the outcome of the lawsuit, the potential recovery, if any, associated with the resolution of the lawsuit or any potential effect it may have on the Company or its operations.year ended December 31, 2019.

ITEM 1A. Risk Factors

~~Deterioration of general macro-economic conditions~~Widespread health developments and economic uncertainty resulting from the recent global COVID-19 pandemic, could ~~have a negative impact on~~materially and adversely affect our business, financial condition and results of ~~operations and liquidity due to impacts on our suppliers, customers and operating costs.~~operations.

Our business ~~depends~~has been, and may continue to be, impacted by the fear of exposure to, or actual effects, of the COVID-19 pandemic in countries where we operate or our customers and suppliers are located, such as recommendations or mandates from governmental authorities to close businesses, limit travel, avoid large gatherings or to self-quarantine, as well as temporary closures or decreased operations of the facilities of our customers, distributors or suppliers. These impacts include, but are not limited to:

Significant reductions in demand or significant volatility in demand for one or more of our products, which may be caused by, among other things: the temporary inability of consumers to purchase our products due to illness, quarantine or other restrictions, store closures, or financial hardship, shifts in demand away from one or more of our higher priced products to lower priced products, or stockpiling or similar activity, reduced options for marketing and promotion of products or other restrictions in connection with the COVID-19 pandemic; if prolonged, such impacts can further increase the difficulty of operating our business, including accurately planning and forecasting;

Inability to meet our consumers' and customers’ needs and achieve cost targets due to disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements, such as raw materials or purchased finished goods, logistics, reduction or loss of workforce due to the insufficiency or failure of our safety protocols, or other manufacturing and distribution capability;

Failure of third parties, including those located in international locations, on ~~developing and maintaining close relationships with~~which we rely, including our suppliers, bottlers, distributors, contract manufacturers, third-party service providers, contractors, commercial banks and ~~on our suppliers’ ability and willingness~~external business partners, to ~~sell quality products~~meet their obligations to us ~~at favorable prices and terms. Many factors outside our control may harm these relationships and the ability~~ or ~~willingness of these suppliers~~ to ~~sell us products on favorable terms. Such factors include a general decline~~timely meet those obligations, or significant disruptions in the economy and economic conditions and prolonged recessionary conditions. These events could negatively affect our suppliers’ operations and make it difficult for them to obtain the credit lines or loans necessary to finance their operations in the short-term or long-term and meet our product requirements.

~~Financial or operational difficulties that some of our suppliers may face, including~~ their ability to do so, which may be caused by their own financial or operational difficulties; or

Significant changes in the conditions in markets in which we manufacture, sell or distribute our products, including quarantines, governmental or regulatory actions, closures or other restrictions that limit or close our operating and manufacturing facilities, restrict our employees’ ability to perform necessary business functions, restrict or prevent consumers from having access ~~working capital,~~to our products, or otherwise prevent our third-party bottlers, distributors, partners, suppliers, or customers from sufficiently staffing operations, including operations necessary for the production, distribution, sale, and support of our products.

All of these impacts could ~~also increase the cost of the products we purchase from them, the timing of settlement for our obligation to the supplier or~~place limitations on our ability to ~~source product from them.~~execute on our business plan and materially and adversely affect our business, financial condition and results of operations. We ~~might not be able~~continue to ~~pass our increased costs onto our customers~~monitor the situation, have actively implemented policies and procedures to address the ~~extent these difficulties impact~~situation, and as the ~~timing of settlement for our obligation~~pandemic continues to ~~the supplier,~~further unfold, we may adjust our current policies and procedures as regulations are implemented or more information and guidance become available. The impact of COVID-19 may also exacerbate other risks discussed in Item 1A of our Annual Report, any of which could have a ~~decrease in our cash flow from operations~~material effect on us. This situation is changing rapidly and additional impacts may ~~have to use our various financing arrangements for short-term liquidity needs.~~arise that we are not aware of currently.

There have been no other material changes that we are aware of from the risk factors set forth in Item 1A of our Annual ~~Report on Form 10-K for the year ended December 31, 2018.~~Report.

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ITEM 6. Exhibits



2.1	Agreement and Plan of Merger, dated as of November 21, 2016, by and among Bai Brands LLC, Dr Pepper Snapple Group, Inc., Superfruit Merger Sub, LLC and Fortis Advisors LLC, (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K (filed on November 23, 2016) and incorporated herein by reference).
2.2	Amendment No. 1, dated as of January 31, 2017, to the Agreement and Plan of Merger, dated as of November 21, 2016, by and among Bai Brands LLC, Dr Pepper Snapple Group, Inc., Superfruit Merger Sub, LLC and Fortis Advisors LLC, (filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K (filed on January 31, 2017) and incorporated herein by reference).
3.1	Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference).
3.2	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 17, 2012 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (filed July 26, 2012) and incorporated herein by reference).
3.3	Certificate of Second Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 19, 2016 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed May 20, 2016) and incorporated herein by reference).
3.4	Certificate of Third Amendment to the Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of July 9, 2018 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed July 9, 2018) and incorporate herein by reference).
3.5	Amended and Restated By-Laws of Keurig Dr Pepper Inc. effective as of July 9, 2018 (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K (filed July 9, 2018) and incorporated herein by reference.
4.1	Indenture, dated April 30, 2008, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.2	Form of 7.45% Senior Notes due 2038 (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.3	Registration Rights Agreement, dated April 30, 2008, between Dr Pepper Snapple Group, Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, UBS Securities LLC, BNP Paribas Securities Corp., Mitsubishi UFJ Securities International plc, Scotia Capital (USA) Inc., SunTrust Robinson Humphrey, Inc., Wachovia Capital Markets, LLC and TD Securities (USA) LLC (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.4	Registration Rights Agreement Joinder, dated May 7, 2008, by the subsidiary guarantors named therein (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference).
4.5	Supplemental Indenture, dated May 7, 2008, among Dr Pepper Snapple Group, Inc., the subsidiary guarantors named therein and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference).
4.6	Second Supplemental Indenture dated March 17, 2009, to be effective as of December 31, 2008, among Splash Transport, Inc., as a subsidiary guarantor, Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company's Annual Report on Form 10-K (filed on March 26, 2009) and incorporated herein by reference).
4.7	Third Supplemental Indenture, dated October 19, 2009, among 234DP Aviation, LLC, as a subsidiary guarantor; Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q (filed November 5, 2009) and incorporated herein by reference).
4.8	Fourth Supplemental Indenture, dated as of January 31, 2017, among Bai Brands LLC, a New Jersey limited liability company, 184 Innovations Inc., a Delaware corporation (each as a new subsidiary guarantors under the Indenture dated April 30, 2008 (as referenced in Item 4.1 in this Exhibit Index), Dr Pepper Snapple Group, Inc., each other then-existing Guarantor under the Indenture and Wells Fargo, National Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed February 2, 2017) and incorporated herein by reference).
4.9	Indenture, dated as of December 15, 2009, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference).
4.10	Second Supplemental Indenture, dated as of January 11, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on January 11, 2011) and incorporated herein by reference).
4.11	Third Supplemental Indenture, dated as of November 15, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).
4.12	2.60% Senior Note due 2019 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).
~~4.13~~	3.20% Senior Note due 2021 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).

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~~4.14~~4.13	Fourth Supplemental Indenture, dated as of November 20, 2012, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference).

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~~4.15~~4.14	2.00% Senior Note due 2020 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference).
~~4.16~~4.15	2.70% Senior Note due 2022 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference).
~~4.17~~4.16	Fifth Supplemental Indenture, dated as of November 9, 2015, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference).
~~4.18~~4.17	3.40% Senior Note due 2025 (in global form), dated November 9, 2015, in the principal amount of $500,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference).
~~4.19~~4.18	4.50% Senior Note due 2045 (in global form), dated November 9, 2015, in the principal amount of $250,000,000 (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference).
~~4.20~~4.19	Sixth Supplemental Indenture, dated as of September 16, 2016, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on September 16, 2016) and incorporated herein by reference).
~~4.21~~4.20	2.55% Senior Note due 2026 (in global form), dated September 16, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on September 16, 2016) and incorporated herein by reference).
~~4.22~~4.21	Seventh Supplemental Indenture, dated as of December 14, 2016, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
~~4.23~~4.22	2.53% Senior Note due 2021 (in global form), dated December 14, 2016, in the principal amount of $250,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
~~4.24~~4.23	3.13% Senior Note due 2023 (in global form), dated December 14, 2016, in the principal amount of $500,000,000 (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
~~4.25~~4.24	3.43% Senior Note due 2027 (in global form), dated December 14, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
~~4.26~~4.25	4.42% Senior Note due 2046 (in global form), dated December 14, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
~~4.27~~4.26	Eighth Supplemental Indenture, dated as of January 31, 2017, among Bai Brands LLC, a New Jersey limited liability company, 184 Innovations Inc., a Delaware corporation (each as a new subsidiary guarantor under the Indenture dated April 30, 2008 (as referenced in Item 4.1 in this Exhibit Index), Dr Pepper Snapple Group, Inc., each other then-existing Guarantor under the Indenture) and Wells Fargo, National Bank, N.A., as trustee (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on February 2, 2017) and incorporated herein by reference).
~~4.28~~4.27	Ninth Supplemental Indenture, dated as of June 15, 2017, among Dr Pepper Snapple Group, Inc., the guarantors party thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on June 15, 2017) and incorporated herein by reference).
~~4.29~~4.28	Investor Rights Agreement by and among Keurig Dr Pepper Inc. and The Holders Listed on Schedule A thereto, dated as of July 9, 2018 (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
~~4.30~~4.29	Base Indenture, dated as of May 25, 2018 between Maple Escrow Subsidiary and Wells Fargo Bank, N.A. as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
~~4.31~~4.30	First Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2021 Notes (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
~~4.32~~4.31	Second Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2023 Notes (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
~~4.33~~4.32	Third Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2025 Notes (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).

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~~4.34~~4.33	Fourth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2028 Notes (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).

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~~4.35~~4.34	Fifth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2038 Notes (filed as Exhibit 4.6 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
~~4.36~~4.35	Sixth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2048 Notes (filed as Exhibit 4.7 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
~~4.37~~4.36	Seventh Supplemental Indenture, dated as of July 9, 2018, among Keurig Dr Pepper Inc., the subsidiary guarantors thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
~~4.38~~4.37	Registration Rights Agreement, dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., as representative of the several purchasers of the Notes (filed as Exhibit 4.9 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
~~4.39~~4.38	Joinder to the Registration Rights Agreement, dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., as representative of the several purchasers of the Notes (filed as Exhibit 4.10 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.39	Description of registered securities (filed as Exhibit 4.40 to the Company's Annual Report on Form 10-K (filed on February 27, 2020) and incorporated herein by reference).
4.40	Tenth Supplemental Indenture (including 3.20% Senior Notes Due 2030 and 3.80% Senior Notes Due 2050 (in global form)), dated as of April 13, 2020, among Keurig Dr Pepper Inc., the subsidiary guarantors thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on April 13, 2020) and incorporated herein by reference).
10.1	Term Loan Agreement, dated as of February 8, 2019, among Keurig Dr Pepper Inc., the banks party thereto and JPMorgan Chase, Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on February 11, 2019) and incorporated herein by reference).
10.2	Credit Agreement, dated as of May 29, 2019, among Keurig Dr Pepper Inc., the banks party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on May 29, 2019) and incorporated herein by reference).
10.3	Amended and Restated Employment Agreement, dated as of July 2, 2018, by and between Keurig Green Mountain, Inc. and Robert J. Gamgort (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
10.4	Employment Agreement, dated as of April 12, 2016, by and between Keurig Green Mountain, Inc. and Ozan Dokmecioglu (filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
10.5	Consulting Agreement, dated July 12, 2019, by and between Keurig Dr Pepper Inc. and Rodger Collins (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on July 16, 2019) and incorporated herein by reference). ++
~~10.6~~	Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
~~10.7~~10.6	Matching Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
~~10.8~~10.7	Directors' Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
~~10.9~~10.8	Keurig Dr Pepper Inc. Omnibus Stock Incentive Plan of 2019 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on June 11, 2019) and incorporated herein by reference).++
~~10.10~~10.9	Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019 (filed as Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q (filed on August 8, 2019) and incorporated herein by reference).++
~~10.11~~10.10	Matching Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019 (filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q (filed on August 8, 2019) and incorporated herein by reference).++
10.11	Keurig Dr Pepper Inc. Severance Pay Plan for Executives, effective as of January 1, 2020 (filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K (filed on February 27, 2020) and incorporated herein by reference).++
10.12	Credit Agreement, dated as of April 14, 2020, among Keurig Dr Pepper Inc., the banks party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on April 15, 2020) and incorporated herein by reference).
22.1*	List of Guarantor Subsidiaries
31.1*	Certification of Chief Executive Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act.
31.2*	Certification of Chief Financial Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act.

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32.1**	Certification of Chief Executive Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
32.2**	Certification of Chief Financial Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

~~Table of Contents~~



101*	The following financial information from Keurig Dr Pepper Inc.'s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2019,~~March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statement of Changes in Stockholders' Equity, and (vi) the Notes to Condensed Consolidated Financial Statements. The Instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104*	The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL.

* Filed herewith.

** Furnished herewith.

++ Indicates a management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Keurig Dr Pepper Inc.

	By:	/s/ Ozan Dokmecioglu

	Name:	Ozan Dokmecioglu
	Title:	Chief Financial Officer of Keurig Dr Pepper Inc.
		(Principal Financial Officer)
Date: ~~November 7, 2019~~April 30, 2020

7849



(in millions)	Initial Allocation of Consideration			Measurement Period Adjustments			Allocation of Consideration as of September 30, 2019
Cash and cash equivalents	$	147		$	—		$	147
Investments in unconsolidated affiliates	90			—			90
Property, plant and equipment⁽¹⁾	1,549			(74		)	1,475
Other intangible assets	20,404			(326		)	20,078
Long-term obligations	(4,049		)	—			(4,049		)
Finance leases	(214		)	9			(205		)
Acquired assets, net of assumed liabilities⁽²⁾	107			(26		)	81
Deferred tax liabilities, net of deferred tax assets⁽³⁾	(4,959		)	(82		)	(5,041		)
Goodwill	9,407			499			9,906
Total consideration exchanged	$	22,482		$	—		$	22,482
Fair value of stock and replacement equity awards not converted to cash	3,643			—			3,643
Acquisition of business	$	18,839		$	—		$	18,839



(in millions)	Fair Value		Estimated Life (in years)
Brands⁽¹⁾	$	19,556	n/a
Contractual arrangements⁽²⁾	127		n/a
Customer relationships⁽³⁾	390		10-40
Favorable leases⁽⁴⁾	5		5-12
Total other intangible assets	$	20,078



	Third Quarter		First Nine Months
(Unaudited, in millions)	2018		2018
Net sales	$	2,856	$	8,207
Net income	300		834



(in millions)	Operating Leases		Capital Leases			Financing Obligations
2019	$	58	$	35		$	10
2020	53		34			10
2021	44		33			10
2022	34		33			10
2023	25		30			10
Thereafter	98		189			62
Total future minimum lease payments	$	312	354			112
Less: imputed interest			(98		)	(37		)
Present value of minimum lease payments			$	256		$	75



(in millions)	Workforce Reduction Costs			Other⁽¹⁾			Total
Balance as of December 31, 2018	$	28		$	1		$	29
Charges to expense	26			—			26
Cash payments	(39		)	—			(39		)
Non-cash adjustment items	—			(1		)	(1		)
Balance as of September 30, 2019	$	15		$	—		$	15



(in millions)	Amount Utilized		Balances Available
KDP Revolver	$	—	$	2,400
Letters of credit	—		200



	For the First Nine Months of 2018
(in millions)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Operating Activities
Net cash provided by operating activities
Previously reported	$	(29,645	)	$	25,450		$	5,160		$	98		$	1,063
Adjustment	29,818			(25,075		)	(4,610		)	(133		)	—
Revised	$	173		$	375		$	550		$	(35	)	$	1,063
Investing Activities
Acquisitions of businesses
Previously reported	$	10,642		$	(25,208	)	$	(21,674	)	$	17,116		$	(19,124	)
Adjustment	(29,766		)	25,208			21,674			(17,116		)	—
Revised	$	(19,124	)	$	—		$	—		$	—		$	(19,124	)
Net cash used in investing activities
Previously reported	$	8,037		$	(25,555	)	$	(21,770	)	$	20,218		$	(19,070	)
Adjustment	(29,766		)	25,208			21,674			(17,116		)	—
Revised	$	(21,729	)	$	(347	)	$	(96	)	$	3,102		$	(19,070	)
Financing Activities
Inter-company contributions
Previously reported	$	9,162		$	—		$	—		$	(9,162	)	$	—
Adjustment	8,000			—			(17,116		)	9,116			—
Revised	$	17,162		$	—		$	(17,116	)	$	(46	)	$	—
Proceeds from senior unsecured notes
Previously reported	$	8,000		$	—		$	8,000		$	(8,000	)	$	8,000
Adjustment	(8,000		)	—			—			8,000			—
Revised	$	—		$	—		$	8,000		$	—		$	8,000
Proceeds from structured payables
Previously reported	$	—		$	133		$	432		$	(133	)	$	432
Adjustment	—			(133		)	—			133			—
Revised	$	—		$	—		$	432		$	—		$	432
Net cash provided by (used in) financing activities
Previously reported	$	21,623		$	126		$	16,651		$	(20,316	)	$	18,084
Adjustment	—			(133		)	(17,116		)	17,249			—
Revised	$	21,623		$	(7	)	$	(465	)	$	(3,067	)	$	18,084
Effect of exchange rate changes on cash and cash equivalents
Previously reported	$	—		$	—		$	(50	)	$	—		$	(50	)
Adjustment	(52		)	—			52			—			—
Revised	$	(52	)	$	—		$	2		$	—		$	(50	)



	Condensed Consolidating Statements of Income
	For the Third Quarter of 2019
(in millions)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	—		$	1,648		$	1,256		$	(34	)	$	2,870
Cost of sales	—			656			623			(34		)	1,245
Gross profit	—			992			633			—			1,625
Selling, general and administrative expenses	—			660			352			—			1,012
Other operating expense (income), net	—			4			29			—			33
Income from operations	—			328			252			—			580
Interest expense	289			98			18			(247		)	158
Interest expense - related party	—			—			—			—			—
Loss on early extinguishment of debt	—			—			—			—			—
Other expense (income), net	(99		)	(137		)	(2		)	247			9
Income before provision for income taxes	(190		)	367			236			—			413
Provision for income taxes	(53		)	93			69			—			109
Income before equity in earnings of consolidated subsidiaries	(137		)	274			167			—			304
Equity in earnings of consolidated subsidiaries	441			26			—			(467		)	—
Net income	304			300			167			(467		)	304
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—			—			—			—			—
Net income attributable to KDP	$	304		$	300		$	167		$	(467	)	$	304



	Condensed Consolidating Statements of Income
	For the Third Quarter of 2018
(in millions)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	—		$	1,540		$	1,225		$	(33	)	$	2,732
Cost of sales	—			774			626			(33		)	1,367
Gross profit	—			766			599			—			1,365
Selling, general and administrative expenses	1			590			437			—			1,028
Other operating expense, net	(6		)	—			(2		)	—			(8		)
Income from operations	5			176			164			—			345
Interest expense	220			31			31			(110		)	172
Interest expense - related party	—			—			—			—			—
Loss on early extinguishment of debt	—			—			11			—			11
Other expense (income), net	(46		)	(84		)	(13		)	110			(33		)
Income before provision for income taxes	(169		)	229			135			—			195
Provision for income taxes	(46		)	68			24			—			46
Income before equity in earnings of consolidated subsidiaries	(123		)	161			111			—			149
Equity in earnings of consolidated subsidiaries	271			16			—			(287		)	—
Net income	148			177			111			(287		)	149
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—			—			—			—			—
Net income attributable to KDP	$	148		$	177		$	111		$	(287	)	$	149



	Condensed Consolidating Statements of Income
	For the First Nine Months of 2019
(in millions)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	—		$	4,718		$	3,601		$	(133	)	$	8,186
Cost of sales	—			1,888			1,782			(133		)	3,537
Gross profit	—			2,830			1,819			—			4,649
Selling, general and administrative expenses	5			1,890			1,056			—			2,951
Other operating expense (income), net	—			(6		)	39			—			33
Income from operations	(5		)	946			724			—			1,665
Interest expense	687			105			75			(370		)	497
Interest expense - related party	—			—			—			—			—
Loss on early extinguishment of debt	9			—			—			—			9
Other (income) expense, net	(350		)	10			(15		)	370			15
Income before provision for income taxes	(351		)	831			664			—			1,144
Provision for income taxes	(107		)	219			184			—			296
Income before equity in earnings of consolidated subsidiaries	(244		)	612			480			—			848
Equity in earnings of consolidated subsidiaries	1,092			40			—			(1,132		)	—
Net income	848			652			480			(1,132		)	848
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—			—			—			—			—
Net income attributable to KDP	$	848		$	652		$	480		$	(1,132	)	$	848



	Condensed Consolidating Balance Sheets
	As of September 30, 2019
(in millions)	Parent		Guarantors		Non-Guarantors		Eliminations			Total
Current assets:
Cash and cash equivalents	$	—	$	21	$	53	$	—		$	74
Restricted cash and restricted cash equivalents	25		—		3		—			28
Trade accounts receivable, net	—		594		496		—			1,090
Related party receivable	137		176		14		(327		)	—
Inventories	—		247		504		—			751
Prepaid expenses and other current assets	661		207		117		(659		)	326
Total current assets	823		1,245		1,187		(986		)	2,269
Property, plant and equipment, net	—		1,252		984		—			2,236
Investments in consolidated subsidiaries	41,372		4,888		—		(46,260		)	—
Investments in unconsolidated affiliates	—		68		96		—			164
Goodwill	—		8,239		11,873		—			20,112
Other intangible assets, net	—		16,855		7,176		—			24,031
Long-term receivable, related parties	5,160		9,068		—		(14,228		)	—
Other non-current assets	62		248		251		—			561
Deferred tax assets	—		—		27		—			27
Total assets	$	47,417	$	41,863	$	21,594	$	(61,474	)	$	49,400

Current liabilities:
Accounts payable	$	—	$	1,046	$	1,930	$	—		$	2,976
Accrued expenses	170		650		246		—			1,066
Structured payables	—		158		180		—			338
Related party payable	74		44		209		(327		)	—
Short-term borrowings and current portion of long-term obligations	1,761		—		—		—			1,761
Other current liabilities	235		611		222		(659		)	409
Total current liabilities	2,240		2,509		2,787		(986		)	6,550
Long-term obligations to third parties	13,147		—		—		—			13,147
Long-term obligations to related parties	9,037		3,471		1,720		(14,228		)	—
Deferred tax liabilities	41		4,118		1,863		—			6,022
Other non-current liabilities	38		502		227		—			767
Total liabilities	24,503		10,600		6,597		(15,214		)	26,486
Total stockholders' equity	22,914		31,263		14,997		(46,260		)	22,914
Total liabilities and stockholders' equity	$	47,417	$	41,863	$	21,594	$	(61,474	)	$	49,400



	Condensed Consolidating Balance Sheets
	As of December 31, 2018
(in millions)	Parent		Guarantors		Non-Guarantors		Eliminations			Total
Current assets:
Cash and cash equivalents	$	—	$	18	$	65	$	—		$	83
Restricted cash and restricted cash equivalents	42		3		1		—			46
Trade accounts receivable, net	—		596		554		—			1,150
Related party receivable	189		71		76		(336		)	—
Inventories	—		226		400		—			626
Prepaid expenses and other current assets	569		110		132		(557		)	254
Total current assets	800		1,024		1,228		(893		)	2,159
Property, plant and equipment, net	—		1,351		959		—			2,310
Investments in consolidated subsidiaries	40,119		4,882		—		(45,001		)	—
Investments in unconsolidated affiliates	—		63		123		—			186
Goodwill	50		8,371		11,590		—			20,011
Other intangible assets, net	—		16,583		7,384		—			23,967
Long-term receivable, related parties	5,503		7,827		—		(13,330		)	—
Other non-current assets	64		41		154		—			259
Deferred tax assets	—		—		26		—			26
Total assets	$	46,536	$	40,142	$	21,464	$	(59,224	)	$	48,918

Current liabilities:
Accounts payable	$	—	$	497	$	1,803	$	—		$	2,300
Accrued expenses	78		610		324		—			1,012
Structured payables	—		47		479		—			526
Related party payable	65		106		165		(336		)	—
Short-term borrowings and current portion of long-term obligations	1,458		—		—		—			1,458
Other current liabilities	278		626		59		(557		)	406
Total current liabilities	1,879		1,886		2,830		(893		)	5,702
Long-term obligations to third parties	14,201		—		—		—			14,201
Long-term obligations to related parties	7,827		3,369		2,134		(13,330		)	—
Deferred tax liabilities	46		4,075		1,802		—			5,923
Other non-current liabilities	50		337		172		—			559
Total liabilities	24,003		9,667		6,938		(14,223		)	26,385
Total stockholders' equity	22,533		30,475		14,526		(45,001		)	22,533
Total liabilities and stockholders' equity	$	46,536	$	40,142	$	21,464	$	(59,224	)	$	48,918



	Condensed Consolidating Statements of Cash Flows
	For the First Nine Months of 2018
	(Revised)
(in millions)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Operating activities:
Net cash provided by operating activities	$	173		$	375		$	550		$	(35	)	1,063
Investing activities:
Acquisitions of businesses	(19,124		)	—			—			—			(19,124		)
Cash acquired in acquisitions	—			116			34			—			150
Issuance of related party note receivable	(2,606		)	(461		)	(6		)	3,067			(6		)
Investments in unconsolidated affiliates	—			(1		)	(22		)	—			(23		)
Proceeds from capital distributions from investments in unconsolidated and consolidated affiliates	—			36			(35		)	35			36
Purchases of property, plant and equipment	—			(37		)	(67		)	—			(104		)
Proceeds from sales of property, plant and equipment	1			—			—			—			1
Net cash used in investing activities	(21,729		)	(347		)	(96		)	3,102			(19,070		)
Financing activities:
Proceeds from (payments of) related party notes	461			—			2,606			(3,067		)	—
Proceeds from issuance of common stock private placement	—			—			9,000			—			9,000
Inter-company contributions	17,162			—			(17,116		)	(46		)	—
Proceeds from unsecured credit facility	1,900			—			—			—			1,900
Proceeds from senior unsecured notes	—			—			8,000			—			8,000
Proceeds from term loan	2,700			—			—			—			2,700
Net issuance of commercial paper	1,386			—			—			—			1,386
Proceeds from structured payables	—			—			432			—			432
Repayment of unsecured credit facility	(1,900		)	—			—			—			(1,900		)
Repayment of term loan	(34		)	—			(3,329		)	—			(3,363		)
Payments on finance leases	—			(6		)	(14		)	—			(20		)
Deferred financing charges paid	(55		)	—			(40		)	46			(49		)
Cash contributions from redeemable non-controlling interest shareholders	—			—			19			—			19
Cash dividends paid	—			—			(23		)	—			(23		)
Other, net	3			(1		)	—			—			2
Net cash provided by (used in) financing activities	21,623			(7		)	(465		)	(3,067		)	18,084
Cash and cash equivalents — net change from:
Operating, investing and financing activities	67			21			(11		)	—			77
Effect of exchange rate changes on cash and cash equivalents	(52		)	—			2			—			(50		)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	—			—			95			—			95
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	15		$	21		$	86		$	—		$	122



(in millions, except per share data)	Reported KDP⁽¹⁾			DPS July 1 - July 8, 2018⁽²⁾			Pro Forma Adjustments⁽³⁾			Pro Forma Combined
Net sales	$	2,732		$	125		$	(1	)	$	2,856
Cost of sales	1,367			58			(127		)	1,298
Gross profit	1,365			67			126			1,558
Selling, general and administrative expenses	1,028			237			(265		)	1,000
Other operating expense (income), net	(8		)	—			—			(8		)
Income from operations	345			(170		)	391			566
Interest expense	172			4			2			178
Loss on early extinguishment of debt	11			—			—			11
Other income, net	(33		)	(1		)	—			(34		)
Income before provision for income taxes	195			(173		)	389			411
Provision for income taxes	46			(55		)	120			111
Net income	149			(118		)	269			300
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—			—			—			—
Net income attributable to KDP	$	149		$	(118	)	$	269		$	300
Earnings per common share:
Basic	$	0.11								$	0.22
Diluted	0.11									$	0.21
Weighted average common shares outstanding:
Basic	1,361.8						27.2			1,389.0
Diluted	1,373.6						27.1			1,400.7



(in millions, except per share data)	Reported KDP⁽¹⁾			DPS Jan 1 - July 8, 2018⁽²⁾			Pro Forma Adjustments⁽³⁾			Pro Forma Combined
Net sales	$	4,629		$	3,605		$	(27	)	$	8,207
Cost of sales	2,292			1,529			(155		)	3,666
Gross profit	2,337			2,076			128			4,541
Selling, general and administrative expenses	1,649			1,639			(364		)	2,924
Other operating expense (income), net	(2		)	(14		)	3			(13		)
Income from operations	690			451			489			1,630
Interest expense	221			88			184			493
Interest expense - related party	51			—			(51		)	—
Loss on early extinguishment of debt	13			—			—			13
Other (income) expense, net	(28		)	5			14			(9		)
Income before provision for income taxes	433			358			342			1,133
Provision for income taxes	110			82			107			299
Net income	323			276			235			834
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	3			—			(3		)	—
Net income attributable to KDP	$	320		$	276		$	238		$	834
Earnings per common share:
Basic	$	0.33								$	0.60
Diluted	0.32									0.60
Weighted average common shares outstanding:
Basic	983.0						406.0			1,389.0
Diluted	994.1						405.9			1,400.0