PART I - FINANCIAL INFORMATION

ITEM 1.Financial Statements (Unaudited)

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


		Second Quarter				First Six Months					First Quarter
(in millions, except per share data)	(in millions, except per share data)	2021		2020		2021		2020		(in millions, except per share data)		2022		2021
Net sales	Net sales	$	3,140	$	2,864	$	6,042	$	5,477	Net sales		$	3,078	$	2,902
Cost of sales	Cost of sales	1,370		1,302		2,672		2,463		Cost of sales		1,428		1,302
Gross profit	Gross profit	1,770		1,562		3,370		3,014		Gross profit		1,650		1,600
Selling, general and administrative expenses	Selling, general and administrative expenses	1,039		1,001		2,000		2,029		Selling, general and administrative expenses		1,018		961
Gain on litigation settlement										Gain on litigation settlement		(299)		—
Other operating income, net	Other operating income, net	(3)		0		(4)		(42)		Other operating income, net		(35)		(1)
Income from operations	Income from operations	734		561		1,374		1,027		Income from operations		966		640
Interest expense	Interest expense	125		157		265		310		Interest expense		188		140
Loss on early extinguishment of debt	Loss on early extinguishment of debt	0		2		105		4		Loss on early extinguishment of debt		48		105
Gain on sale of equity method investment										Gain on sale of equity method investment		(50)		—
Impairment of investments and note receivable	Impairment of investments and note receivable	0		0		0		86		Impairment of investments and note receivable		6		—
Other (income) expense, net		(4)		(4)		(7)		16
Other expense (income), net										Other expense (income), net		9		(3)
Income before provision for income taxes	Income before provision for income taxes	613		406		1,011		611		Income before provision for income taxes		765		398
Provision for income taxes	Provision for income taxes	165		108		238		157		Provision for income taxes		180		73
Net income		448		298		773		454
Less: Net income attributable to non-controlling interest		0		0		0		0
Net income including non-controlling interest										Net income including non-controlling interest		585		325
Less: Net loss attributable to non-controlling interest										Less: Net loss attributable to non-controlling interest		—		—
Net income attributable to KDP	Net income attributable to KDP	$	448	$	298	$	773	$	454	Net income attributable to KDP		$	585	$	325

Earnings per common share:	Earnings per common share:									Earnings per common share:
Basic	Basic	$	0.32	$	0.21	$	0.55	$	0.32	Basic		$	0.41	$	0.23
Diluted	Diluted	0.31		0.21		0.54		0.32		Diluted		0.41		0.23
Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	1,417.4		1,407.2		1,413.4		1,407.1		Basic		1,418.2		1,409.2
Diluted	Diluted	1,428.1		1,421.5		1,426.9		1,420.8		Diluted		1,429.7		1,425.6

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

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


		Second Quarter				First Six Months					First Quarter
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)		2022		2021
Net income		$	448	$	298	$	773	$	454
Net income including non-controlling interest										Net income including non-controlling interest		$	585	$	325
Other comprehensive income	Other comprehensive income									Other comprehensive income
Foreign currency translation adjustments	Foreign currency translation adjustments	112		151		128		(432)		Foreign currency translation adjustments		99		16
Net change in pension and post-retirement liability, net of tax of $0, $0, $0 and $0, respectively		0		0		0		(1)
Net change in cash flow hedges, net of tax of $(48), $0, $(26) and $0, respectively		(148)		1		(77)		1
Total other comprehensive income (loss)		(36)		152		51		(432)
Comprehensive income		412		450		824		22

Net change in cash flow hedges, net of tax of $48 and $22, respectively										Net change in cash flow hedges, net of tax of $48 and $22, respectively		142		71
Total other comprehensive income										Total other comprehensive income		241		87
Comprehensive income including non-controlling interest										Comprehensive income including non-controlling interest		826		412
Less: Comprehensive income attributable to non-controlling interest	Less: Comprehensive income attributable to non-controlling interest	0		0		0		0		Less: Comprehensive income attributable to non-controlling interest		—		—
Comprehensive income attributable to KDP	Comprehensive income attributable to KDP	$	412	$	450	$	824	$	22	Comprehensive income attributable to KDP		$	826	$	412

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

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


		June 30,		December 31,			March 31,		December 31,
(in millions, except share and per share data)	(in millions, except share and per share data)	2021		2020		(in millions, except share and per share data)	2022		2021
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	167	$	240	Cash and cash equivalents	$	592	$	567
Restricted cash and restricted cash equivalents		3		15
Restricted cash and cash equivalents						Restricted cash and cash equivalents	2		1
Trade accounts receivable, net	Trade accounts receivable, net	1,075		1,048		Trade accounts receivable, net	1,214		1,148
Inventories	Inventories	897		762		Inventories	1,045		894
Prepaid expenses and other current assets	Prepaid expenses and other current assets	474		323		Prepaid expenses and other current assets	637		447
Total current assets	Total current assets	2,616		2,388		Total current assets	3,490		3,057
Property, plant and equipment, net	Property, plant and equipment, net	2,420		2,212		Property, plant and equipment, net	2,436		2,494
Investments in unconsolidated affiliates	Investments in unconsolidated affiliates	86		88		Investments in unconsolidated affiliates	29		30
Goodwill	Goodwill	20,272		20,184		Goodwill	20,243		20,182
Other intangible assets, net	Other intangible assets, net	23,983		23,968		Other intangible assets, net	23,889		23,856
Other non-current assets	Other non-current assets	926		894		Other non-current assets	1,119		937
Deferred tax assets	Deferred tax assets	41		45		Deferred tax assets	38		42
Total assets	Total assets	$	50,344	$	49,779	Total assets	$	51,244	$	50,598
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity					Liabilities and Stockholders' Equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	3,976	$	3,740	Accounts payable	$	4,510	$	4,316
Accrued expenses	Accrued expenses	1,019		1,040		Accrued expenses	1,028		1,110
Structured payables	Structured payables	144		153		Structured payables	143		142
Short-term borrowings and current portion of long-term obligations	Short-term borrowings and current portion of long-term obligations	1,323		2,345		Short-term borrowings and current portion of long-term obligations	—		304
Other current liabilities	Other current liabilities	455		416		Other current liabilities	767		613
Total current liabilities	Total current liabilities	6,917		7,694		Total current liabilities	6,448		6,485
Long-term obligations	Long-term obligations	11,721		11,143		Long-term obligations	11,584		11,578
Deferred tax liabilities	Deferred tax liabilities	5,972		5,993		Deferred tax liabilities	6,054		5,986
Other non-current liabilities	Other non-current liabilities	1,491		1,119		Other non-current liabilities	1,647		1,577
Total liabilities	Total liabilities	26,101		25,949		Total liabilities	25,733		25,626
Commitments and contingencies	Commitments and contingencies	0		0		Commitments and contingencies	0		0
Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, 0 shares issued		0		0
Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,417,441,055 and 1,407,260,676 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		14		14
Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued						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, 1,418,462,239 and 1,418,119,197 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively						Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,418,462,239 and 1,418,119,197 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	14		14
Additional paid-in capital	Additional paid-in capital	21,743		21,677		Additional paid-in capital	21,764		21,785
Retained earnings	Retained earnings	2,357		2,061		Retained earnings	3,518		3,199
Accumulated other comprehensive income		128		77
Accumulated other comprehensive income (loss)						Accumulated other comprehensive income (loss)	215		(26)
Total stockholders' equity	Total stockholders' equity	24,242		23,829		Total stockholders' equity	25,511		24,972
Non-controlling interest	Non-controlling interest	1		1		Non-controlling interest	—		—
Total equity	Total equity	24,243		23,830		Total equity	25,511		24,972
Total liabilities and equity	Total liabilities and equity	$	50,344	$	49,779	Total liabilities and equity	$	51,244	$	50,598

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

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


		First Six Months					First Quarter
(in millions)	(in millions)	2021		2020		(in millions)	2022		2021
Operating activities:	Operating activities:					Operating activities:
Net income		$	773	$	454
Net income attributable to KDP						Net income attributable to KDP	$	585	$	325
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	Depreciation expense	206		183		Depreciation expense	106		102
Amortization of intangibles	Amortization of intangibles	67		66		Amortization of intangibles	34		33
Other amortization expense	Other amortization expense	80		76		Other amortization expense	42		40
Provision for sales returns	Provision for sales returns	32		20		Provision for sales returns	12		19
Deferred income taxes	Deferred income taxes	(12)		(29)		Deferred income taxes	8		11
Employee stock-based compensation expense	Employee stock-based compensation expense	48		42		Employee stock-based compensation expense	(15)		25
Loss on early extinguishment of debt	Loss on early extinguishment of debt	105		4		Loss on early extinguishment of debt	48		105

Gain on sale of equity method investment						Gain on sale of equity method investment	(50)		—
Gain on disposal of property, plant and equipment	Gain on disposal of property, plant and equipment	(4)		(40)		Gain on disposal of property, plant and equipment	(38)		(1)
Unrealized (gain) loss on foreign currency		(15)		12
Unrealized (gain) loss on derivatives		(72)		76
Unrealized gain on foreign currency						Unrealized gain on foreign currency	(11)		(10)
Unrealized gain on derivatives						Unrealized gain on derivatives	—		(41)
Equity in loss of unconsolidated affiliates	Equity in loss of unconsolidated affiliates	1		18		Equity in loss of unconsolidated affiliates	3		—
Impairment on investments and note receivable of unconsolidated affiliate	Impairment on investments and note receivable of unconsolidated affiliate	0		86		Impairment on investments and note receivable of unconsolidated affiliate	6		—
Other, net	Other, net	3		36		Other, net	13		15
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Trade accounts receivable	Trade accounts receivable	(41)		58		Trade accounts receivable	(73)		(37)
Inventories	Inventories	(131)		(101)		Inventories	(147)		(77)
Income taxes receivable and payables, net	Income taxes receivable and payables, net	(65)		69		Income taxes receivable and payables, net	135		25
Other current and non-current assets	Other current and non-current assets	(131)		(234)		Other current and non-current assets	(284)		(295)
Accounts payable and accrued expenses	Accounts payable and accrued expenses	293		260		Accounts payable and accrued expenses	151		121
Other current and non-current liabilities	Other current and non-current liabilities	2		6		Other current and non-current liabilities	138		186
Net change in operating assets and liabilities	Net change in operating assets and liabilities	(73)		58		Net change in operating assets and liabilities	(80)		(77)
Net cash provided by operating activities	Net cash provided by operating activities	1,139		1,062		Net cash provided by operating activities	663		546
Investing activities:	Investing activities:					Investing activities:

Proceeds from sale of investment in unconsolidated affiliates						Proceeds from sale of investment in unconsolidated affiliates	50		—
Purchases of property, plant and equipment	Purchases of property, plant and equipment	(204)		(276)		Purchases of property, plant and equipment	(109)		(95)
Proceeds from sales of property, plant and equipment	Proceeds from sales of property, plant and equipment	15		202		Proceeds from sales of property, plant and equipment	78		7
Purchases of intangibles	Purchases of intangibles	(12)		(15)		Purchases of intangibles	(10)		(12)
Issuance of related party note receivable	Issuance of related party note receivable	(2)		(6)		Issuance of related party note receivable	(6)		—
Investments in unconsolidated affiliates						Investments in unconsolidated affiliates	(3)		—
Other, net	Other, net	3		3		Other, net	3		1
Net cash used in investing activities		$	(200)	$	(92)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	$	3	$	(99)

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

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED, CONTINUED)


		First Six Months					First Quarter
(in millions)	(in millions)	2021		2020		(in millions)	2022		2021
Financing activities:	Financing activities:					Financing activities:
Proceeds from issuance of Notes	Proceeds from issuance of Notes	$	2,150	$	1,500	Proceeds from issuance of Notes	$	—	$	2,150
Repayments of Notes	Repayments of Notes	(3,595)		(250)		Repayments of Notes	(201)		(1,845)
Proceeds from issuance of commercial paper	Proceeds from issuance of commercial paper	2,776		5,518		Proceeds from issuance of commercial paper	—		120
Repayments of commercial paper	Repayments of commercial paper	(1,453)		(6,354)		Repayments of commercial paper	(149)		(120)
Proceeds from KDP Revolver		0		1,850
Repayments of KDP Revolver		0		(1,850)
Proceeds from sale of stock by JAB		0		22

Repayments of 2019 KDP Term Loan	Repayments of 2019 KDP Term Loan	(425)		(730)		Repayments of 2019 KDP Term Loan	—		(425)
Proceeds from structured payables	Proceeds from structured payables	73		86		Proceeds from structured payables	38		35
Repayments of structured payables	Repayments of structured payables	(81)		(227)		Repayments of structured payables	(37)		(41)
Cash dividends paid	Cash dividends paid	(424)		(423)		Cash dividends paid	(265)		(192)
Proceeds from issuance of common stock	Proceeds from issuance of common stock	140		0		Proceeds from issuance of common stock	—		140
Tax withholdings related to net share settlements	Tax withholdings related to net share settlements	(125)		0		Tax withholdings related to net share settlements	(5)		(125)
Payments on finance leases	Payments on finance leases	(27)		(24)		Payments on finance leases	(20)		(15)
Other, net	Other, net	(37)		(19)		Other, net	(5)		(37)
Net cash used in financing activities	Net cash used in financing activities	(1,028)		(901)		Net cash used in financing activities	(644)		(355)
Cash, cash equivalents, restricted cash, and restricted cash equivalents:
Cash, cash equivalents, and restricted cash and cash equivalents:						Cash, cash equivalents, and restricted cash and cash equivalents:
Net change from operating, investing and financing activities	Net change from operating, investing and financing activities	(89)		69		Net change from operating, investing and financing activities	22		92
Effect of exchange rate changes	Effect of exchange rate changes	4		(3)		Effect of exchange rate changes	4		2
Beginning balance	Beginning balance	255		111		Beginning balance	568		255
Ending balance	Ending balance	$	170	$	177	Ending balance	$	594	$	349

Supplemental cash flow disclosures of non-cash investing activities:	Supplemental cash flow disclosures of non-cash investing activities:					Supplemental cash flow disclosures of non-cash investing activities:
Capital expenditures included in accounts payable and accrued expenses	Capital expenditures included in accounts payable and accrued expenses	$	213	$	180	Capital expenditures included in accounts payable and accrued expenses	$	139	$	259

Supplemental cash flow disclosures of non-cash financing activities:	Supplemental cash flow disclosures of non-cash financing activities:					Supplemental cash flow disclosures of non-cash financing activities:
Dividends declared but not yet paid	Dividends declared but not yet paid	265		212		Dividends declared but not yet paid	266		232
Finance lease additions		289		26
Supplemental cash flow disclosures:	Supplemental cash flow disclosures:					Supplemental cash flow disclosures:
Cash paid for interest	Cash paid for interest	259		240		Cash paid for interest	27		29
Cash paid for income taxes	Cash paid for income taxes	305		118		Cash paid for income taxes	37		31

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

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

Common Stock Issued Additional
Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Non-controlling Interest Total
Equity
(in millions, except per share data) Shares Amount
Balance as of January 1, 2021 1,407.3 $ 14 $ 21,677 $ 2,061 $ 77 $ 23,829 $ 1 $ 23,830
Net income — — — 325 — 325 0 325
Other comprehensive income — — — — 87 87 — 87
Dividends declared, $0.15 per share — — — (212) — (212) — (212)
Issuance of common stock 4.3 — 140 — — 140 — 140
Shares issued under employee stock-based compensation plans and other 5.7 — — — — — — —
Stock-based compensation and stock options exercised — — (99) — — (99) — (99)
Balance as of March 31, 2021 1,417.3 14 21,718 2,174 164 24,070 1 24,071
Net income — — — 448 — 448 0 448
Other comprehensive income — — — — (36) (36) — (36)
Dividends declared, $0.1875 per share — — — (265) — (265) — (265)
Shares issued under employee stock-based compensation plans and other 0.1 — — — — — — —
Stock-based compensation and stock options exercised — — 25 — — 25 — 25
Balance as of June 30, 2021 $ 1,417.4 $ 14 $ 21,743 $ 2,357 $ 128 $ 24,242 $ 1 $ 24,243

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


	Common Stock Issued			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity		Non-controlling Interest		Total Equity
(in millions, except per share data)	Shares	Amount
Balance as of January 1, 2022	1,418.1	$	14	$	21,785	$	3,199	$	(26)	$	24,972	$	—	$	24,972
Net income	—	—		—		585		—		585		—		585
Other comprehensive income	—	—		—		—		241		241		—		241
Dividends declared, $0.1875 per share	—	—		—		(266)		—		(266)		—		(266)

Shares issued under employee stock-based compensation plans and other	0.4	—		—		—		—		—		—		—
Tax withholdings related to net share settlements	—	—		(5)		—		—		(5)		—		(5)
Stock-based compensation and stock options exercised	—	—		(16)		—		—		(16)		—		(16)
Balance as of March 31, 2022	1,418.5	$	14	$	21,764	$	3,518	$	215	$	25,511	$	—	$	25,511

~~Table of Contents~~

~~KEURIG DR PEPPER INC.~~

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

(~~UNAUDITED, CONTINUED~~)


		Common Stock Issued			Additional Paid-In Capital				Retained Earnings		Accumulated Other Comprehensive Income (Loss)					Total Stockholders' Equity			Non-controlling Interest				Total Equity			Common Stock Issued				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity				Non-controlling Interest				Total Equity
(in millions, except per share data)	(in millions, except per share data)	Shares	Amount										(in millions, except per share data)		Shares						Amount
Balance as of January 1, 2020		1,406.8	$	14			$	21,557					$	1,582				$	104			$	23,257			$	0	$	23,257
Balance as of January 1, 2021																									Balance as of January 1, 2021	1,407.3		$	14			$	21,677			$	2,061			$	77			$	23,829			$	1			$	23,830

Net income	Net income	—	—		—				156		—					156			—				156		Net income	—		—		—				325				—				325				—				325
Other comprehensive loss	Other comprehensive loss	—	—		—				—		(584)					(584)			—				(584)		Other comprehensive loss	—		—		—				—				87				87				—				87
Dividends declared, $0.15 per share	Dividends declared, $0.15 per share	—	—		—				(211)		—					(211)			—				(211)		Dividends declared, $0.15 per share	—		—		—				(212)				—				(212)				—				(212)

Issuance of common stock																									Issuance of common stock	4.3		—		140				—				—				140				—				140
Shares issued under stock-based compensation plans and other	Shares issued under stock-based compensation plans and other	0.3	—		—				—		—					—			—				—		Shares issued under stock-based compensation plans and other	5.7		—		—				—				—				—				—				—
Tax withholdings related to net share settlements																									Tax withholdings related to net share settlements	—		—		(125)				—				—				(125)				—				(125)
Stock-based compensation and stock options exercised	Stock-based compensation and stock options exercised	—	—		22				—		—					22			—				22		Stock-based compensation and stock options exercised	—		—		26				—				—				26				—				26
Balance as of March 31, 2020		1,407.1	14		21,579				1,527		(480)					22,640			0				22,640
Net income		—	—		—				298		—					298			—				298
Other comprehensive income		—	—		—				—		152					152			—				152
Dividends declared, $0.15 per share		—	—		—				(212)		—					(212)			—				(212)
Proceeds from controlling shareholder stock transactions		—	—		22				—		—					22			—				22
Shares issued under employee stock-based compensation plans and other		0.1	—		—				—		—					—			—				—
Stock-based compensation and stock options exercised		—	—		23				—		—					23			—				23
Balance as of June 30, 2020		1,407.2	$	14	$	21,624			$	1,613	$	(328)				$	22,923		$	0			$	22,923
Balance as of March 31, 2021																									Balance as of March 31, 2021	1,417.3		$	14	$	21,718			$	2,174			$	164			$	24,070			$	1			$	24,071

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

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. 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. 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.

~~Except as otherwise specified, references~~References to the ~~"second~~"first quarter" indicate the Company's quarterly periods ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.

PRINCIPLES OF CONSOLIDATION

KDP consolidates all wholly owned subsidiaries.

The Company consolidates investments in companies in which it holds the majority interest. In these cases, the third party equity interest is referred to as non-controlling interest. Non-controlling ~~interests are~~interest is presented as a separate component within equity in the unaudited Condensed Consolidated Balance Sheets, and net income attributable to the non-controlling ~~interests are~~interest is presented separately in the unaudited Condensed Consolidated Statements of Income.

The Company would be required to consolidate VIEs for which KDP has been determined to be the primary beneficiary. To determine if KDP is the primary beneficiary, the Company assesses whether it has the power to direct the significant activities of the VIE and the obligation to absorb losses or receive benefits from the VIE that may be significant to the VIE. The Company has determined that it is not the primary beneficiary of any VIEs. However, future events may require the Company to consolidate VIEs if the Company becomes the primary beneficiary.

The Company uses the equity method to account for investments in companies if the investment provides ~~the Company~~KDP 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.

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 unaudited condensed consolidated financial 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.~~amounts. 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.

SIGNIFICANT ACCOUNTING POLICY CHANGES

Prior to January 1, 2022, the Company recorded forfeitures as incurred. Effective January 1, 2022, the Company changed its accounting policy election to record expense only for awards expected to vest. Estimated forfeiture rates are based on historical data and are periodically reassessed. The cumulative effect of this change in accounting policy was recorded effective January 1, 2022. The impact of forfeitures on stock-based compensation has historically been insignificant to the Company.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

RECLASSIFICATIONS

~~The Company~~KDP reclassified amounts in the ~~Financing Activities section of the~~ unaudited condensed consolidated ~~Statement of Cash Flows~~financial statements for the first ~~six months~~quarter of ~~2020~~2021 in order to conform to current year ~~presentation. Refer to Note 2 for additional information about changes to the maturities~~presentation, as follows:

Statement of ~~KDP’s commercial paper.~~Cash Flows

(in millions)

First Quarter

Current Presentation

Prior Presentation

~~First Six Months of 2020~~2021

Proceeds from issuance of commercial paper

Net ~~(repayment) issuance~~payment of commercial paper

~~5,518~~120

Repayments of commercial paper

Net ~~(repayment) issuance~~payment of commercial paper

~~(6,354)~~(120)

Statement of Changes in Stockholders’ Equity

(in millions)

First Quarter

Current Presentation

Prior Presentation

2021

Tax withholdings related to net share settlements

Stock-based compensation and stock options exercised

(125)

Stock-based compensation and stock options exercised

~~KEURIG DR PEPPER INC.~~UNALLOCATED CORPORATE COST ALIGNMENT

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, CONTINUED)~~

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

~~As of~~Effective January 1, ~~2021,~~2022, the Company ~~adopted ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method~~updated its presentation of certain of KDP's unallocated corporate costs, primarily related to IT, to be aligned among the Company's segments and ~~Joint Ventures (Topic 323),~~to more consistently reflect controllable costs at the segment level. Refer to Note 6 for current year presentation. The following table summarizes the revised and ~~Derivatives and Hedging (Topic 815): Clarifying~~prior presentations of income from operations at the Interactions between Topic 321, Topic 323, and Topic 815. The objective of the new standard is to clarify the interaction of the accounting for equity securities, investments accounted for under the equity method of accounting and the accounting for certain forward contracts and purchased options accounted for under different topics in U.S. GAAP. The adoption of the standard did not impact KDP's consolidated financial statements.segment level:


(in millions)	First Quarter 2021
Segment Results – Income from operations	Current Presentation		Prior Presentation
Coffee Systems	$	368	$	336
Packaged Beverages	179		175
Beverage Concentrates	238		238
Latin America Beverages	22		22
Unallocated corporate costs	(167)		(131)
Income from operations	$	640	$	640

2. Long-term Obligations and Borrowing Arrangements

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


(in millions)	(in millions)	June 30, 2021		December 31, 2020		(in millions)	March 31, 2022		December 31, 2021
Notes	Notes	$	11,721	$	13,065	Notes	$	11,584	$	11,733

Term loan		0		423
Subtotal		11,721		13,488
Less - current portion		0		(2,345)
Less: current portion of long-term obligations						Less: current portion of long-term obligations	—		(155)
Long-term obligations	Long-term obligations	$	11,721	$	11,143	Long-term obligations	$	11,584	$	11,578

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

(in millions) June 30, 2021 December 31, 2020
Commercial paper notes $ 1,323 $ 0
Revolving credit facilities 0 0
Current portion of long-term obligations:
Notes 0 2,246
Term loan 0 99
Short-term borrowings and current portion of long-term obligations $ 1,323 $ 2,345


(in millions)	March 31, 2022		December 31, 2021
Commercial paper notes	$	—	$	149
Current portion of long-term obligations	—		155
Short-term borrowings and current portion of long-term obligations	$	—	$	304

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

SENIOR UNSECURED NOTES

The Company's Notes consisted of the following:


(in millions, except %)	(in millions, except %)							(in millions, except %)
Issuance	Issuance	Maturity Date	Rate	June 30, 2021		December 31, 2020		Issuance	Maturity Date	Rate	March 31, 2022		December 31, 2021
2021 Merger Notes		May 25, 2021	3.551%	$	0	$	1,750
2021-A Notes		November 15, 2021	3.200%	0		250
2021-B Notes		November 15, 2021	2.530%	0		250
2022 Notes		November 15, 2022	2.700%	0		250
2023 Merger Notes		May 25, 2023	4.057%	1,000		2,000
2023 Merger Notes(3)								2023 Merger Notes(3)	May 25, 2023	4.057%	$	1,000	$	1,000
2023 Notes	2023 Notes	December 15, 2023	3.130%	500		500		2023 Notes	December 15, 2023	3.130%	500		500
2024 Notes(1)		March 15, 2024	0.750%	1,150		0
2025 Merger Notes		May 25, 2025	4.417%	1,000		1,000
2024 Notes								2024 Notes	March 15, 2024	0.750%	1,150		1,150
2025 Merger Notes(3)								2025 Merger Notes(3)	May 25, 2025	4.417%	1,000		1,000
2025 Notes	2025 Notes	November 15, 2025	3.400%	500		500		2025 Notes	November 15, 2025	3.400%	500		500
2026 Notes	2026 Notes	September 15, 2026	2.550%	400		400		2026 Notes	September 15, 2026	2.550%	400		400
2027 Notes	2027 Notes	June 15, 2027	3.430%	500		500		2027 Notes	June 15, 2027	3.430%	500		500
2028 Merger Notes		May 25, 2028	4.597%	2,000		2,000
2028 Merger Notes(3)								2028 Merger Notes(3)	May 25, 2028	4.597%	2,000		2,000
2030 Notes	2030 Notes	May 1, 2030	3.200%	750		750		2030 Notes	May 1, 2030	3.200%	750		750
2031 Notes	2031 Notes	March 15, 2031	2.250%	500		0		2031 Notes	March 15, 2031	2.250%	500		500
2038 Notes		May 1, 2038	7.450%	125		125
2038 Merger Notes		May 25, 2038	4.985%	500		500
2038 Notes(1)								2038 Notes(1)	May 1, 2038	7.450%	—		125
2038 Merger Notes(3)								2038 Merger Notes(3)	May 25, 2038	4.985%	500		500
2045 Notes	2045 Notes	November 15, 2045	4.500%	550		550		2045 Notes	November 15, 2045	4.500%	550		550
2046 Notes	2046 Notes	December 15, 2046	4.420%	400		400		2046 Notes	December 15, 2046	4.420%	400		400
2048 Merger Notes		May 25, 2048	5.085%	750		750
2048 Merger Notes(3)								2048 Merger Notes(3)	May 25, 2048	5.085%	750		750
2050 Notes	2050 Notes	May 1, 2050	3.800%	750		750		2050 Notes	May 1, 2050	3.800%	750		750
2051 Notes	2051 Notes	March 15, 2051	3.350%	500		0		2051 Notes	March 15, 2051	3.350%	500		500
Principal amount	Principal amount			$	11,875	$	13,225	Principal amount			11,750		11,875
Adjustment from principal amount to carrying amount(2)	Adjustment from principal amount to carrying amount(2)			(154)		(160)		Adjustment from principal amount to carrying amount(2)			(166)		(142)
Carrying amount	Carrying amount			$	11,721	$	13,065	Carrying amount			$	11,584	$	11,733

(1)On January 24, 2022, KDP redeemed and retired the remainder of its 2038 Notes. The ~~2024 Notes may be called anytime~~loss on ~~or after March 15, 2022, in whole or in part, at the Company’s option, at a redemption price equal to 100%~~early extinguishment of the ~~principal amount being redeemed, plus accrued~~2038 Notes was approximately $45 million, comprised of the make-whole premium and ~~unpaid interest.~~the write-off of the associated unamortized fair value adjustment related to the DPS Merger.

(2)The carrying amount includes unamortized discounts, debt issuance costs and fair value adjustments related to the DPS Merger.

On(3)Subsequent to March ~~15, 2021, the Company completed the issuance of the 2024 Notes, the 2031 Notes,~~31, 2022, KDP undertook a strategic refinancing and ~~the 2051 Notes. The discount associated with these notes was~~issued approximately $3 ~~million and the Company incurred $13 million in debt issuance costs.~~billion of Notes. The ~~net~~ proceeds from the issuance were used to ~~repay~~voluntarily prepay and retire several tranches of our existing Notes. Refer to Note 17 for additional information.

VARIABLE-RATE BORROWING ARRANGEMENTS

The following table summarizes information about the ~~Company’s 2021-A Notes, 2021-B Notes,~~ 2022 ~~Notes,~~Revolving Credit Agreement:

(in millions)

March 31, 2022

December 31, 2021

Issuance

Maturity Date

Capacity

Carrying Value

2022 Revolving Credit Agreement(1)

February 23, 2027

4,000

—

(1)The 2022 Revolving Credit Agreement has $200 million letters of credit available, none of which were utilized as of March 31, 2022.

On February 23, 2022, KDP terminated the 2021 364-Day Credit Agreement and ~~approximately $1 billion of~~ the ~~2023 Merger Notes, as well as to repay and terminate the 2019~~ KDP ~~Term Loan as described below. As a result of the repayments of senior unsecured notes, the Company recorded losses~~Revolver. The loss on early extinguishment of ~~debt of $104~~these instruments was approximately $3 million, ~~during the first quarter of 2021,~~ comprised of termination fees and the write-off of the associated deferred financing fees. There were no amounts drawn upon the 2021 364-Day Credit Agreement or the KDP Revolver prior to termination.

Also on February 23, 2022, KDP entered into the 2022 Revolving Credit Agreement among KDP, as borrower, the lenders from time to time party thereto and JPMorgan Chase, Bank, N.A., as administrative agent. The 2022 Revolving Credit Agreement provides for a ~~make-whole premium, fair market value adjustments and~~$4 billion revolving credit facility, including a letter of credit sub-facility in an aggregate principal amount of up to $200 million. The Company incurred approximately $4 million in deferred financing fees ~~written off.~~related to the issuance. The 2022 Revolving Credit Agreement will mature in February 2027.

~~On May 25, 2021,~~The 2022 Revolving Credit Agreement replaced the ~~Company repaid~~KDP Revolver and the 2021 ~~Merger Notes at maturity using commercial paper.~~

364-Day Credit Agreement and the proceeds of the credit facility are intended to be used for working capital and for other general corporate purposes of KDP.

109

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

~~VARIABLE-RATE BORROWING ARRANGEMENTS~~

~~The KDP Credit Agreements consist of~~Borrowings under the ~~following:~~

(in millions) June 30, 2021 December 31, 2020
Issuance Maturity Date Available Balances Carrying Value Carrying Value
2019 KDP Term Loan $ — $ 0 $ 425
KDP Revolver(1)
February 2023 2,400 0 0
2020 364-Day Credit Agreement 0 0 0
2021 364-Day Credit Agreement March 2022 1,500 0 0
Principal amount $ 0 $ 425
Unamortized discounts and debt issuance costs 0 (2)
Carrying amount $ 0 $ 423

~~(1)The KDP Revolver has $200 million letters of credit availability and NaN utilized as of~~ ~~June 30, 2021.~~

~~As of June 30, 2021,~~ ~~KDP~~ ~~was in compliance with all financial covenant requirements relating to the~~ ~~KDP Credit Agreements~~.

~~2019 KDP Term Loan~~

In March 2021, KDP voluntarily prepaid and terminated the 2019 KDP Term Loan using proceeds from the aforementioned issuance of senior subordinated notes, which resulted in $1 million of loss on early extinguishment of debt for the first six months of 2021.

~~364-Day Credit Agreements~~

~~In March 2021, KDP terminated its 2020 364-Day~~2022 Revolving Credit Agreement ~~which was originally available through April 2021. No amounts were drawn under the 2020 364-Day Credit Agreement prior to termination.~~

KDP then entered into the 2021 364-Day Credit Agreement on March 24, 2021 among KDP, the banks party thereto and Bank of America, N.A. as administrative agent, pursuant to which KDP obtained a $1,500 million commitment. Thewill bear interest ~~rate applicable to borrowings under the 2021 364-Day Credit Agreement ranges from~~at a rate per annum equal to, ~~LIBOR~~at KDP's option, an adjusted SOFR rate plus a margin of ~~1.000%~~0.875% to ~~1.625%~~1.500% or a base rate plus a margin of 0.000% to ~~0.625%~~0.500%, in each case, depending on the rating of certain index debt of ~~the Company.~~KDP. The ~~2021 364-Day~~2022 Revolving Credit Agreement ~~matures~~contains customary representations and warranties for investment grade financings. The 2022 Revolving Credit Agreement also contains (i) certain customary affirmative covenants, including those that impose certain reporting and/or performance obligations on KDP and its subsidiaries, (ii) certain customary negative covenants that generally limit, subject to various exceptions, KDP and its subsidiaries from taking certain actions, including, without limitation, incurring liens, consummating certain fundamental changes and entering into transactions with affiliates, (iii) a financial covenant in the form of a minimum interest coverage ratio (as defined therein) of 3.25 to 1.00 and (iv) customary events of default (including a change of control) for financings of this type.

As of March ~~23,~~31, 2022, ~~and includes a term-out option which allows~~ KDP was in compliance with its minimum interest coverage ratio relating to ~~extend any outstanding amounts borrowed under~~ the ~~agreement for one year for a fee of 0.750% on the amounts borrowed.~~2022 Revolving Credit Agreement.

Commercial Paper Program

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

Second Quarter First Six Months
(in millions, except %) 2021 2020 2021 2020
Weighted average commercial paper borrowings $ 907 $ 497 $ 467 $ 1,081
Weighted average borrowing rates 0.26 % 1.10 % 0.26 % 1.68 %

~~In April 2021, KDP began issuing commercial paper notes with maturities greater than 90 days. KDP continues to classify its commercial paper notes as short-term, as maturities do not exceed one year.~~


	First Quarter
(in millions, except %)		2022			2021
Weighted average commercial paper borrowings		$	45		$	22
Weighted average borrowing rates		0.30		%	0.18		%

Letter of Credit Facility

In addition to the portion of the ~~KDP Revolver~~2022 Revolving Credit Agreement reserved for issuance of letters of credit, KDP has an incremental letter of credit facility. Under this facility, ~~$100~~$150 million is available for the issuance of letters of credit, ~~$44~~$96 million of which was utilized as of ~~June 30, 2021~~March 31, 2022 and ~~$56~~$54 million of which remains available for use.

FAIR VALUE DISCLOSURES

The fair ~~values~~value of KDP's commercial paper ~~approximate~~approximates the carrying value and are considered Level 2 within the fair value hierarchy.

The fair values of KDP's Notes are based on current market rates available to KDP and are considered Level 2 within the fair value hierarchy. 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 fair value of KDP's Notes was ~~$13,342~~$11,868 million and ~~$15,274~~$13,078 million as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, CONTINUED)~~

3. Goodwill and Other Intangible Assets

GOODWILL

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


(in millions)	(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total		(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total
Balance as of January 1, 2021		$	9,795	$	5,314	$	4,536	$	539	$	20,184
Balance as of January 1, 2022												Balance as of January 1, 2022	$	9,800	$	5,319	$	4,539	$	524	$	20,182
Foreign currency translation	Foreign currency translation	54		19		12		3		88		Foreign currency translation	31		8		5		17		61

Balance as of June 30, 2021		$	9,849	$	5,333	$	4,548	$	542	$	20,272
Balance as of March 31, 2022												Balance as of March 31, 2022	$	9,831	$	5,327	$	4,544	$	541	$	20,243

INTANGIBLE ASSETS OTHER THAN GOODWILL

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


(in millions)	(in millions)	June 30, 2021		December 31, 2020		(in millions)	March 31, 2022		December 31, 2021
Brands(1)	Brands(1)	$	19,941	$	19,874	Brands(1)	$	19,920	$	19,865
Trade names	Trade names	2,480		2,480		Trade names	2,480		2,480
Contractual arrangements	Contractual arrangements	124		123		Contractual arrangements	123		123
Distribution rights(2)	Distribution rights(2)	66		57		Distribution rights(2)	95		85
Total	Total	$	22,611	$	22,534	Total	$	22,618	$	22,553

(1)The increase of ~~$67~~$55 million in brands with indefinite lives was due to foreign currency translation during the first ~~six months~~quarter of ~~2021.~~2022.

(2)The Company executed three agreements to acquire distribution rights during the first quarter of 2022, which resulted in an increase of approximately $10 million.

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:


		June 30, 2021						December 31, 2020							March 31, 2022						December 31, 2021
(in millions)	(in millions)	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount		(in millions)	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Acquired technology	Acquired technology	$	1,146	$	(364)	$	782	$	1,146	$	(328)	$	818	Acquired technology	$	1,146	$	(419)	$	727	$	1,146	$	(401)	$	745
Customer relationships	Customer relationships	639		(152)		487		638		(135)		503		Customer relationships	639		(178)		461		638		(169)		469
Trade names	Trade names	128		(78)		50		127		(69)		58		Trade names	128		(90)		38		128		(86)		42
Contractual arrangements	Contractual arrangements	24		(6)		18		24		(5)		19		Contractual arrangements	24		(8)		16		24		(8)		16
Brands	Brands	21		(7)		14		21		(5)		16		Brands	22		(10)		12		21		(8)		13
Distribution rights	Distribution rights	29		(8)		21		26		(6)		20		Distribution rights	30		(13)		17		29		(11)		18

Total	Total	$	1,987	$	(615)	$	1,372	$	1,982	$	(548)	$	1,434	Total	$	1,989	$	(718)	$	1,271	$	1,986	$	(683)	$	1,303

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


		Second Quarter				First Six Months					First Quarter
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)		2022		2021
Amortization expense	Amortization expense	$	34	$	33	$	67	$	66	Amortization expense		$	34	$	33

Amortization expense of these intangible assets over the remainder of ~~2021~~2022 and the next five years is expected to be as follows:

Remainder of 2021 For the Years Ending December 31,
(in millions) 2022 2023 2024 2025 2026
Expected amortization expense $ 67 $ 134 $ 132 $ 124 $ 109 $ 105

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, CONTINUED)~~


	Remainder of 2022		For the Years Ending December 31,
(in millions)	Remainder of 2022		2023		2024		2025		2026		2027
Expected amortization expense	$	101	$	132	$	124	$	110	$	105	$	91

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. As a result of the changes to the Company’s operating segments effective January 1, 2021, as described in Note 7, which resulted in a change to the Company’s reporting units, management performed a step zero analysis as of the effective date of the goodwill for the impacted reporting units. The Company ~~also~~ performed an analysis as of ~~June 30, 2021~~March 31, 2022 to ensure that there were no ~~additional~~ triggering events which occurred during the quarter. As a result of ~~these analyses,~~this analysis, management did not identify any indications that the carrying amount of any goodwill or any intangible ~~asset~~assets may not be recoverable.

4. ~~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.

~~DPS INTEGRATION PROGRAM~~

As part of the DPS Merger, 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 in 2021. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $679 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through June 30, 2021. Restructuring and integration charges on the DPS Integration Program were as follows:

Second Quarter First Six Months
(in millions) 2021 2020 2021 2020
Restructuring and integration charges $ 49 $ 52 $ 92 $ 105

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 for the DPS Integration Program, all of which were workforce reduction costs, were as follows for the period presented:


~~(in millions)~~	~~Restructuring Liabilities~~
~~Balance as of January 1, 2021~~	$	14
~~Charges to expense~~	22
~~Cash payments~~	~~(19)~~

~~Balance as of June 30, 2021~~	$	17

5. Derivatives

KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and 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 hold or issue derivative financial instruments for trading or speculative purposes.

KDP formally designates and accounts for certain foreign exchange forward contracts and interest rate contracts that meet established accounting criteria under U.S. GAAP as cash flow hedges. For such contracts, the effective portion of the gain or loss on the derivative instruments is recorded, net of applicable taxes, in AOCI. When net income is affected by the variability of the underlying transaction, the applicable offsetting amount of the gain or loss from the derivative instrument deferred in AOCI is reclassified to net income. Cash flows from derivative instruments designated in a qualifying hedging relationship are classified in the same category as the cash flows from the hedged items. If a cash flow hedge were to cease to qualify for hedge accounting, or were terminated, the derivatives would continue to be carried on the balance sheet at fair value until settled, and hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCI would be reclassified to earnings at that time.

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, CONTINUED)~~

For derivatives that are not designated or for which the designated hedging relationship is discontinued, the gain or loss on the instrument is recognized in earnings in the period of change.

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.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

INTEREST RATES

Economic Hedges

KDP 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 overall cost structure and to manage the balance of fixed-rate and variable-rate debt. KDP primarily enters into receive-fixed, pay-variable and receive-variable, pay-fixed swaps and swaption contracts. 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. As of ~~June 30, 2021,~~March 31, 2022, economic interest rate derivative instruments have maturities ranging from ~~September 2021~~January 2027 to ~~May 2028.~~April 2032.

Cash Flow Hedges

In order to hedge the variability in cash flows from interest rate changes associated with the Company’s planned future issuances of long-term debt, during the first quarter of 2021, the Company entered into forward starting swaps and designated them as cash flow hedges. The forward starting swaps are planned to be unwound at the issuance of long-term debt. As of ~~June 30, 2021,~~March 31, 2022, the forward starting swaps have mandatory termination dates ranging from June 2022 to May 2025.

FOREIGN EXCHANGE

KDP is exposed to foreign exchange risk in its international subsidiaries, which may transact in currencies that are different from the functional currencies of those subsidiaries. The balance sheets of each of these businesses are also subject to exposure from movements in exchange rates.

Economic Hedges

During the ~~second~~first quarter of 2022 and ~~first six months of~~ 2021, ~~and 2020,~~ KDP held FX forward contracts to economically manage the balance sheet exposures resulting from changes in the FX exchange rates described above. The intent of these FX contracts is to minimize the impact of FX risk associated with balance sheet positions not in local currency. 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~~As of March 31, 2022, these FX contracts have maturities ranging from ~~July 2021~~April 2022 to September ~~2024 as of June 30, 2021.~~2024.

Cash Flow Hedges

~~During 2020,~~ KDP ~~began to designate~~designates certain FX forward contracts related to inventory purchases of the Canadian and Mexican businesses as cash flow hedges in order to manage the exposures resulting from changes in the FX rates described above. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. ~~These~~As of March 31, 2022, these FX contracts ~~carried at fair value,~~ have maturities ranging from ~~July 2021~~April 2022 to ~~March 2023 as of June 30, 2021.~~August 2023.

COMMODITIES

Economic Hedges

KDP centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. During the ~~second~~first quarter of 2022 and ~~first six months of~~ 2021, ~~and 2020,~~ 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~~As of March 31, 2022, these commodity contracts have maturities ranging from ~~July 2021~~April 2022 to ~~January 2024 as of June 30, 2021.~~November 2023.

1412

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS

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


(in millions)	(in millions)	June 30, 2021		December 31, 2020		(in millions)	March 31, 2022		December 31, 2021
Interest rate contracts	Interest rate contracts					Interest rate contracts
Forward starting swaps, designated as cash flow hedges	Forward starting swaps, designated as cash flow hedges	$	2,500	$	0	Forward starting swaps, designated as cash flow hedges	$	2,500	$	2,500
Receive-variable, pay-fixed interest rate swaps, not designated as hedging instruments		450		450

Receive-fixed, pay-variable interest rate swaps, not designated as hedging instruments	Receive-fixed, pay-variable interest rate swaps, not designated as hedging instruments	250		0		Receive-fixed, pay-variable interest rate swaps, not designated as hedging instruments	1,900		400
Swaptions, not designated as hedging instruments		250		0

FX contracts	FX contracts					FX contracts
Forward contracts, not designated as hedging instruments	Forward contracts, not designated as hedging instruments	522		476		Forward contracts, not designated as hedging instruments	481		463
Forward contracts, designated as cash flow hedges	Forward contracts, designated as cash flow hedges	434		333		Forward contracts, designated as cash flow hedges	462		385
Commodity contracts		518		450
Commodity contracts, not designated as hedging instruments						Commodity contracts, not designated as hedging instruments	483		529

FAIR VALUE OF DERIVATIVE INSTRUMENTS

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 or SOFR 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.

Not Designated as Hedging Instruments

The following table summarizes the location of the fair value of the Company's derivative instruments which are not designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets. All such instruments are ~~designated~~considered level 2 within the fair value hierarchy.


(in millions)	(in millions)	Balance Sheet Location	June 30, 2021		December 31, 2020		(in millions)	Balance Sheet Location	March 31, 2022		December 31, 2021
Assets:	Assets:						Assets:
Interest rate contracts	Interest rate contracts	Prepaid expenses and other current assets	$	2	$	0	Interest rate contracts	Prepaid expenses and other current assets	$	—	$	2
FX contracts							FX contracts	Prepaid expenses and other current assets	—		3
Commodity contracts							Commodity contracts	Prepaid expenses and other current assets	204		133

Commodity contracts		Prepaid expenses and other current assets	104		45
Interest rate contracts		Other non-current assets	2		0

Commodity contracts	Commodity contracts	Other non-current assets	36		12		Commodity contracts	Other non-current assets	—		2

Liabilities:	Liabilities:						Liabilities:
Interest rate contracts	Interest rate contracts	Other current liabilities	$	4	$	2	Interest rate contracts	Other current liabilities	$	6	$	—
FX contracts	FX contracts	Other current liabilities	7		6		FX contracts	Other current liabilities	4		2
Commodity contracts	Commodity contracts	Other current liabilities	10		5		Commodity contracts	Other current liabilities	14		28
Interest rate contracts	Interest rate contracts	Other non-current liabilities	1		7		Interest rate contracts	Other non-current liabilities	68		5
FX contracts	FX contracts	Other non-current liabilities	21		9		FX contracts	Other non-current liabilities	17		9
Commodity contracts	Commodity contracts	Other non-current liabilities	3		2		Commodity contracts	Other non-current liabilities	—		1

1513

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

Designated as Hedging Instruments

The following table summarizes the location of the fair value of the Company's derivative instruments which are designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets. All such instruments are designated level 2 within the fair value hierarchy.


(in millions)	(in millions)	Balance Sheet Location	June 30, 2021		December 31, 2020		(in millions)	Balance Sheet Location	March 31, 2022		December 31, 2021
Assets:	Assets:						Assets:
FX contracts	FX contracts	Prepaid expenses and other current assets	$	1	$	0	FX contracts	Prepaid expenses and other current assets	$	1	$	6

FX contracts							FX contracts	Other non-current assets	—		1
Interest rate contracts							Interest rate contracts	Prepaid expenses and other current assets	12		—
Interest rate contracts							Interest rate contracts	Other non-current assets	$	59	$	—

Liabilities:	Liabilities:						Liabilities:
FX contracts	FX contracts	Other current liabilities	$	12	$	12	FX contracts	Other current liabilities	$	7	$	1
FX contracts		Other non-current liabilities	3		0

Interest rate contracts	Interest rate contracts	Other non-current liabilities	101		0		Interest rate contracts	Other current liabilities	—		8
Interest rate contracts							Interest rate contracts	Other non-current liabilities	10		128

IMPACT OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

The following table presents the amount of (gains) losses, net, 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.


			Second Quarter				First Six Months						First Quarter
(in millions)	(in millions)	Income Statement Location	2021		2020		2021		2020		(in millions)	Income Statement Location		2022		2021
Interest rate contracts	Interest rate contracts	Interest expense	$	(5)	$	5	$	(13)	$	9	Interest rate contracts	Interest expense		$	67	$	(8)
FX contracts	FX contracts	Cost of sales	5		3		9		(20)		FX contracts	Cost of sales		5		4
FX contracts	FX contracts	Other (income) expense, net	6		5		11		(12)		FX contracts	Other expense (income), net		8		5
Commodity contracts	Commodity contracts	Cost of sales	(39)		34		(56)		51		Commodity contracts	Cost of sales		(97)		(17)
Commodity contracts	Commodity contracts	SG&A expenses	(27)		(9)		(56)		36		Commodity contracts	SG&A expenses		(37)		(29)
Total			$	(60)	$	38	$	(105)	$	64

IMPACT OF CASH FLOW HEDGES

The following table presents the amount of ~~(gain) loss~~losses, net, reclassified from AOCI into the unaudited Condensed Consolidated Statements of Income related to derivative instruments designated as cash flow hedging instruments during the periods presented:


			Second Quarter				First Six Months						First Quarter
(in millions)	(in millions)	Income Statement Location	2021		2020		2021		2020		(in millions)	Income Statement Location		2022		2021
Interest rate contracts	Interest rate contracts	Interest expense	$	0	$	0	$	0	$	0	Interest rate contracts	Interest expense		$	—	$	—
FX contracts	FX contracts	Cost of sales	4		(1)		9		(1)		FX contracts	Cost of sales		3		5

KDP expects to reclassify approximately ~~$17~~$5 million of pre-tax net losses from AOCI into net income during the next twelve months related to its FX contracts. KDP ~~does not expect~~expects to reclassify ~~any amounts~~$5 million of pre-tax net gains from AOCI into net income during the next twelve months related to its interest rate contracts.

~~6. 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 the Company to renew the lease at rates equivalent to fair market value at the end of the lease term. ~~KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.~~

~~The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants, except for leases of certain manufacturing properti~~es and of our Frisco headquarters, which contain residual value guarantees at the end of the respective lease terms that approximate a percentage of the cost of the asset as of the inception of the lease. The Company considers the possibility of incurring costs associated with the residual value guarantees to be remote.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

5. Leases

The following table presents the components of lease cost:


		Second Quarter				First Six Months					First Quarter
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)		2022		2021
Operating lease cost	Operating lease cost	$	33	$	28	$	63	$	56	Operating lease cost		$	32	$	30
Finance lease cost	Finance lease cost									Finance lease cost
Amortization of right-of-use assets	Amortization of right-of-use assets	17		11		30		22		Amortization of right-of-use assets		18		13
Interest on lease liabilities	Interest on lease liabilities	4		3		7		7		Interest on lease liabilities		6		3
Variable lease cost(1)	Variable lease cost(1)	7		7		15		13		Variable lease cost(1)		9		8
Short-term lease cost		0		1		0		1
Sublease income		(1)		0		(1)		(1)

Total lease cost	Total lease cost	$	60	$	50	$	114	$	98	Total lease cost		$	65	$	54

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

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


		First Six Months					First Quarter
(in millions)	(in millions)	2021		2020		(in millions)	2022		2021
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:					Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	56	$	49	Operating cash flows from operating leases	$	29	$	28
Operating cash flows from finance leases	Operating cash flows from finance leases	7		7		Operating cash flows from finance leases	6		3
Financing cash flows from finance leases	Financing cash flows from finance leases	27		24		Financing cash flows from finance leases	20		15
Right-of-use assets obtained in exchange for lease obligations:						Right-of-use assets obtained in exchange for lease obligations:
Operating leases						Operating leases	168		208
Finance leases						Finance leases	23		89

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

June 30, 2021

December 31, 2020

March 31, 2022

December 31, 2021

Weighted average discount rate

Operating leases

4.2

4.3

Operating leases

4.3

Finance leases

4.3

4.4

Finance leases

3.5

3.6

Weighted average remaining lease term

Operating leases

11 years

12 years

Operating leases

11 years

12 years

Finance leases

12 years

11 years

Finance leases

10 years

Future minimum lease payments for non-cancellable leases that have commenced and are reflected on the unaudited Condensed Consolidated Balance Sheets as of ~~June 30, 2021~~March 31, 2022 were as follows:


(in millions)	(in millions)	Operating Leases		Finance Leases		(in millions)	Operating Leases		Finance Leases
Remainder of 2021		$	47	$	36
2022		95		86
Remainder of 2022						Remainder of 2022	$	82	$	83
2023	2023	84		85		2023	119		109
2024	2024	79		80		2024	113		103
2025	2025	71		76		2025	106		98
2026	2026	60		99		2026	97		133
2027						2027	79		51
Thereafter	Thereafter	387		274		Thereafter	448		256
Total future minimum lease payments	Total future minimum lease payments	823		736		Total future minimum lease payments	1,044		833
Less: imputed interest	Less: imputed interest	(165)		(132)		Less: imputed interest	(222)		(131)
Present value of minimum lease payments	Present value of minimum lease payments	$	658	$	604	Present value of minimum lease payments	$	822	$	702

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED

As of ~~June 30, 2021,~~March 31, 2022, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately ~~$301~~$186 million. These leases are expected to commence ~~between the third~~in 2022 and ~~fourth quarters of 2021,~~2023, with initial lease terms ranging from 5 years to 107 years.

ASSET SALE-LEASEBACK TRANSACTION

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, CONTINUED)~~

~~7. Segments~~

~~Effective January 1, 2021,~~On March 31, 2022, the Company ~~modified its internal reporting~~closed on an asset sale-leaseback transaction with Veyron SPEs on one manufacturing property and one distribution property. The Company received proceeds of approximately $77 million, net of selling costs for the properties, which had a carrying value of $39 million, and resulted in an approximately $38 million gain on the sale transaction. The leaseback is accounted for as an operating ~~segments~~lease.

The initial term of the leaseback is 15 years, with 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 ~~reflect changes~~be reasonably certain of exercising the renewal options in the ~~executive leadership team~~distant future and (ii) the options are contingent on the Company remaining investment grade and no change-in-control as of the end of the lease term. The leaseback has a RVG. Refer to ~~further enhance speed-to-market and decision effectiveness. These modifications did not change~~Note 16 for additional information about the ~~Company’s reportable segments.~~ RVG associated with the asset sale-leaseback transaction.

6. Segments

The Company's reportable segments consist of the following:

•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,~~single-serve brewers, K-Cup pods and ~~brewers.~~other coffee products.

•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 DSD and WD systems. DSD and WD have both been identified as operating segments that the Company aggregated into Packaged Beverages due to similar economic characteristics and similarities in the nature of finished goods sales and route-to-markets.

•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. Our FFS operating segment is aggregated with our Branded Concentrates operating segment into our Beverage Concentrates reportable segment due to similar economic characteristics and similarities in the nature of the product sold.

•The Latin America Beverages segment reflects sales primarily in Mexico and the Caribbean 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~~Effective January 1, 2022, the Company updated its presentation of certain of KDP's corporate costs, primarily related to IT, to be aligned among the Company's ~~operations by reportable~~segments and to more consistently reflect controllable costs at the segment ~~is as follows:~~

Second Quarter First Six Months
(in millions) 2021 2020 2021 2020
Segment Results – Net sales
Coffee Systems $ 1,101 $ 1,043 $ 2,243 $ 2,016
Packaged Beverages 1,498 1,392 2,805 2,609
Beverage Concentrates 375 309 703 615
Latin America Beverages 166 120 291 237
Net sales $ 3,140 $ 2,864 $ 6,042 $ 5,477

Second Quarter First Six Months
(in millions) 2021 2020 2021 2020
Segment Results – Income from operations
Coffee Systems $ 322 $ 290 $ 658 $ 562
Packaged Beverages 258 208 433 397
Beverage Concentrates 254 220 492 417
Latin America Beverages 36 21 58 48
Unallocated corporate costs (136) (178) (267) (397)
Income from operations $ 734 $ 561 $ 1,374 $ 1,027
level. The prior period segment disclosures reflect the revised presentation.

1816

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

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


	First Quarter
(in millions)		2022		2021
Segment Results – Net sales
Coffee Systems		$	1,093	$	1,142
Packaged Beverages		1,480		1,307
Beverage Concentrates		359		328
Latin America Beverages		146		125
Net sales		$	3,078	$	2,902

Segment Results – Income from operations
Coffee Systems		$	268	$	368
Packaged Beverages		486		179
Beverage Concentrates		244		238
Latin America Beverages		25		22
Unallocated corporate costs		(57)		(167)
Income from operations		$	966	$	640

7. Earnings Per Share

The following table presents the Company's basic and diluted EPS and shares outstanding. Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

Second Quarter First Six Months
(in millions, except per share data) 2021 2020 2021 2020
Net income attributable to KDP $ 448 $ 298 $ 773 $ 454
Weighted average common shares outstanding 1,417.4 1,407.2 1,413.4 1,407.1
Dilutive effect of stock-based awards 10.7 14.3 13.5 13.7
Weighted average common shares outstanding and common stock equivalents 1,428.1 1,421.5 1,426.9 1,420.8
Basic EPS $ 0.32 $ 0.21 $ 0.55 $ 0.32
Diluted EPS 0.31 0.21 0.54 0.32


	First Quarter
(in millions, except per share data)		2022		2021
Net income attributable to KDP		$	585	$	325

Weighted average common shares outstanding		1,418.2		1,409.2
Dilutive effect of stock-based awards		11.5		16.4
Weighted average common shares outstanding and common stock equivalents		1,429.7		1,425.6

Basic EPS		$	0.41	$	0.23
Diluted EPS		0.41		0.23

9.8. Stock-Based Compensation

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


		Second Quarter				First Six Months					First Quarter
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)		2022		2021
Total stock-based compensation expense(1)	Total stock-based compensation expense(1)	$	23	$	23	$	48	$	42	Total stock-based compensation expense(1)		$	(15)	$	25
Income tax benefit		(4)		(4)		(8)		(8)
Income tax expense (benefit)										Income tax expense (benefit)		4		(4)
Stock-based compensation expense, net of tax	Stock-based compensation expense, net of tax	$	19	$	19	$	40	$	34	Stock-based compensation expense, net of tax		$	(11)	$	21

(1)Effective January 1, 2022, the Company changed its accounting policy for stock-based compensation expense with respect to forfeitures. The cumulative effect of this change resulted in a one-time reduction in stock-based compensation expense of $40 million recognized in the first quarter of 2022. Refer to Note 1 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

RESTRICTED SHARE 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, 2020		26,688,304	$	19.66	2.0	$	854
Outstanding as of December 31, 2021								Outstanding as of December 31, 2021	18,808,491	$	25.74	2.2	$	693
Granted	Granted	3,972,147	28.28					Granted	2,804,755	38.62
Vested and released	Vested and released	(9,431,933)	10.42			317		Vested and released	(574,816)	22.77			21
Forfeited	Forfeited	(1,038,984)	25.00					Forfeited	(296,255)	26.15
Outstanding as of June 30, 2021		20,189,534	$	25.39	2.6	$	711
Outstanding as of March 31, 2022								Outstanding as of March 31, 2022	20,742,175	$	27.55	2.2	$	786

As of ~~June 30, 2021,~~March 31, 2022, there was ~~$344~~$257 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of ~~3.7~~3.5 years.

~~Total payments~~

9. Restructuring and Integration Costs

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 primarily recorded within SG&A expenses on the income statement and are held primarily within unallocated corporate costs.

DPS INTEGRATION PROGRAM

As part of the DPS Merger, 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. Although the program was initially expected to be completed in 2021, as a result of delays due to COVID-19, KDP will continue to recognize expenditures for certain initiatives which began during the integration period and are expected to be completed in 2022. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $826 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through March 31, 2022. Restructuring and integration charges on the DPS Integration Program were as follows:


	First Quarter
(in millions)		2022		2021
Restructuring and integration charges		$	36	$	43

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 for the ~~employees' tax obligations to the relevant taxing authorities~~DPS Integration Program, all of which were ~~$125 million~~workforce reduction costs, were as follows for the first six months of 2021, which were funded through the issuance of shares in at-the-market offerings, known as an ATM program. There were 0 such payments made during the first six months of 2020. This payment is reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows.period presented:


(in millions)	Restructuring Liabilities
Balance as of January 1, 2022	$	19
Charges to expense	6
Cash payments	(9)

Balance as of March 31, 2022	$	16

1918

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

10. Revenue Recognition

KDP recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include CSDs, NCBs, K-Cup pods and appliances, occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration that KDP expects to receive in exchange for transferring goods. The amount of consideration KDP receives and revenue KDP recognizes varies with changes in customer incentives that KDP 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 KDP's revenue by portfolio:


(in millions)	(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total		(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total
For the second quarter of 2021:

For the first quarter of 2022:												For the first quarter of 2022:
CSD(1)	CSD(1)	$	0	$	711	$	368	$	122	$	1,201	CSD(1)	$	—	$	704	$	354	$	100	$	1,158
NCB(1)												NCB(1)	—		672		2		46		720
K-Cup pods(2)	K-Cup pods(2)	831		0		0		0		831		K-Cup pods(2)	855		—		—		—		855
NCB(1)		0		673		4		44		721
Appliances	Appliances	210		0		0		0		210		Appliances	178		—		—		—		178
Other	Other	60		114		3		0		177		Other	60		104		3		—		167
Net sales	Net sales	$	1,101	$	1,498	$	375	$	166	$	3,140	Net sales	$	1,093	$	1,480	$	359	$	146	$	3,078

For the second quarter of 2020:
For the first quarter of 2021:												For the first quarter of 2021:
CSD(1)	CSD(1)	$	0	$	621	$	304	$	91	$	1,016	CSD(1)	$	—	$	624	$	323	$	87	$	1,034
NCB(1)												NCB(1)	—		581		3		38		622
K-Cup pods(2)	K-Cup pods(2)	830		0		0		0		830		K-Cup pods(2)	903		—		—		—		903
NCB(1)		0		662		2		28		692
Appliances	Appliances	173		0		0		0		173		Appliances	174		—		—		—		174
Other	Other	40		109		3		1		153		Other	65		102		2		—		169
Net sales	Net sales	$	1,043	$	1,392	$	309	$	120	$	2,864	Net sales	$	1,142	$	1,307	$	328	$	125	$	2,902

For the first six months of 2021:
CSD(1)		$	0	$	1,335	$	691	$	209	$	2,235
K-Cup pods(2)		1,734		0		0		0		1,734
NCB(1)		0		1,254		7		82		1,343
Appliances		384		0		0		0		384
Other		125		216		5		0		346
Net sales		$	2,243	$	2,805	$	703	$	291	$	6,042

For the first six months of 2020:
CSD(1)		$	0	$	1,184	$	606	$	173	$	1,963
K-Cup pods(2)		1,621		0		0		0		1,621
NCB(1)		0		1,224		4		63		1,291
Appliances		300		0		0		0		300
Other		95		201		5		1		302
Net sales		$	2,016	$	2,609	$	615	$	237	$	5,477

(1)Represents net sales of owned and partner 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)~~

11. Income Taxes

The Company’s effective tax rates were as follows:


		Second Quarter				First Six Months					First Quarter
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)		2022		2021
Effective tax rate	Effective tax rate	26.9	%	26.6	%	23.5	%	25.7	%	Effective tax rate		23.5	%	18.3	%

For the ~~second~~first quarter of ~~2021,~~2022, the provision for income taxes was higher than the ~~second~~first quarter of ~~2020,~~2021, which was primarily driven by the ~~increase on the revaluation of state deferred tax liabilities due~~unfavorable comparison to ~~state legislative changes in 2021. This increase was slightly offset by the decrease of U.S. taxation of foreign earnings.~~

~~For the first six months of 2021, the provision for income taxes was lower than the first six months of 2020, which was primarily driven by~~ the tax benefit received from excess tax deductions that were generated from the vesting of RSUs during the first ~~six months~~quarter of ~~2021.~~2021, partially offset by the Company’s incremental income in low tax jurisdictions during the first quarter of 2022.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

12. Investments ~~in Unconsolidated Affiliates~~

The following table summarizes investments in unconsolidated affiliates as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


(in millions)	(in millions)	Ownership Interest		June 30, 2021		December 31, 2020		(in millions)	Ownership Interest		March 31, 2022		December 31, 2021
BodyArmor		12.5	%	$	52	$	51

Bedford								Bedford	30.0	%	—		—
Dyla LLC	Dyla LLC	12.4	%	12		12		Dyla LLC	12.4	%	12		12
Force Holdings LLC(1)	Force Holdings LLC(1)	33.3	%	5		5		Force Holdings LLC(1)	33.3	%	4		5
Beverage startup companies(2)	Beverage startup companies(2)	(various)		11		15		Beverage startup companies(2)	(various)		8		8
Other	Other	(various)		6		5		Other	(various)		5		5
Investments in unconsolidated affiliates	Investments in unconsolidated affiliates			$	86	$	88	Investments in unconsolidated affiliates			$	29	$	30

(1)Force Holdings LLC has a 14.1% ownership interest in Dyla LLC.

(2)Beverage startup companies represent equity method investments in development stage entities and may include entities which are pre-revenue, in test markets, or in early operations.

BEDFORD INVESTMENT

~~13. Other Financial Information~~In December 2021, Bedford began procedures to wind down the company. As part of the wind down procedures, KDP and ABI agreed to together fund a $68 million credit agreement to Bedford. KDP will fund 30% of this loan, in line with the Company’s ownership percentage in Bedford. Approximately $8 million of the Company’s responsibility under this credit agreement has been funded as of March 31, 2022. The Company recorded impairment losses related to this credit agreement of $6 million in the first quarter of 2022.

~~CASH AND CASH EQUIVALENTS~~BODYARMOR INVESTMENT

In January 2022, KDP agreed to a $350 million payment from BodyArmor for a full settlement of all of the claims under the litigation against BodyArmor and in complete satisfaction of the holdback amount owed to ABC in association with the sale of ABC’s equity interest in BodyArmor in 2021. ABC received the settlement payment in January 2022 and the lawsuit was dismissed.

The ~~carrying value of cash, cash equivalents, restricted cash and restricted cash equivalents is valued as~~Company allocated approximately $300 million of the ~~balance sheet date equating fair value~~settlement for resolution of the prior litigation, of which $299 million was recorded to Gain on litigation settlement and ~~classified~~$1 million was applied against outstanding receivables from BodyArmor. Approximately $28 million of the $299 million gain on litigation settlement was held in unallocated corporate costs as ~~Level 1.~~ a recovery of legal fees incurred during the litigation process, with the remaining $271 million of the $299 million recorded to our Packaged Beverages segment.

Approximately $50 million of the $350 million payment was allocated to the settlement of the holdback liability, which was recorded to Gain on the sale of our equity method investment.

13. Accumulated Other Comprehensive Income (Loss)

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

(in millions) June 30, 2021 December 31, 2020
Cash and cash equivalents $ 167 $ 240
Restricted cash and restricted cash equivalents(1)
3 15
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows $ 170 $ 255

~~(1)~~Restricted cash and cash equivalents as of June 30, 2021 primarily represent amounts held in escrow in connection with the acquisitions of Core Nutrition LLC and Big Red Group Holdings, LLC, which have a corresponding holdback liability recorded in other current liabilities, as shown below. The decrease during the first six months of 2021 was primarily driven by the release of $10 million from escrow in April 2021 related to the 2017 acquisition of Bai Brands LLC.

~~ALLOWANCE FOR EXPECTED CREDIT LOSSES~~

~~Activity in the allowance for expected credit losses account during the periods presented was as follows:~~


~~(in millions)~~	~~Allowance for Expected Credit Losses~~



~~Balance as of December 31, 2020~~	$	21
~~Provision (reversal) for allowance for expected credit losses~~	~~(13)~~
~~Write-offs and adjustments~~	1
~~Balance as of June 30, 2021~~	$	9


(in millions)	Foreign Currency Translation Adjustments		Pension and Post-Retirement Benefit Liabilities		Cash Flow Hedges		Accumulated Other Comprehensive Income (Loss)












For the first quarter of 2022:
Beginning balance	$	81	$	(4)	$	(103)	$	(26)
Other comprehensive income	99		—		140		239
Amounts reclassified from AOCI	—		—		2		2
Other comprehensive income, net	99		—		142		241
Balance as of March 31, 2022	$	180	$	(4)	$	39	$	215

For the first quarter of 2021:
Beginning balance	$	95	$	(4)	$	(14)	$	77
Other comprehensive income	16		—		68		84
Amounts reclassified from AOCI	—		—		3		3
Other comprehensive income, net	16		—		71		87
Balance as of March 31, 2021	$	111	$	(4)	$	57	$	164

2120

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

The following table presents the amount of losses reclassified from AOCI into the unaudited Condensed Consolidated Statements of Income:


		First Quarter
(in millions)	Income Statement Caption		2022		2021
Cash Flow Hedges:
Interest rate contracts	Interest expense		$	—	$	—
FX contracts	Cost of sales		3		5
Total			3		5
Income tax benefit			(1)		(2)
Total, net of tax			$	2	$	3

14. Other Financial Information

SELECTED BALANCE SHEET INFORMATION

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


	March 31,		December 31,
(in millions)	2022		2021
Inventories:
Raw materials	$	363	$	330
Work-in-progress	8		6
Finished goods	701		577
Total	1,072		913
Allowance for excess and obsolete inventories	(27)		(19)
Total Inventories	$	1,045	$	894
Prepaid expenses and other current assets:
Other receivables	$	128	$	112
Customer incentive programs	103		21
Derivative instruments	217		144
Prepaid marketing	20		12
Spare parts	74		72

Income tax receivable	16		14
Other	79		72
Total prepaid expenses and other current assets	$	637	$	447
Other non-current assets:
Operating lease right-of-use assets	$	809	$	673
Customer incentive programs	58		59
Derivative instruments	59		3

Equity securities(1)	50		58
Equity securities without readily determinable fair values	1		1


Other	142		143
Total other non-current assets	$	1,119	$	937

(1)Equity securities are comprised of assets held in a rabbi trust in connection with a non-qualified defined contribution plan, as well as our ownership interest in Vita Coco. Fair values of these equity 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.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)


	March 31,		December 31,
(in millions)	2022		2021
Accrued expenses:
Customer rebates & incentives	$	353	$	446
Accrued compensation	152		227
Insurance reserve	39		33
Accrued interest	138		55
Accrued professional fees	16		19
Other accrued expenses	330		330
Total accrued expenses	$	1,028	$	1,110
Other current liabilities:
Dividends payable	$	266	$	265
Income taxes payable	282		144
Operating lease liability	87		76
Finance lease liability	87		79
Derivative instruments	31		39

Other	14		10
Total other current liabilities	$	767	$	613
Other non-current liabilities:
Operating lease liability	735		608
Finance lease liability	615		621
Pension and post-retirement liability	$	41	$	40
Insurance reserves	67		75


Derivative instruments	95		143
Deferred compensation liability	38		43
Other	56		47
Total other non-current liabilities	$	1,647	$	1,577

ACCOUNTS PAYABLE

KDP has ~~an agreement~~agreements with a third party ~~administrator~~administrators which ~~allows~~allow participating suppliers to track payments from KDP, and if voluntarily elected by the supplier, to 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. KDP has been informed by the third party ~~administrator~~administrators that as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020, $2,901~~2021, $3,409 million and ~~$2,578~~$3,194 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

~~SELECTED BALANCE SHEET INFORMATION~~

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

June 30, December 31,
(in millions) 2021 2020
Inventories:
Raw materials $ 286 $ 260
Work-in-progress 6 6
Finished goods 628 520
Total 920 786
Allowance for excess and obsolete inventories (23) (24)
Total Inventories $ 897 $ 762
Prepaid expenses and other current assets:
Other receivables $ 75 $ 85
Customer incentive programs 68 34
Derivative instruments 107 45
Prepaid marketing 18 15
Spare parts 63 55
Assets held for sale 2 2
Income tax receivable 12 11
Other 129 76
Total prepaid expenses and other current assets $ 474 $ 323
Other non-current assets:
Customer incentive programs $ 63 $ 70
Marketable securities - trading(1)
44 41
Operating lease right-of-use assets 648 645
Derivative instruments 38 12
Equity securities without readily determinable fair values 1 1
Other 132 125
Total other non-current assets $ 926 $ 894

~~(1)~~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 $44 million and $41 million as of June 30, 2021 and December 31, 2020, respectively.

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, CONTINUED)~~

June 30, December 31,
(in millions) 2021 2020
Accrued expenses:
Customer rebates & incentives $ 398 $ 382
Accrued compensation 194 215
Insurance reserve 45 35
Accrued interest 55 57
Accrued professional fees 18 21
Other accrued expenses 309 330
Total accrued expenses $ 1,019 $ 1,040
Other current liabilities:
Dividends payable $ 265 $ 212
Income taxes payable 13 39
Operating lease liability 81 72
Finance lease liability 52 44
Derivative instruments 33 25
Holdback liabilities 2 15
Other 9 9
Total other current liabilities $ 455 $ 416
Other non-current liabilities:
Pension and post-retirement liability $ 39 $ 38
Insurance reserves 75 72
Operating lease liability 577 580
Finance lease liability 552 298
Derivative instruments 129 18
Deferred compensation liability 44 41
Other 75 72
Total other non-current liabilities $ 1,491 $ 1,119

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, CONTINUED)~~

~~14. Accumulated Other Comprehensive Income (Loss)~~

~~The following table provides a summary of changes in AOCI, net of taxes:~~

(in millions) Foreign Currency Translation Adjustments Pension and Post-Retirement Benefit Liabilities Cash Flow Hedges Accumulated Other Comprehensive Income (Loss)
For the second quarter of 2021:
Beginning balance $ 111 $ (4) $ 57 $ 164
Other comprehensive income 112 0 (152) (40)
Amounts reclassified from AOCI 0 0 4 4
Other comprehensive income, net 112 — (148) (36)
Balance as of June 30, 2021 $ 223 $ (4) $ (91) $ 128
For the second quarter of 2020:
Beginning balance $ (479) $ (1) $ 0 $ (480)
Other comprehensive income 151 0 1 152
Balance as of June 30, 2020 $ (328) $ (1) $ 1 $ (328)
For the first six months of 2021:
Beginning balance $ 95 $ (4) $ (14) $ 77
Other comprehensive income 128 0 (84) 44
Amounts reclassified from AOCI 0 0 7 7
Other comprehensive income, net 128 — (77) 51
Balance as of June 30, 2021 $ 223 $ (4) $ (91) $ 128
For the first six months of 2020:
Beginning balance $ 104 $ 0 $ 0 $ 104
Other comprehensive loss (432) (1) 1 (432)
Balance as of June 30, 2020 $ (328) $ (1) $ 1 $ (328)

~~The following table presents the amount of (gains)/losses reclassified from AOCI into the unaudited Condensed Consolidated Statements of Income:~~

Second Quarter First Six Months
(in millions) Income Statement Caption 2021 2020 2021 2020
Cash Flow Hedges:
Interest rate contracts Interest expense $ 0 $ 0 $ 0 $ 0
FX contracts Cost of sales 4 0 9 0
Total 4 0 9 0
Income tax benefit 0 0 (2) 0
Total, net of tax $ 4 $ 0 $ 7 $ 0

~~KEURIG DR PEPPER INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, CONTINUED)~~

15. Commitments and Contingencies

~~LEGAL MATTERS~~

~~The Company~~KDP is ~~involved from time~~occasionally subject to ~~time in various claims, proceedings, and litigation. KDP establishes reserves~~litigation or other legal proceedings. Reserves are recorded for specific legal proceedings when the Company determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. As of March 31, 2022 and December 31, 2021, the Company had litigation reserves of $11 million and $14 million, respectively. KDP has also identified certain other legal matters where ~~the Company believes~~we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. The Company does not believe that the outcome of these, or any other, pending legal matters, individually or collectively, will have a material adverse effect on the results of operations, financial condition or liquidity of KDP.

~~Antitrust Litigation~~

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

ANTITRUST LITIGATION

In February 2014, TreeHouse Foods, Inc. and certain affiliated entities filed suit against KDP’s wholly-owned subsidiary, ~~KGM,~~Keurig, in the U.S. District Court for the Southern District of New York (“SDNY”) (TreeHouse Foods, Inc. et al. v. Green Mountain Coffee Roasters, Inc. et ~~al)~~al.). The TreeHouse complaint asserted claims under the federal antitrust laws and various state laws, contending that Keurig had monopolized alleged markets for single serve coffee brewers and single serve coffee pods. The TreeHouse complaint sought treble monetary damages, declaratory relief, injunctive relief and attorneys’ fees. In March 2014, JBR, Inc. filed suit against ~~KGM~~Keurig in the U.S. District Court for the Eastern District of California (JBR, Inc. v. Keurig Green Mountain, Inc.). The claims asserted and relief sought in the JBR ~~Inc.~~ complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint.

Beginning in ~~March~~ 2014, ~~twenty-seven~~a number of putative class actions asserting similar claims and seeking similar relief to the matters described above were filed on behalf of purported direct ~~and indirect~~ purchasers of ~~KGM’s~~Keurig’s products in various federal district courts. In June 2014, ~~the Judicial Panel on Multidistrict Litigation granted a motion to transfer~~ these various actions, including the TreeHouse and JBR ~~actions,~~suits, were transferred to a single judicial district for coordinated ~~or consolidated~~ pre-trial proceedings (the “Multidistrict Antitrust Litigation”). ~~Consolidated~~A consolidated putative class action ~~complaints~~complaint by direct purchaser ~~and indirect purchaser~~ plaintiffs ~~were~~was filed in July 2014. An additional class action on behalf of indirect purchasers, originally filed in the Circuit Court of Faulkner County, Arkansas (Julie Rainwater et al. v. Keurig Green Mountain, Inc.), was transferred into the Multidistrict Antitrust Litigation in November 2015. In January 2019, McLane Company, Inc. filed suit against ~~KGM~~Keurig (McLane Company, Inc. v. Keurig Green Mountain, Inc.) in the SDNY asserting similar claims and was also ~~was~~ transferred into the Multidistrict Antitrust Litigation. These actions are now pending in the SDNY (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation). Discovery in the Multidistrict Antitrust Litigation ~~commenced~~concluded in ~~December 2017.~~

~~Separately,~~2021, with plaintiffs collectively claiming more than $5 billion of monetary damages. Keurig strongly disputes the merits of the claims and the calculation of damages. As a ~~statement~~result, Keurig has fully briefed a summary judgment motion that, if successful, would end the cases entirely. Keurig has also fully briefed other significant motions, including challenges to the validity of ~~claim was filed in September 2014 against KGM and~~plaintiffs’ damages calculations. Keurig ~~Canada Inc. in Ontario, Canada by Club Coffee L.P., a Canadian manufacturer of single serve beverage pods, asserting a breach of competition law and false and misleading statements by Keurig.~~is also pursuing its opposition to direct purchaser plaintiffs’ motion for class certification.

In July 2021, BJ’s Wholesale Club, Inc. filed suit against Keurig (BJ’s Wholesale Club, Inc. v. Keurig Green Mountain, Inc.) in the U.S. District Court for the Eastern District of New York (“EDNY”) asserting similar claims and also was transferred into the Multidistrict Antitrust Litigation. In August 2021, Winn-Dixie Stores, Inc. and Bi-Lo Holding LLC filed suit against Keurig (Winn-Dixie Stores, Inc. et al. v. Keurig Green Mountain, Inc. et al.) in the EDNY asserting similar claims and was also transferred into the Multidistrict Antitrust Litigation. These cases remain in the early stages of discovery.

A number of putative class actions asserting similar claims and seeking similar relief were previously filed on behalf of purported indirect purchasers of Keurig’s products. In July 2020, ~~KGM~~Keurig reached an agreement with the putative indirect purchaser class plaintiffs in the Multidistrict Antitrust Litigation to settle the claims asserted ~~in their complaint~~ for $31 million. The settlement class consists of individuals and entities in the United States that purchased, from persons other than ~~KGM~~Keurig and not for purposes of resale, ~~KGM~~Keurig manufactured or licensed single serve beverage portion packs during the applicable class period (beginning in September 2010 for most states). The court granted preliminary approval of the settlement in December 2020, and the Company paid the settlement amount in January 2021. ~~Final~~In June 2021, the Court granted final approval of the settlement, entered final judgment, and dismissed the indirect purchasers’ claims.

Separate from the U.S. actions described above, a statement of claim was ~~granted~~filed in September 2014 against Keurig and Keurig Canada Inc. in Ontario, Canada, by ~~the court in June 2021.~~Club Coffee L.P., a Canadian manufacturer of single serve beverage pods, asserting a breach of competition law and false and misleading statements by Keurig. To date, this plaintiff has not taken substantive action to prosecute its claims.

KDP intends to vigorously defend the remaining lawsuits ~~brought by Treehouse, JBR, McLane, the putative direct purchaser class and Club Coffee.~~described above. At this time, the Company is unable to predict the outcome of these lawsuits, the potential loss or range of loss, if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations. Accordingly, the Company has not accrued for a loss contingency. Additionally, as the timelines in these cases may be beyond our control, we cannot assure you if or when there will be material developments in these matters.

~~Proposition~~PROPOSITION 65 ~~Litigation~~LITIGATION

In May 2011, CERT filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, (Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182), alleging that ~~KGM,~~Keurig, and certain other defendants who manufacture, package, distribute or sell coffee, failed to warn persons in California that ~~KGM's~~Keurig's coffee products expose persons to the chemical acrylamide in violation of Proposition 65.

~~KGM,~~Keurig, as part of a joint defense group organized to defend against the lawsuit, disputed CERT's claims and asserted multiple affirmative defenses. The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees, but such trial did not occur in light of California’s Office of Environmental Health Hazard Assessment proposal of a new Proposition 65 regulation clarifying that cancer warnings are not required for chemicals, such as acrylamide, that are present in coffee as a result of roasting coffee beans. After the regulation took effect in October 2019, the litigation continued based on, among other items, CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims. In August 2020, the court granted the defendants' motion for summary judgment, effectively ending CERT's Proposition 65 litigation at the trial court level. CERT has filed its appeal brief, and the Company intends to continue vigorously defending itself in this action. However, the Company believes that the likelihood that it will incur a material loss in connection with the CERT litigation is remote and accordingly, no loss contingency has been recorded.

2523

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

16. ~~Related Parties~~Transactions with Variable Interest Entities

~~IDENTIFICATION OF RELATED PARTIES~~

JAB holds a significant but non-controlling interest in KDP. As of June 30, 2021, JAB beneficially owned approximately 33% of KDP's outstanding common stock. JAB and its affiliates also hold investments inThe Company has a number of ~~other companies that have commercial relationships~~leasing arrangements and one licensing arrangement with special purpose entities associated with the ~~Company, including Peet's, Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc.~~same sponsor, which are referred to as the Veyron SPEs. The Veyron SPEs are VIEs for which KDP is not the primary beneficiary.

•~~KDP purchases certain raw materials from Peet's and manufactures coffee and tea portion packs under Peet's brands for sale by KDP and Peet's in the U.S. and Canada.~~LEASING ARRANGEMENTS

•~~KDP exclusively manufactures, distributes and sells Peet's RTD beverage products in the U.S. and Canada.~~

•~~KDP licenses the Caribou Coffee, Panera Bread and Krispy Kreme trademarks for use in the manufacturing~~As of ~~portion packs for the Keurig brewing system.~~

•KDP sells various beverage concentrates and packaged beverages to Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc. for resale to retail customers.

~~KDP holds investments in certain brand ownership companies, and in certain instances,~~March 31, 2022, the Company ~~also~~ has rights in specified territories to bottle and/or distribute the brands owned by such companies. KDP purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S. Additionally, anyentered into twelve lease transactions with ~~significant partners in these investments, such as ABI, are considered related party~~the Veyron SPEs, eleven of which were associated with asset sale-leaseback transactions. ~~ABI purchases Clamato from KDP and pays the Company a royalty for use of the brand name.~~ Refer to Note 125 for additional information about ~~KDP's investments~~the current period asset sale-leaseback transactions. Each lease has a RVG based on a percentage of Veyron SPEs’s purchase price; however, the Company concluded it was not probable that the Company will owe an amount at the end of each individual lease term, as the fair values of the properties are not expected to fall below the RVGs at the end of each individual lease term. As such, the Company recorded each lease obligation excluding the associated RVG. The aggregate maximum undiscounted RVG associated with the leasing arrangements as of March 31, 2022 and December 31, 2021 were $602 million and $549 million, respectively. This aggregate maximum value assumes that the fair value of each property at the end of either the original lease term or renewal term is equal to zero, which the Company has concluded is not probable.

The following table provides the carrying amounts of the right-to-use assets and lease obligations recorded on the Company’s Consolidated Balance Sheets associated with these leasing arrangements related to the VIEs as of March 31, 2022 and December 31, 2021.


(in millions)	March 31, 2022(1)		December 31, 2021(2)
Current assets	$	21	$	19
Non-current assets	357		312
Current liabilities	18		13
Non-current liabilities	369		323

(1)The leasing agreements included as of March 31, 2022 include eight manufacturing sites, three distribution centers and our Frisco, Texas headquarters.

(2)The leasing agreements included as of December 31, 2021 include seven manufacturing sites, two distribution centers and our Frisco, Texas headquarters.

LICENSING ARRANGEMENT

ABC, a wholly-owned subsidiary of KDP, has provided a guarantee in ~~brand ownership companies.~~connection with its distribution agreement with the Veyron SPEs to be paid only in the event the Veyron SPEs sell specific distribution rights and the value of those distribution rights does not exceed $142 million, which is the maximum undiscounted amount that KDP could pay under the guarantee. All obligations with respect to the guarantee will cease upon termination of the distribution agreement, which would occur upon notice by ABC not to renew the distribution agreement, KDP no longer being investment grade at the end of the term, or the sale of the distribution rights by the Veyron SPEs. As of March 31, 2022, KDP has not recorded a liability as it is not probable that the Company will have to make any payments required under the residual value guarantee, as the fair value of the distribution rights is not expected to fall below $142 million over the term of the agreement.

As of March 31, 2022, KDP had $106 million in fixed service fee commitments related to the 15-year distribution agreement which was effective on December 28, 2020, with Veyron SPEs. These commitments were used to assist the Veyron SPEs in obtaining financing. Such fixed service fee payments began on January 1, 2021.

Fixed service fees over the next five years are expected to be as follows:


	Remainder of 2022		For the Years Ending December 31,
(in millions)	Remainder of 2022		2023		2024		2025		2026		2027
Fixed service fees	$	6	$	8	$	8	$	8	$	8	$	8

2624

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

17. Subsequent Events

On April 22, 2022, KDP undertook a strategic refinancing and issued $3 billion aggregate face value of Notes, consisting of $1,000 million of 2029 Notes, $850 million of 2032 Notes, and $1,150 million of 2052 Notes. The discount associated with these notes was approximately $16 million, and KDP incurred approximately $23 million of debt issuance costs.

In association with the aforementioned issuance of Notes, KDP unwound approximately $1,500 million of notional amount of the Company’s forward starting swaps, which were designated as cash flow hedges. Upon termination, KDP received $125 million to settle the contracts with the counterparties, which will be amortized to interest expense over the respective terms of the issued Notes. As of April 28, 2022, KDP had $1,000 million of notional amount of forward starting swaps outstanding, which continue to be designated as cash flow hedges.

The proceeds from the issuance were used to voluntarily prepay and retire the remaining 2023 Merger Notes and to tender portions of the 2025 Merger Notes, the 2028 Merger Notes, the 2038 Merger Notes, and the 2048 Merger Notes.

The following table presents KDP’s revised schedule of Notes maturities after the aforementioned transactions:


(in millions, except %)
Issuance	Maturity Date	Rate	April 28, 2022		March 31, 2022
2023 Merger Notes	May 25, 2023	4.057%	$	—	$	1,000
2023 Notes	December 15, 2023	3.130%	500		500
2024 Notes	March 15, 2024	0.750%	1,150		1,150
2025 Merger Notes	May 25, 2025	4.417%	529		1,000
2025 Notes	November 15, 2025	3.400%	500		500
2026 Notes	September 15, 2026	2.550%	400		400
2027 Notes	June 15, 2027	3.430%	500		500
2028 Merger Notes	May 25, 2028	4.597%	1,112		2,000
2029 Notes	April 15, 2029	3.950%	1,000		—
2030 Notes	May 1, 2030	3.200%	750		750
2031 Notes	March 15, 2031	2.250%	500		500
2032 Notes	April 15, 2032	4.050%	850		—

2038 Merger Notes	May 25, 2038	4.985%	211		500
2045 Notes	November 15, 2045	4.500%	550		550
2046 Notes	December 15, 2046	4.420%	400		400
2048 Merger Notes	May 25, 2048	5.085%	391		750
2050 Notes	May 1, 2050	3.800%	750		750
2051 Notes	March 15, 2051	3.350%	500		500
2052 Notes	April 15, 2052	4.500%	1,150		—
Principal amount			$	11,743	$	11,750

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 Annual ~~Report, as filed on February 25, 2021.~~Report.

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 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 the global COVID-19 pandemic, inflation, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters, supply chain issues 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 “outlook,” “guidance,” “anticipate,” “expect,” “believe,” “could,” “estimate,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar words, phrases or expressions and variations or negatives of these words 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, as well as 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.

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 tea and coffee, juice, juice drinks, mixers and specialty coffee, and is a leading producer of innovative 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, and partner brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S., according to IRi, which are 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.~~systems. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, ~~pure-play~~ e-commerce retailers, office superstores, vending machines, grocery and ~~office superstores;~~drug stores, and convenience stores; 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 halfreportable segments consist of the ~~year due to the holiday shopping season.~~following:

~~TABLE OF CONTENTS~~•

~~COFFEE SYSTEMS~~

~~Our~~The Coffee Systems segment ~~is primarily a producer of innovative single serve brewers and specialty coffee~~reflects sales in the U.S. and ~~Canada.~~

~~Our Coffee Systems segment manufactures over 75%~~Canada of the ~~pods in the single-serve K-Cup pod format in the U.S. We~~ manufacture and ~~sell 100%~~distribution of ~~the~~finished goods relating to our single-serve brewers, K-Cup pods ~~of the following brands to retailers, away from home channel participants and end-use consumers: Green Mountain Coffee Roasters, The Original Donut Shop, McCafé, Laughing Man, REVV, and Van Houtte.~~

We manufacture and sell K-Cup pods for the following brands to our partners, who in turn sell them to retailers: Starbucks, Smuckers, Peet's, Dunkin' Donuts, Folgers, Newman’s Own Organics, Caribou Coffee, Eight O’Clock, Maxwell House, and Tim Hortons, as well as private label arrangements. Generally, we are able to sell these brands to our away from home channel participants and end-use consumers. We also have 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, including under our own brand, Mott's.

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 most of our single serve brewers, where we then utilize third-party contract manufacturers located in various countries in Asia for brewer appliance manufacturing. We distribute our brewers using third-party distributors, retail partners and through our website at www.keurig.com.products.

~~PACKAGED BEVERAGES~~

~~Our~~•The 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 partner brands and manufacture packaged beverages for other third partiesreflects sales in the U.S. and ~~Canada.~~

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

~~The majority of our Packaged Beverages net sales come~~ from the ~~manufacturing~~manufacture and distribution of finished beverages and other products, including sales of our own brands and ~~the contract manufacturing of certain private label and emerging brand beverages. We also recognize net sales in this segment from the distribution of our partner~~third-party brands, such as evian, Vita Coco, Peet's RTD Coffee, A Shoc energy drinks, Runa energy drinks and Polar sparkling seltzer waters. We provide a route-to-market for 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 ofthrough both 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.~~systems.

~~BEVERAGE CONCENTRATES~~

~~Our~~•The Beverage Concentrates segment ~~is principally a brand ownership business where we manufacture~~reflects sales of our branded concentrates and ~~sell beverage concentrates~~syrup to third-party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are ~~CSD~~carbonated soft drink brands. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, Sun Drop, Sunkist soda, A&W, 7UP, Squirt, Big Red, RC Cola and Hawaiian Punch. Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri. We are expanding our manufacturing capabilities to include a concentrate manufacturing facility in Ireland in 2021.

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 sell them as a finished beverage to retailers through our Branded Concentrates operating segment. 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 through our FFS operating segment. Dr Pepper represents most of our FFS volume.

~~Our Beverage Concentrates brands are sold by our bottlers through all major retail channels.~~

•

~~LATIN AMERICA BEVERAGES~~

~~Our~~The Latin America Beverages segment ~~is a brand ownership, manufacturing~~reflects sales primarily in Mexico and the Caribbean from the manufacture and distribution ~~business, with operations in Mexico representing approximately 90%~~ of ~~the segment's 2020 net sales. This segment participates mainly in the carbonated mineral water, flavored CSD, bottled water~~concentrates, syrup and ~~vegetable juice categories. The largest brands include Peñafiel, Clamato, Squirt, Aguafiel and Crush.~~

~~VOLUME~~

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

~~Coffee Systems K-Cup Pod and 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.~~

~~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.

~~Beverage Concentrates Sales Volume~~

In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales 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, the equivalent of 24 twelve ounce servings. It does not include any other component of the finished beverage other than concentrate.beverages.

COMPARABLE RESULTS OF OPERATIONS

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 certain items affecting ~~comparability.~~comparability and the impact of foreign currency. 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 this Management's Discussion and Analysis discussion as Adjusted income from operations, Adjusted interest expense, Adjusted provision for income taxes, Adjusted net income and Adjusted diluted EPS.

2926

EXECUTIVE SUMMARY

Financial Overview - ~~Second~~First Quarter of ~~2021~~2022 as compared to ~~Second~~First Quarter of ~~2020~~2021

As Reported, in millions (except EPS)

As Adjusted, in millions (except EPS)

Key Events During and Subsequent to the ~~Second~~First Quarter of ~~2021~~2022

~~On May 25, 2021, we repaid our 2021 Merger Notes at maturity using commercial paper.~~ During the ~~second~~first quarter of ~~2021,~~2022, we made net repayments of our Notes, our commercial paper and our other credit agreements of ~~$427~~$350 million, which includes a make-whole premium on our 2038 Notes of $76 million.

~~Additionally,~~In January 2022, we agreed to and received a $350 million settlement payment from BodyArmor. Refer to Note 12 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

In February 2022, we terminated our 2021 364-Day Credit Agreement and our KDP Revolver and entered into the 2022 Revolving Credit Agreement. Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

In April 2022, we chose to undertake a strategic refinancing initiative, reducing our weighted average coupon rate on ~~May 25, 2021,~~ our ~~Board~~Notes from 3.671% at March 31, 2022 to 3.595% after the refinancing. Refer to Note 17 of ~~Directors declared a regular quarterly dividend of $0.1875 per share, an increase of 25% compared~~the Notes to ~~the previous quarterly dividend, which was paid on July 15, 2021 to shareholders of record as of July 1, 2021.~~

our Unaudited Condensed Consolidated Financial Statements for further information.

3027

Uncertainties and Trends Affecting Our Business

We believe the North American beverage market is influenced by certain key trends and uncertainties. Refer to Item 1A, "Risk Factors", of our Annual Report, for more information about risks and uncertainties facing us.

Some of these items, such as the ongoing COVID-19 pandemic and the invasion of Ukraine by Russia, and the resulting impacts on the global economy, including supply chain constraints and labor shortages, have led to inflation in input costs, logistics, manufacturing and labor costs. During the first quarter of 2022, we have experienced supply chain disruptions and a significant inflationary impact compared to the prior year period. These impacts have created headwinds for our products that we expect to continue throughout 2022.

As a result of these inflationary pressures, we have increased the pricing on a number of our products. Consequently, we may incur a reduction of volume or net sales, which, combined with the inflationary pressures, could impact our margins and operating results.

Refer to Note 4 of the Notes to our Unaudited Condensed Consolidated Financial Statements for our discussion of how we manage our exposure to commodity risk.

Impact of COVID-19 on our Financial Statements

The following table sets forth our reconciliation of significant COVID-19-related expenses. Employee compensation expense and employee protection costs, which impact our SG&A expenses and cost of sales, are included as the COVID-19 item affecting comparability and are excluded in our Adjusted financial measures. In addition, reported amounts under U.S. GAAP also include additional costs, not included as the COVID-19 item affecting comparability, as presented in tables below.


		Items Affecting Comparability(1)											Items Affecting Comparability(1)
(in millions)	(in millions)	Employee Compensation Expense(2)		Employee Protection Costs(3)		Allowances for Expected Credit Losses(4)		Inventory Write-Downs(5)		Total		(in millions)	Employee Compensation Expense(2)		Employee Protection Costs(3)		Total
For the second quarter of 2021:

For the first quarter of 2022:												For the first quarter of 2022:
Coffee Systems	Coffee Systems	$	1	$	4	$	(2)	$	—	$	3	Coffee Systems	$	1	$	2	$	3
Packaged Beverages	Packaged Beverages	3		3		(8)		—		(2)		Packaged Beverages	1		1		2
Beverage Concentrates	Beverage Concentrates	—		—		(3)		—		(3)		Beverage Concentrates	—		—		—
Latin America Beverages	Latin America Beverages	—		—		—		—		—		Latin America Beverages	—		—		—
Total	Total	$	4	$	7	$	(13)	$	—	$	(2)	Total	$	2	$	3	$	5

For the second quarter of 2020:
For the first quarter of 2021:												For the first quarter of 2021:
Coffee Systems	Coffee Systems	$	7	$	2	$	—	$	8	$	17	Coffee Systems	$	1	$	9	$	10
Packaged Beverages	Packaged Beverages	38		16		—		—		54		Packaged Beverages	3		2		5
Beverage Concentrates	Beverage Concentrates	—		—		4		—		4		Beverage Concentrates	—		—		—
Latin America Beverages	Latin America Beverages	—		—		—		—		—		Latin America Beverages	—		1		1
Total	Total	$	45	$	18	$	4	$	8	$	75	Total	$	4	$	12	$	16

For the first six months of 2021:
Coffee Systems		$	2	$	13	$	(2)	$	—	$	13
Packaged Beverages		6		5		(8)		—		3
Beverage Concentrates		—		—		(3)		—		(3)
Latin America Beverages		—		1		—		—		1
Total		$	8	$	19	$	(13)	$	—	$	14

For the first six months of 2020:
Coffee Systems		$	7	$	2	$	2	$	8	$	19
Packaged Beverages		41		18		8		—		67
Beverage Concentrates		—		—		4		—		4
Latin America Beverages		—		—		—		—		—
Total		$	48	$	20	$	14	$	8	$	90

(1)Employee compensation expense and employee protection costs are both included as the COVID-19 items affecting comparability in the reconciliation of our Adjusted Non-GAAP financial measures.

(2)~~In 2021, amounts~~Amounts include pay for temporary employees, including the associated taxes, as well as incremental benefits provided to frontline workers such as extended sick leave, in order to maintain essential operations during the COVID-19 pandemic. In 2020, amounts primarily reflected temporary incremental frontline incentive pay and benefits, as well as pay for temporary employees, including the associated taxes. Impacts both cost of sales and SG&A expenses.

(3)Includes costs associated with personal protective equipment, temperature scans, cleaning and other sanitization services. Impacts both cost of sales and SG&A expenses.

~~(4)~~In 2020, allowances reflected the expected impact of the economic uncertainty caused by COVID-19, leveraging estimates of credit worthiness, default and recovery rates for certain of our customers. In 2021, reversals of those previously recorded allowances reflect improving economic conditions. Impacts SG&A expenses.

~~(5)Impacts cost of sales.~~

3128

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".

~~Non-GAAP financial measures are provided in addition to U.S. GAAP measures. Such non-GAAP financial measures are excluded from the~~ ~~Results of Operations by Segment~~ ~~when there is no difference between the non-GAAP and the corresponding U.S. GAAP measure. See~~ ~~Non-GAAP Financial Measures~~ ~~for more information, including reconciliations to the corresponding U.S. GAAP measures.~~

~~Second Quarter of 2021 Compared to Second Quarter of 2020~~

~~Consolidated Operations~~

~~The following table sets forth our unaudited condensed consolidated results of operations for the second quarter of 2021 and 2020:~~

Second Quarter Dollar Percentage
($ in millions, except per share amounts) 2021 2020 Change Change
Net sales $ 3,140 $ 2,864 $ 276 9.6 %
Cost of sales 1,370 1,302 68 5.2
Gross profit 1,770 1,562 208 13.3
Selling, general and administrative expenses 1,039 1,001 38 3.8
Other operating income, net (3) — (3) NM
Income from operations 734 561 173 30.8
Interest expense 125 157 (32) (20.4)
Loss on early extinguishment of debt — 2 (2) NM
Other (income) expense, net (4) (4) — NM
Income before provision for income taxes 613 406 207 51.0
Provision for income taxes 165 108 57 52.8
Net income $ 448 $ 298 150 50.3
Earnings per common share:
Basic $ 0.32 $ 0.21 $ 0.11 52.4 %
Diluted 0.31 0.21 0.10 47.6
Gross margin 56.4 % 54.5 % 190 bps
Operating margin 23.4 % 19.6 % 380 bps
Effective tax rate 26.9 % 26.6 % 30 bps

~~Sales Volume.The following table sets forth changes in sales volume for the second quarter of 2021 compared to the prior year period:~~


	~~Percentage Change~~
~~K-Cup pod volume~~	~~0.2~~	%
~~Brewer volume~~	~~29.0~~
~~CSD sales volume~~	~~7.2~~
~~NCB sales volume~~	~~(5.5)~~

~~Net Sales.~~Net sales increased $276 million, or 9.6%, to $3,140 million for the second quarter of 2021 compared with $2,864 million in the prior year period. This performance reflected volume/mix growth of 6.1%, higher net price realization of 2.0% and favorable FX translation of 1.5%.

~~Gross Profit.~~Gross profit increased $208 million for the second quarter of 2021 compared with the prior year period. This performance primarily reflected the impact of growth in volume/mix, higher net price realization, a favorable change in unrealized commodity mark-to-market impacts, the benefit of productivity and merger synergies and favorable FX impacts, including both transaction and translation. These benefits were partially offset by higher manufacturing costs, due to both the growth in volume/mix and inflation in input costs. Gross margin increased 190 bps versus the year ago period to 56.4%, driven by our Beverage Concentrates segment.

~~Selling, General and Administrative Expenses.~~ SG&A expenses increased $38 million, or 3.8%, to $1,039 million for the second quarter of 2021 compared with $1,001 million in the prior year period. The increase was driven by higher marketing expense and increases in logistics, driven by both inflation and higher volume/mix. These increases were partially offset by reduced expenses related to the COVID-19 pandemic, a favorable comparison to an increase in our litigation reserve in the prior year period, and the benefit of productivity and merger synergies.

~~Income from Operations.~~Income from operations increased $173 million to $734 million for the second quarter of 2021 compared to $561 million in the prior year period due to the increase in gross profit, partially offset by increased SG&A expenses. Operating margin increased 380 bps versus the year ago period to 23.4%.

~~Interest Expense.~~Interest expense decreased $32 million, or 20.4%, to $125 million for the second quarter of 2021 compared with $157 million in the prior year period. This change was primarily the result of the benefit of our strategic refinancing initiatives and continued deleveraging, realized gains on certain interest rate contracts in the second quarter of 2021, and a favorable change in unrealized mark-to-market impacts on interest rate contracts.

~~Effective Tax Rate.~~The effective tax rate increased 30 bps to 26.9% for the second quarter of 2021, compared to 26.6% in the prior year period, primarily driven by the increase on the revaluation of deferred tax liabilities due to state legislative changes in 2021. This increase was mostly offset by the decrease of U.S. taxation of foreign earnings.

~~Adjusted Results of Operations~~

~~The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the second quarter of 2021 and 2020:~~

Second Quarter Dollar Percent
(in millions, except per share amounts) 2021 2020 Change Change
Adjusted income from operations $ 839 $ 775 $ 64 8.3 %
Adjusted interest expense 119 145 (26) (17.9)
Adjusted provision for income taxes 186 165 21 12.7
Adjusted net income 538 469 69 14.7
Adjusted diluted EPS 0.38 0.33 0.05 15.2
Adjusted operating margin 26.7 % 27.1 % (40) bps
Adjusted effective tax rate 25.7 % 26.0 % (30) bps

~~Adjusted Income from Operations.~~ Adjusted income from operations increased $64 million, or 8.3%, to $839 million for the second quarter of 2021 as compared to Adjusted income from operations of $775 million in the prior year period. Driving this performance in the quarter were volume/mix growth, higher net price realization, the benefit of productivity and merger synergies, and favorable FX impacts, including both transaction and translation. These benefits were partially offset by higher marketing expense and higher manufacturing costs, due to both the growth in volume/mix and inflation in input costs. Adjusted operating margin declined 40 bps versus the year ago period to 26.7%.

~~Adjusted Interest Expense.~~Adjusted interest expense decreased $26 million, or 17.9%, to $119 million for the second quarter of 2021 compared to Adjusted interest expense of $145 million in the prior year period. This benefit was primarily the result of our strategic refinancing initiatives and realized gains on certain interest rate contracts.

~~Adjusted Effective Tax Rate.~~The Adjusted effective tax rate decreased 30 bps to 25.7% for the second quarter of 2021, compared to the Adjusted effective tax rate of 26.0% in the prior year period. This decrease was primarily driven by the release of reserves ~~related to settlement of a state audit in the~~ ~~second quarter of 2021~~ ~~and reduced US taxation of foreign earnings.~~

~~Adjusted Net Income.~~Adjusted net income increased 14.7% to $538 million for the second quarter of 2021 as compared to Adjusted net income of $469 million in the prior year period. This performance was driven by the strong growth in Adjusted income from operations.

~~Adjusted Diluted EPS.Adjusted diluted EPS increased 15.2% to $0.38 per diluted share for the second quarter of 2021 as compared to Adjusted diluted EPS of $0.33 per diluted share in the prior year period.~~

~~Results of Operations by Segment~~

The following tables set forth net sales and income from operations for our segments for the second quarter of 2021 and 2020, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:

Second Quarter
(in millions) 2021 2020
Segment Results — Net sales
Coffee Systems $ 1,101 $ 1,043
Packaged Beverages 1,498 1,392
Beverage Concentrates 375 309
Latin America Beverages 166 120
Net sales $ 3,140 $ 2,864
Second Quarter
(in millions) 2021 2020
Segment Results — Income from Operations
Coffee Systems $ 322 $ 290
Packaged Beverages 258 208
Beverage Concentrates 254 220
Latin America Beverages 36 21
Unallocated corporate costs (136) (178)
Income from operations $ 734 $ 561

~~COFFEE SYSTEMS~~

~~The following table provides selected information about our Coffee Systems segment's results:~~

Second Quarter Dollar Percent
(in millions) 2021 2020 Change Change
Net sales $ 1,101 $ 1,043 $ 58 5.6 %
Income from operations 322 290 32 11.0
Operating margin 29.2 % 27.8 % 140 bps
Adjusted income from operations $ 371 $ 363 $ 8 2.2 %
Adjusted operating margin 33.7 % 34.8 % (110) bps

~~Sales Volume.~~ Volume growth for the Coffee Systems segment included K-Cup pod volume growth of 0.2%, reflecting improvement in our away-from-home businesses which was largely offset by the unfavorable comparison to consumer stock-up purchasing related to the COVID-19 pandemic in the year-ago period. Brewer volume increased 29.0% in the quarter, as compared to 11.6% in the year ago period, driven by our successful brewer innovation program.

~~Net Sales.~~ Net sales increased 5.6% to $1,101 million for the second quarter of 2021 compared to net sales of $1,043 million in the prior year period, reflecting volume/mix growth of 3.5%, favorable FX translation of 1.7% and higher net price realization of 0.4%.

~~Income from Operations.~~Income from operations increased $32 million, or 11.0%, to $322 million for the second quarter of 2021, compared to $290 million for the prior year period, driven by the continued benefit of productivity and merger synergies, which impacted both cost of sales and SG&A, a favorable comparison to an increase in our litigation reserve in the prior year period, a favorable change in unrealized commodity mark-to-market impacts, favorable FX effects, including both transaction and translation, phasing of marketing expense and higher net price realization. These impacts were partially offset by unfavorable product mix related to the strong brewer growth and inflation in input costs, logistics and manufacturing. Operating margin increased 140 bps versus the year ago period to 29.2%.

~~Adjusted Income from Operations.~~Adjusted income from operations increased $8 million, or 2.2%, to $371 million for the second quarter of 2021, compared with Adjusted income from operations of $363 million for the prior year period, driven by the continued benefit of productivity and merger synergies, which impacted both cost of sales and SG&A, favorable FX effects, including both transaction and translation, phasing of marketing expense and higher net price realization. These impacts were partially offset by unfavorable product mix related to the strong brewer growth and inflation in input costs, logistics and manufacturing. Adjusted operating margin decreased 110 bps versus the year ago period to 33.7%.

~~PACKAGED BEVERAGES~~

~~The following table provides selected information about our Packaged Beverages segment's results:~~

Second Quarter Dollar Percent
(in millions) 2021 2020 Change Change
Net sales $ 1,498 $ 1,392 $ 106 7.6 %
Income from operations 258 208 50 24.0
Operating margin 17.2 % 14.9 % 230 bps
Adjusted income from operations $ 286 $ 269 $ 17 6.3 %
Adjusted operating margin 19.1 % 19.3 % (20) bps

~~Sales Volume.~~ Sales volume for the second quarter of 2021 increased 0.7% due primarily to strength in our CSDs, driven by our broad flavor portfolio, water, and the addition of Polar to our portfolio of partner brands. This was partially offset by declines in Hawaiian Punch and reductions in contract manufacturing.

~~Net Sales.~~Net sales increased 7.6% to $1,498 million for the second quarter of 2021, compared with net sales of $1,392 million in the prior year period, driven by volume/mix growth of 6.2%, higher net price realization of 1.1% and favorable FX translation of 0.3%.

~~Income from Operations.~~Income from operations increased $50 million, or 24.0%, to $258 million for the second quarter of 2021, compared with $208 million for the prior year period, driven by volume/mix growth, the favorable comparison to COVID-19-related expenses in the prior year period, the benefits of productivity and merger synergies and higher net price realization. These growth drivers were partially offset by inflation in input costs, logistics and manufacturing, higher marketing expense, increased operating costs due to higher volumes and expenses associated with productivity projects. Operating margin grew 230 bps versus the year ago period to 17.2%.

~~Adjusted Income from Operations.~~ Adjusted income from operations increased $17 million, or 6.3%, to $286 million for the second quarter of 2021, compared with Adjusted income from operations of $269 million for the prior year period, driven by volume/mix growth, the benefits of productivity and merger synergies and higher net price realization. These growth drivers were partially offset by inflation in input costs, logistics and manufacturing,higher marketing expense and increased operating costs due to higher volumes. Adjusted operating margin declined 20 bps versus the year ago period to 19.1%.

~~BEVERAGE CONCENTRATES~~

~~The following table provides selected information about our Beverage Concentrates segment's results:~~

Second Quarter Dollar Percent
(in millions) 2021 2020 Change Change
Net sales $ 375 $ 309 $ 66 21.4 %
Income from operations 254 220 34 15.5
Operating margin 67.7 % 71.2 % (350) bps
Adjusted income from operations $ 256 $ 222 $ 34 15.3 %
Adjusted operating margin 68.3 % 71.8 % (350) bps

~~Sales volume.~~Sales volume for the second quarter of 2021 increased 7.0%, primarily reflecting improving trends in our fountain foodservice component of the business, which services restaurants and hospitality, driven by higher levels of consumer mobility as compared to the year-ago period.

~~Net Sales.~~Net sales increased 21.4% to $375 million for the second quarter of 2021 compared to $309 million for the prior year period, reflecting higher net price realization of 10.4%, driven by the impact of our annual price increases and the favorable comparison of annual true-ups of our prior year estimated customer incentive liability, favorable volume/mix of 10.3% and favorable FX translation of 0.7%.

~~Income from Operations.~~Income from operations increased $34 million, or 15.5%, to $254 million for the second quarter of 2021 compared to $220 million for the prior year period, driven by the impact of higher net sales, partially offset by higher marketing expense. Operating margin declined 350 bps from versus the year ago period to 67.7%.

~~Adjusted Income from Operations.~~ Adjusted income from operations increased $34 million, or 15.3%, to $256 million for the second quarter of 2021 compared with Adjusted income from operations of $222 million for the prior year period, driven by the impact of higher net sales, partially offset by higher marketing expense. Adjusted operating margin declined 350 bps versus the year ago period to 68.3%.

~~LATIN AMERICA BEVERAGES~~

~~The following table provides selected information about our Latin America Beverages segment's results:~~

Second Quarter Dollar Percent
(in millions) 2021 2020 Change Change
Net sales $ 166 $ 120 $ 46 38.3 %
Income from operations 36 21 15 71.4 %
Operating margin 21.7 % 17.5 % 420 bps
Adjusted income from operations $ 37 $ 23 $ 14 60.9 %
Adjusted operating margin 22.3 % 19.2 % 310 bps

~~Sales Volume.Sales volume for the second quarter of 2021 increased 2.6% compared to the prior year period, driven primarily by Clamato, Aguafiel and Penafiel, partially offset by declines in Squirt.~~

~~Net Sales.~~Net sales increased 38.3% to $166 million for the second quarter of 2021 compared to $120 million for the prior year period, driven by favorable FX translation of 17.5%, favorable volume/mix of 16.6% and higher net price realization of 4.2%.

~~Income from Operations~~. Income from operations increased 71.4% to $36 million for the second quarter of 2021 compared to $21 million in the prior year period, driven by favorable FX effects, including both transaction and translation, favorable volume/mix and higher net pricing, partially offset by inflation in logistics and input costs, higher marketing investments and increased operating costs due to higher volumes. Operating margin increased 420 bps versus the year ago period to 21.7%.

~~Adjusted Income from Operations~~. Adjusted income from operations increased 60.9% to $37 million for the second quarter of 2021 compared to $23 million in the prior year period, driven by favorable FX effects, including both transaction and translation, favorable volume/mix and higher net pricing, partially offset by inflation in logistics and input costs, higher marketing investments and increased operating costs due to higher volumes. Adjusted operating margin grew 310 bps versus the prior year period to 22.3%.

~~First Six Months of 2021 Compared to First Six Months of 2020~~

Consolidated Operations

The following table sets forth our unaudited condensed consolidated results of operations for the first ~~six months~~quarter of ~~2021~~2022 and ~~2020:~~2021:


		First Six Months						Dollar		Percentage			First Quarter						Dollar		Percentage
($ in millions, except per share amounts)	($ in millions, except per share amounts)	2021			2020			Change		Change		($ in millions, except per share amounts)	2022			2021			Change		Change
Net sales	Net sales	$	6,042		$	5,477		$	565	10.3	%	Net sales	$	3,078		$	2,902		$	176	6.1	%
Cost of sales	Cost of sales	2,672			2,463			209		8.5		Cost of sales	1,428			1,302			126		9.7
Gross profit	Gross profit	3,370			3,014			356		11.8		Gross profit	1,650			1,600			50		3.1
Selling, general and administrative expenses	Selling, general and administrative expenses	2,000			2,029			(29)		(1.4)		Selling, general and administrative expenses	1,018			961			57		5.9
Gain on litigation settlement												Gain on litigation settlement	(299)			—			(299)		NM
Other operating income, net	Other operating income, net	(4)			(42)			38		NM		Other operating income, net	(35)			(1)			(34)		NM
Income from operations	Income from operations	1,374			1,027			347		33.8		Income from operations	966			640			326		50.9
Interest expense	Interest expense	265			310			(45)		(14.5)		Interest expense	188			140			48		34.3
Loss on early extinguishment of debt	Loss on early extinguishment of debt	105			4			101		NM		Loss on early extinguishment of debt	48			105			(57)		NM
Gain on sale of equity method investment												Gain on sale of equity method investment	(50)			—			(50)		NM
Impairment of investments and note receivable	Impairment of investments and note receivable	—			86			(86)		NM		Impairment of investments and note receivable	6			—			6		NM
Other (income) expense, net		(7)			16			(23)		NM
Other expense (income), net												Other expense (income), net	9			(3)			12		NM
Income before provision for income taxes	Income before provision for income taxes	1,011			611			400		65.5		Income before provision for income taxes	765			398			367		92.2
Provision for income taxes	Provision for income taxes	238			157			81		51.6		Provision for income taxes	180			73			107		146.6
Net income		$	773		$	454		319		70.3
Net income including non-controlling interest												Net income including non-controlling interest	585			325			260		80.0
Less: Net loss attributable to non-controlling interest												Less: Net loss attributable to non-controlling interest	—			—			—		NM
Net income attributable to KDP												Net income attributable to KDP	$	585		$	325		260		80.0

Earnings per common share:	Earnings per common share:											Earnings per common share:
Basic	Basic	$	0.55		$	0.32		$	0.23	71.9	%	Basic	$	0.41		$	0.23		$	0.18	78.3	%
Diluted	Diluted	0.54			0.32			0.22		68.8		Diluted	0.41			0.23			0.18		78.3

Gross margin	Gross margin	55.8		%	55.0		%			80 bps		Gross margin	53.6		%	55.1		%			(150) bps
Operating margin	Operating margin	22.7		%	18.8		%			390 bps		Operating margin	31.4		%	22.1		%			930 bps
Effective tax rate	Effective tax rate	23.5		%	25.7		%			(220) bps		Effective tax rate	23.5		%	18.3		%			520 bps

Sales ~~Volume~~Volume.. The following table provides the percentage increase in sales volumes compared to the prior year period:


	Percentage Change
K-Cup ~~Pods~~pods	~~6.8~~ (5.2)	%
Brewers	~~41.3~~ (5.2)
CSDs	~~7.0~~3.8
NCBs	~~(7.7)~~(0.4)

Net Sales. Net sales increased ~~$565~~$176 million, or ~~10.3%~~6.1%, to ~~$6,042~~$3,078 million for the first ~~six months~~quarter of ~~2021~~2022 compared to ~~$5,477~~$2,902 million in the prior year period. This performance reflected ~~volume/mix of 8.1%,~~favorable net price realization of ~~1.3% and favorable FX translation~~6.3% across all segments, slightly offset by reduced volume/mix of ~~0.9%.~~0.2%, as expected reductions in our Coffee Systems segment more than offset volume gains in our other segments.

Gross Profit. Gross profit increased ~~$356~~$50 million, or ~~11.8%~~3.1%, to ~~$3,370~~$1,650 million for the first ~~six months~~quarter of ~~2021~~2022 compared to ~~$3,014~~$1,600 million in the prior year period. This performance primarily reflected strong ~~volume/mix, the benefit of productivity and merger synergies, higher~~growth in net ~~price realization~~sales and a favorable change in unrealized commodity mark-to-market impacts. These benefits were partially offset by higher manufacturing costs driven by ~~both volume/mix growth and inflation in input costs.~~broad-based inflation. Gross margin ~~increased 80~~decreased 150 bps versus the year ago period to ~~55.8%~~53.6%.

Selling, General and Administrative Expenses. SG&A expenses ~~decreased $29~~increased $57 million, or ~~1.4%~~5.9%, to ~~$2,000~~$1,018 million for the first ~~six months~~quarter of ~~2021~~2022 compared to ~~$2,029~~$961 million in the prior year period. The ~~decrease~~increase was driven by ~~the favorable change in commodity mark-to-market impacts of $77 million, a favorable change in expenses related to the COVID-19 pandemic of $54 million,~~higher logistics costs, driven by both inflation and ~~a favorable comparison to an increase in our litigation reserve in the prior year.~~product mix. These ~~benefits~~drivers were partially offset by ~~higher operating costs associated with~~ the ~~increased shipment volume, inflation~~impact of a change in ~~logistics, and higher marketing expense.~~our accounting policy related to the recognition of forfeitures for our stock awards of $40 million.

Gain on litigation settlement. Gain on litigation settlement reflects the portion of the settlement payment from BodyArmor which was allocated to the gain on the full settlement of the existing claims against BodyArmor. Refer to Note 12 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Other Operating Income, net. Other operating income, net ~~had an unfavorable change of $38~~increased $34 million for the first ~~six months~~quarter of ~~2021~~2022 compared to the prior year period, ~~largely~~primarily driven by ~~the network optimization program~~a $38 million gain ~~of $42 million~~ on ~~the~~an asset sale-leaseback ~~of four facilities~~transaction related to our strategic asset investment program in the ~~prior year~~current period.

Income from Operations. Income from operations increased ~~$347~~$326 million, or ~~33.8%~~50.9%, to ~~$1,374~~$966 million for the first ~~six months~~quarter of ~~2021~~2022 compared to ~~$1,027~~$640 million in the prior year period, primarily driven by the ~~increase in gross profit~~gain on the litigation settlement and the ~~decrease in SG&A expenses, partially offset by the unfavorable change in other operating income, net.~~gain related to our strategic asset investment program. Operating margin increased ~~390~~930 bps versus the year ago period to ~~22.7%~~31.4%.

Interest Expense. Interest expense ~~decreased $45~~increased $48 million, or ~~14.5%~~34.3%, to ~~$265~~$188 million for the first ~~six months~~quarter of ~~2021~~2022 compared to ~~$310~~$140 million for the prior year period. This change was primarily ~~the result~~driven by unfavorable unrealized mark-to-market losses of ~~the favorable change in unrealized~~$79 million on interest rate ~~swap mark-to-market impacts of $34 million and the benefit of our strategic refinancing initiatives and continued deleveraging,~~contracts, which was partially offset by ~~the unfavorable comparison to the realized benefit~~reduced interest expense on our senior unsecured notes as a result of ~~unwinding several interest rate swap contracts in the prior year period.~~our 2021 strategic refinancing and continued deleveraging.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt reflected ~~expense~~a favorable change of ~~$105~~$57 million, with a loss of $48 million during the first ~~six months~~quarter of ~~2021 due~~2022 related to our ~~strategic refinancing initiatives.~~

~~Impairment~~early repayment of ~~Investments~~the 2038 Notes and ~~Note Receivable.~~ ~~Impairment on investments~~our replacement of the KDP Revolver and ~~note receivable reflected a favorable comparison~~the 2021 364-Day Credit Agreement with the 2022 Revolving Credit Agreement, as compared to a ~~non-cash impairment charge~~loss of ~~$86~~$105 million in the prior year period associated with our ~~Bedford~~2021 strategic refinancing.

Gain on sale of equity method investment. Gain on sale of equity method investment reflects the portion of the settlement payment from BodyArmor which was allocated to the satisfaction of the holdback amount owed to us in association with the sale of our equity interest in BodyArmor in 2021. Refer to Note 12 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Impairment of Investments and Note Receivable.Impairment on investments and note receivable reflected an impairment charge of $6 million in the first quarter of 2022 associated with the wind-down of Bedford. Refer to Note 12 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Effective Tax Rate. The effective tax rate ~~decreased 220~~increased 520 bps to 23.5% for the first ~~six months~~quarter of ~~2021,~~2022, compared to ~~25.7%~~18.3% in the prior year period, primarily driven by the unfavorable comparison to the tax benefit received from excess tax deductions that were generated from the vesting of RSUs induring the first ~~six months~~quarter of ~~2021.~~2021, partially offset by our incremental income in low tax jurisdictions during the first quarter of 2022.

Net ~~Income.~~Income Attributable to KDP. Net income attributable to KDP increased ~~$319~~$260 million, or ~~70.3%~~80.0%, to ~~$773~~$585 million for the first ~~six months~~quarter of ~~2021~~2022 as compared to ~~$454~~$325 million in the prior year period, driven by ~~improved~~the gain on the sale of our investment in BodyArmor, higher income from operations, and ~~reduced interest expense, as well as~~ the favorable comparison to ~~the impairment on investments and note receivable in the first quarter of 2020, partially offset by~~ the loss on early extinguishment of debt in the first ~~six months~~quarter of ~~2021.~~2022, partially offset by the increase in our effective tax rate and increased interest expense.

Diluted EPS. Diluted EPS increased ~~68.8%~~78.3% to ~~$0.54~~$0.41 per diluted share as compared to ~~$0.32 in the prior year period.~~

~~Adjusted Results of Operations~~

~~The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the first six months of 2021 and 2020:~~

First Six Months Dollar Percent
(in millions, except per share amounts) 2021 2020 Change Change
Adjusted income from operations $ 1,580 $ 1,459 $ 121 8.3 %
Adjusted interest expense 258 265 (7) (2.6)
Adjusted provision for income taxes 320 301 19 6.3
Adjusted net income 1,009 877 132 15.1
Adjusted diluted EPS 0.71 0.62 0.09 14.5
Adjusted operating margin 26.2 % 26.6 % (40) bps
Adjusted effective tax rate 24.1 % 25.6 % (150) bps

~~Adjusted Income from Operations.~~ Adjusted income from operations increased $121 million, or 8.3%, to $1,580 million for the first six months of 2021 compared to Adjusted income from operations of $1,459 million in the prior year period. Driving this performance in the current period were strong volume/mix, the benefit of productivity and merger synergies, which impacted both SG&A and cost of sales, higher net price realization, and favorable FX effects, including both transaction and translation. Partially offsetting these positive drivers were inflation, led by input costs and logistics, higher marketing expense, an unfavorable comparison to a network optimization program gain of $42 million on the asset sale-leaseback of four facilities in the prior year period, and increased operating costs due to higher volumes. Adjusted operating margin declined 40 bps versus the year ago period to 26.2%.

~~Adjusted Interest Expense.~~Adjusted interest expense decreased $7 million, or 2.6%, to $258 million for the first six months of 2021 compared to Adjusted interest expense of $265 million in the prior year period, driven by the benefit of lower indebtedness due to continued deleveraging, partially offset by the unfavorable comparison to the realized benefit of unwinding several interest rate swap contracts in the prior year period.

~~Adjusted Effective Tax Rate.The Adjusted effective tax rate decreased 150 bps to 24.1% for the~~ first six months of 2021, compared to 25.6% in the prior year period, primarily driven by the tax benefit received from excess tax deductions that were generated from the vesting of RSUs in the first six months of 2021.

~~Adjusted Net Income.~~Adjusted net income increased 15.1% to $1,009 million for the first six months of 2021 as compared to Adjusted net income of $877 million in the prior year period. This performance was driven primarily by strong growth in Adjusted income from operations and the decrease in the Adjusted effective tax rate.

~~Adjusted Diluted EPS.Adjusted diluted EPS increased 14.5% to $0.71 per diluted share as compared to Adjusted diluted EPS of $0.62 per diluted share~~$0.23 in the prior year period.

3830

Results of Operations by Segment

The following tables provide net sales and income from operations for our reportable segments for the first ~~six months~~quarter of ~~2021~~2022 and ~~2020,~~2021, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. ~~GAAP:~~GAAP.

(in millions) First Six Months
Segment Results — Net sales 2021 2020
Coffee Systems $ 2,243 $ 2,016
Packaged Beverages 2,805 2,609
Beverage Concentrates 703 615
Latin America Beverages 291 237
Net sales $ 6,042 $ 5,477
First Six Months
(in millions) 2021 2020
Segment Results — Income from Operations
Coffee Systems $ 658 $ 562
Packaged Beverages 433 397
Beverage Concentrates 492 417
Latin America Beverages 58 48
Unallocated corporate costs (267) (397)
Income from operations $ 1,374 $ 1,027
Effective January 1, 2022, the Company updated its presentation of certain of KDP's corporate costs, primarily related to IT, to be aligned among the Company's segments and to more consistently reflect controllable costs at the segment level. The prior period segment disclosures reflect the revised presentation.


(in millions)	First Quarter
Net sales	2022		2021
Coffee Systems	$	1,093	$	1,142
Packaged Beverages	1,480		1,307
Beverage Concentrates	359		328
Latin America Beverages	146		125
Total net sales	$	3,078	$	2,902

Income from operations
Coffee Systems	$	268	$	368
Packaged Beverages	486		179
Beverage Concentrates	244		238
Latin America Beverages	25		22
Unallocated corporate costs	(57)		(167)
Total income from operations	$	966	$	640

COFFEE SYSTEMS

The following table provides selected information about our Coffee Systems segment's results:


		First Six Months						Dollar		Percent			First Quarter						Dollar		Percent
(in millions)	(in millions)	2021			2020			Change		Change		(in millions)	2022			2021			Change		Change
Net sales	Net sales	$	2,243		$	2,016		$	227	11.3	%	Net sales	$	1,093		$	1,142		$	(49)	(4.3)	%
Income from operations	Income from operations	658			562			96		17.1		Income from operations	268			368			(100)		(27.2)
Operating margin	Operating margin	29.3		%	27.9		%			140 bps		Operating margin	24.5		%	32.2		%			(770) bps
Adjusted income from operations		760			710			50		7.0
Adjusted operating margin		33.9		%	35.2		%			(130) bps

Sales Volume.~~Sales~~K-Cup pod volume declined 5.2%, driven by the unfavorable comparison to growth ~~in the first six months~~ of ~~2021 compared to~~13.7% in the prior year period ~~for the Coffee Systems segment included K-Cup pod volume growth of 6.8%, reflecting strength in at-home consumption~~ and ~~modest improvement in the away-from-home businesses.~~continued capacity constraints, as we prioritized production to rebuild inventory. Brewer volume ~~increased 41.3%~~decreased 5.2% in the first ~~six months~~quarter of ~~2021, as compared~~2022, driven by the unfavorable comparison to significant brewer shipment growth of ~~5.8%~~61.4% in the ~~year-ago period, driven by our successful brewer innovation program.~~prior year period.

Net Sales.Net sales ~~increased 11.3%~~decreased 4.3% to ~~$2,243~~$1,093 million for the first ~~six months~~quarter of ~~2021~~2022 compared to ~~$2,016~~$1,142 million in the prior year period, driven by ~~strong~~ volume/mix declines of ~~11.2% and favorable FX translation of 1.1%~~7.5%, partially offset by ~~lower~~favorable net price realization of ~~1.0%~~3.2%.

Income from Operations. Income from operations ~~increased $96~~decreased $100 million, or ~~17.1%~~27.2%, to ~~$658~~$268 million for the first ~~six months~~quarter of ~~2021,~~2022, compared to ~~$562~~$368 million in the prior year period, ~~driven by strong~~as a result of broad-based inflation and lower volume/mix, the continued benefit of productivity and merger synergies, as well as reduced costs to achieve the productivity and merger synergies, a favorable comparison to an increase in our litigation reserve in the prior year, a favorable change in unrealized mark-to-market impacts on commodity contracts, and favorable FX effects, including both transaction and translation.mix. These ~~benefits~~decreases were partially offset by ~~declines due~~the benefits of pricing actions, primarily on owned and licensed pods, productivity, and reduced costs related to inflation in input costs, logistics and manufacturing, strategic pricing initiatives, and the unfavorable comparison to a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility in the prior year period.COVID-19. Operating margin ~~grew 140~~declined 770 bps versus the year ago period to ~~29.3%~~24.5%.

~~Adjusted Income from Operations.~~Adjusted income from operations increased $50 million, or 7.0%, to $760 million for the first six months of 2021, compared to $710 million in the prior year period, driven by strong volume/mix, the continued benefit of productivity and merger synergies, and favorable FX effects, including both transaction and translation. These benefits were partially offset by declines due to inflation in input costs, logistics and manufacturing, strategic pricing initiatives, and the unfavorable comparison to a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility in the prior year period. Adjusted operating margin declined 130 bps versus the year ago period to 33.9%, primarily reflecting unfavorable mix due to the strong brewer growth and the unfavorable comparison to the gain on an asset sale-leaseback in the prior year.

PACKAGED BEVERAGES

The following table provides selected information about our Packaged Beverages segment's results:


		First Six Months						Dollar		Percent			First Quarter						Dollar		Percent
(in millions)	(in millions)	2021			2020			Change		Change		(in millions)	2022			2021			Change		Change
Net sales	Net sales	$	2,805		$	2,609		$	196	7.5	%	Net sales	$	1,480		$	1,307		$	173	13.2	%
Income from operations	Income from operations	433			397			36		9.1		Income from operations	486			179			307		171.5
Operating margin	Operating margin	15.4		%	15.2		%			20 bps		Operating margin	32.8		%	13.7		%			NM
Adjusted income from operations		483			472			11		2.3
Adjusted operating margin		17.2		%	18.1		%			(90) bps

Sales Volume. Sales volume for the first ~~six months~~quarter of ~~2021~~2022 increased ~~2.1%~~3.1% compared to the prior year period, due primarily to strength in CSDs, ~~driven by our broad flavor portfolio, water,~~Motts, Snapple, Core and ~~the addition of~~ Polar, ~~to our portfolio of partner brands. This~~which was partially offset by ~~declines in Hawaiian Punch and~~ reductions in contract manufacturing.

Net Sales. Net sales increased ~~7.5%~~13.2% to ~~$2,805~~$1,480 million in the first ~~six months~~quarter of ~~2021,~~2022, compared to ~~$2,609~~$1,307 million in the prior year period, driven by ~~volume/mix of 6.4%,~~favorable net price realization of ~~0.8%~~8.3% and ~~favorable FX translation~~volume/mix growth of ~~0.3%~~4.9%.

Income from Operations. Income from operations increased ~~$36~~$307 million, or ~~9.1%~~171.5%, to ~~$433~~$486 million for the first ~~six months~~quarter of ~~2021~~2022 compared to ~~$397~~$179 million for the prior year period, driven ~~primarily~~ by ~~strong volume/mix~~the gain on the settlement of litigation with BodyArmor of $271 million and the benefits of net sales growth, ~~the favorable comparison to COVID-19-related expenses~~asset sale-leaseback activity in the ~~prior year~~current period relating to our strategic asset initiative, and ~~the benefit of productivity and merger synergies.~~productivity. These increases were partially offset by ~~inflation in input costs, logistics and manufacturing,~~ the unfavorable comparison to a network optimization gain of $26 million in the prior year period related to the asset sale-leaseback of three facilities, expenses associated with productivity projects and increased ~~operating~~ costs due to ~~higher volumes. Operating margin grew 20 bps from~~ the ~~year ago period to 15.4%.~~

~~Adjusted Income from Operations.Adjusted income from operations increased $11 million, or 2.3%, to $483 million for the first six months~~impacts of 2021 compared to $472 million for the prior year period, driven primarily by strong volume/mix growth and the benefit of productivity and merger synergies. These increases were partially offset by inflation in input costs, logistics and manufacturing, the unfavorable comparison to a network optimization gain of $26 million in the prior year period related to the asset sale-leaseback of three facilities, and increased operating costs due to higher volumes. Adjusted operating margin declined 90 bps versus the year ago period to 17.2%, primarily reflecting the aforementioned asset sale-leaseback gain in the year-ago period.

broad-based inflation.

BEVERAGE CONCENTRATES

The following table provides selected information about our Beverage Concentrates segment's results:


		First Six Months						Dollar		Percent			First Quarter						Dollar		Percent
(in millions)	(in millions)	2021			2020			Change		Change		(in millions)	2022			2021			Change		Change
Net sales	Net sales	$	703		$	615		$	88	14.3	%	Net sales	$	359		$	328		$	31	9.5	%
Income from operations	Income from operations	492			417			75		18.0		Income from operations	244			238			6		2.5
Operating margin	Operating margin	70.0		%	67.8		%			220 bps		Operating margin	68.0		%	72.6		%			(460) bps
Adjusted income from operations		495			419			76		18.1
Adjusted operating margin		70.4		%	68.1		%			230 bps

Sales Volume. Sales volume for the first ~~six months~~quarter of ~~2021~~2022 increased ~~4.1%~~1.9% compared to the prior year period, reflecting improving trends in our fountain foodservice component of the business, which services restaurants and hospitality, driven by increasing levels of consumer mobility during the first ~~six months~~quarter of ~~2021~~2022 compared to the year-ago period.

Net ~~Sales~~Sales.. Net sales increased ~~14.3%~~9.5% to ~~$703~~$359 million in the first ~~six months~~quarter of ~~2021,~~2022, compared to ~~$615~~$328 million in the prior year period, reflecting higher net price realization of ~~8.8%,~~7.6% and volume/mix growth of ~~5.0% and favorable FX translation of 0.5%~~1.9%.

Income from Operations. Income from operations increased ~~$75~~$6 million, or ~~18.0%~~2.5%, to ~~$492~~$244 million for the first ~~six months~~quarter of ~~2021~~2022 compared to ~~$417~~$238 million in the prior year period. This performance reflected the impact of net sales growth, partially offset by the impacts of broad-based inflation, higher marketing ~~expense.~~expense, and costs associated with productivity initiatives. Operating margin ~~increased 220~~decreased 460 bps versus the year ago period to ~~70.0%~~68.0%.

~~Adjusted Income from Operations.~~Adjusted income from operations increased $76 million, or 18.1%, to $495 million for the first six months of 2021 compared to $419 million in the prior year period. This performance reflected the impact of net sales growth, partially offset by higher marketing expense. Adjusted operating margin increased 230 bps versus the year ago period to 70.4%.

LATIN AMERICA BEVERAGES

The following table provides selected information about our Latin America Beverages segment's results:


		First Six Months						Dollar		Percent			First Quarter						Dollar		Percent
(in millions)	(in millions)	2021			2020			Change		Change		(in millions)	2022			2021			Change		Change
Net sales	Net sales	$	291		$	237		$	54	22.8	%	Net sales	$	146		$	125		$	21	16.8	%
Income from operations	Income from operations	58			48			10		20.8		Income from operations	25			22			3		13.6
Operating margin	Operating margin	19.9		%	20.3		%			(40) bps		Operating margin	17.1		%	17.6		%			(50) bps
Adjusted income from operations		60			50			10		20.0
Adjusted operating margin		20.6		%	21.1		%			(50) bps

Sales Volume. Sales volume for the first ~~six months~~quarter of ~~2021~~2022 as compared to the prior year period increased ~~1.3%~~5.4%, driven by ~~Clamato and Penafiel, partially offset by declines in Squirt.~~improving consumer mobility.

Net Sales. Net sales grew ~~22.8%~~16.8% to ~~$291~~$146 million for the first ~~six months~~quarter of ~~2021,~~2022, compared to ~~$237~~$125 million in the prior year period, reflecting favorable ~~FX translation of 8.5%,~~ net price realization of ~~7.2%,~~9.6% and volume/mix growth of ~~7.1%.~~8.0%, slightly offset by unfavorable FX translation of 0.8%,

Income from ~~Operations~~Operations.. Income from operations increased ~~$10~~$3 million, or ~~20.8%~~13.6%, to ~~$58~~$25 million for the first ~~six months~~quarter of ~~2021~~2022 compared to ~~$48~~$22 million in the prior year period, driven by ~~favorable volume/mix and~~ higher net price realization and favorable volume/mix, partially offset by the impacts of broad-based inflation ~~in input costs and logistics, increases in logistics driven by volume/mix growth,~~ and higher marketing expense. Operating margin decreased ~~40 bps versus the year ago period to 19.9%.~~

~~Adjusted Income from Operations.~~Adjusted income from operations increased $10 million, or 20.0%, to $60 million for the first six months of 2021 compared to $50 million in the prior year period, driven by favorable volume/mix and higher net price realization, partially offset by inflation in input costs and logistics, as well as increased operating costs due to higher volumes, and higher marketing expense. Adjusted operating margin declined 50 bps versus the year ago period to ~~20.6%~~17.1%.

~~UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS~~

NON-GAAP FINANCIAL MEASURES

To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented for certain constant currency adjusted or adjusted financial measures for the first quarter of 2022 and 2021, which are considered non-GAAP financial measures. 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 non-GAAP financial measures are not substitutes for their comparable U.S. GAAP financial measures, such as 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. We use these non-GAAP financial measures, in addition to U.S. GAAP financial measures, to evaluate our operating and financial performance and to compare such performance to that of prior periods and to the performance of our competitors. Additionally, we use these non-GAAP financial measures in making operational and financial decisions and in our budgeting and planning process. We believe that providing these non-GAAP financial measures to investors helps investors evaluate our operating performance, profitability and business trends in a way that is consistent with how management evaluates such performance and consistent with guidance previously provided by us. The non-GAAP measures are defined as follows:

Adjusted: Defined as certain financial statement captions and metrics adjusted for certain items affecting comparability.

Items affecting comparability: Defined as certain items that are excluded for comparison to prior year periods, adjusted for the ~~North American beverage market~~tax impact as applicable. Tax impact is ~~influenced by~~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; (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 and the associated windfall tax benefit attributable to the matching awards made to employees who made an initial investment in KDP; (vi) non-cash changes in deferred tax liabilities related to goodwill and other intangible assets as a result of tax rate or apportionment changes; and (vii) other certain ~~key trends~~items that are excluded for comparison purposes to prior year periods.

For the first quarter of 2022, the other certain items excluded for comparison purposes include (i) restructuring and ~~uncertainties. Some~~integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant non-routine legal matters; (iv) the loss on early extinguishment of debt related to the redemption of debt; (v) incremental costs to our operations related to risks associated with the COVID-19 pandemic; (vi) the gain on the sale of our investment in BodyArmor as a result of the settlement of the associated holdback liability; (vii) the gain on the settlement of our prior litigation with BodyArmor, excluding recoveries of previously incurred litigation expenses which were included in our adjusted results and (viii) losses recognized with respect to our equity method investment in Bedford as a result of funding our share of their wind-down costs.

For the first quarter of 2021, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant non-routine legal matters; (iv) the loss on early extinguishment of debt related to the redemption of debt; (v) incremental costs to our operations related to risks associated with the COVID-19 pandemic; and (vi) gains from insurance recoveries related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment.

Costs related to significant non-routine legal matters relate to the antitrust litigation. 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 ~~items, such as the ongoing outbreak~~costs reflects how management views our business results on a consistent basis. See Impact of COVID-19 ~~increased health consciousness~~on our Financial Statements for further information.

Constant currency adjusted: Defined as certain financial statement captions and ~~changes in consumer preferences~~metrics adjusted for certain items affecting comparability, calculated on a constant currency basis by converting our current period local currency financial results using the prior period foreign currency exchange rates.

For the first quarter of 2022 and ~~economic factors, have previously created~~2021, the supplemental financial data set forth below includes reconciliations of adjusted and ~~may continue~~constant currency adjusted financial measures to the applicable financial measure presented in the ~~future~~unaudited condensed consolidated financial statements for the same period.

KEURIG DR PEPPER INC.

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

(Unaudited, in millions, except per share and percentages)


	Cost of sales		Gross profit		Gross margin		Selling, general and administrative expenses		Gain on litigation settlement		Other operating (expense) income, net		Income from operations		Operating margin
For the First Quarter of 2022
Reported	$	1,428	$	1,650	53.6	%	$	1,018	$	(299)	$	(35)	$	966	31.4	%
Items Affecting Comparability:
Mark to market	59		(59)				26		—		—		(85)
Amortization of intangibles	—		—				(34)		—		—		34


Stock compensation	—		—				7		—		—		(7)
Restructuring and integration costs	—		—				(33)		—		(3)		36
Productivity	(28)		28				(22)		—		—		50



Non-routine legal matters	—		—				(4)		—		—		4
COVID-19	(4)		4				(1)		—		—		5
Gain on litigation	—		—				—		271		—		(271)




Adjusted	$	1,455	$	1,623	52.7	%	$	957	$	(28)	$	(38)	$	732	23.8	%
Impact of foreign currency					—	%									—	%
Constant currency adjusted					52.7	%									23.8	%

For the First Quarter of 2021
Reported	$	1,302	$	1,600	55.1	%	$	961	$	—	$	(1)	$	640	22.1	%
Items Affecting Comparability:
Mark to market	9		(9)				29		—		—		(38)
Amortization of intangibles	—		—				(33)		—		—		33


Stock compensation	—		—				(6)		—		—		6
Restructuring and integration costs	—		—				(43)		—		—		43
Productivity	(8)		8				(25)		—		—		33



Non-routine legal matters	—		—				(10)		—		—		10
COVID-19	(12)		12				(4)		—		—		16



Malware incident	—		—				2		—		—		(2)

Adjusted	$	1,291	$	1,611	55.5	%	$	871	$	—	$	(1)	$	741	25.5	%

Refer to ~~create category headwinds~~page 36 for ~~a number~~reconciliations of reported net sales to constant currency net sales and adjusted income from operations to constant currency adjusted income from operations.

KEURIG DR PEPPER INC.

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

(Unaudited, in millions, except per share and percentages)


	Interest expense			Loss on early extinguishment of debt		Gain on sale of equity-method investment		Impairment of investments and note receivable		Other (income) expense, net		Income before provision for income taxes		Provision for income taxes		Effective tax rate		Net income attributable to KDP			Diluted earnings per share
For the First Quarter of 2022
Reported	$	188		$	48	$	(50)	$	6	$	9	$	765	$	180	23.5	%	$	585		$	0.41
Items Affecting Comparability:
Mark to market	(71)			—		—		—		(3)		(11)		(2)				(9)			(0.01)
Amortization of intangibles	—			—		—		—		—		34		9				25			0.02
Amortization of deferred financing costs	(1)			—		—		—		—		1		—				1			—
Amortization of fair value debt adjustment	(5)			—		—		—		—		5		1				4			—
Stock compensation	—			—		—		—		—		(7)		(1)				(6)			—
Restructuring and integration costs	—			—		—		—		—		36		9				27			0.02
Productivity	—			—		—		—		—		50		12				38			0.03

Impairment of investment	—			—		—		(6)				6		—				6			—
Loss on early extinguishment of debt	—			(48)		—		—		—		48		11				37			0.03
Non-routine legal matters	—			—		—		—		—		4		1				3			—
COVID-19	—			—		—		—		—		5		1				4			—
Gain on litigation	—			—		—		—		—		(271)		(68)				(203)			(0.14)
Gain on sale of equity-method investment	—			—		50		—		—		(50)		(12)				(38)			(0.03)



Adjusted	$	111		$	—	$	—	$	—	$	6	$	615	$	141	22.9	%	$	474		$	0.33
Impact of foreign currency																—	%
Constant currency adjusted																22.9	%

For the First Quarter of 2021
Reported	$	140		$	105	$	—	$	—	$	(3)	$	398	$	73	18.3	%	$	325		$	0.23
Items Affecting Comparability:
Mark to market	8			—		—		—		—		(46)		(11)				(35)			(0.02)
Amortization of intangibles	—			—		—		—		—		33		8				25			0.02
Amortization of deferred financing costs	(3)			—		—		—		—		3		—				3			—
Amortization of fair value of debt adjustment	(6)			—		—		—		—		6		2				4			—
Stock compensation	—			—		—		—		—		6		12				(6)			—
Restructuring and integration costs	—			—		—		—		—		43		11				32			0.02
Productivity	—			—		—		—		—		33		8				25			0.02


Loss on early extinguishment of debt	—			(105)		—		—		—		105		25				80			0.06
Non-routine legal matters	—			—		—		—		—		10		2				8			0.01
COVID-19	—			—		—		—		—		16		4				12			0.01



Malware incident	—			—		—		—		—		(2)		—				(2)			—

Adjusted	$	139		$	—	$	—	$	—	$	(3)	$	605	$	134	22.1	%	$	471		$	0.33

Change - adjusted	(20.1)		%															0.6		%	—		%
Impact of foreign currency	—		%															0.2		%	—		%
Change - constant currency adjusted	(20.1)		%															0.8		%	—		%

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

KEURIG DR PEPPER INC.

RECONCILIATION OF CERTAIN REPORTED SEGMENT MEASURES

TO CERTAIN NON-GAAP ADJUSTED AND CURRENCY NEUTRAL ADJUSTED SEGMENT MEASURES

(Unaudited)


(in millions)	Reported		Items Affecting Comparability		Adjusted
For the first quarter of 2022:
Income from operations
Coffee Systems	$	268	$	51	$	319
Packaged Beverages	486		(251)		235
Beverage Concentrates	244		3		247
Latin America Beverages	25		1		26
Unallocated corporate costs	(57)		(38)		(95)
Total income from operations	$	966	$	(234)	$	732

For the first quarter of 2021:
Income from operations
Coffee Systems	$	368	$	53	$	421
Packaged Beverages	179		22		201
Beverage Concentrates	238		1		239
Latin America Beverages	22		1		23
Unallocated corporate costs	(167)		24		(143)
Total income from operations	$	640	$	101	$	741


	Reported		Impact of Foreign Currency		Constant Currency
For the first quarter of 2022:
Net sales
Coffee Systems	(4.3)	%	—	%	(4.3)	%
Packaged Beverages	13.2		—		13.2
Beverage Concentrates	9.5		—		9.5
Latin America Beverages	16.8		0.8		17.6
Total net sales	6.1		—		6.1


	Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the first quarter of 2022:
Income from operations
Coffee Systems	(24.2)	%	—	%	(24.2)	%
Packaged Beverages	16.9		—		16.9
Beverage Concentrates	3.3		—		3.3
Latin America Beverages	13.0		—		13.0
Total income from operations	(1.2)		—		(1.2)


	Reported		Items Affecting Comparability		Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the first quarter of 2022:
Operating margin
Coffee Systems	24.5	%	4.7	%	29.2	%	—	%	29.2	%
Packaged Beverages	32.8		(16.9)		15.9		—		15.9
Beverage Concentrates	68.0		0.8		68.8		—		68.8
Latin America Beverages	17.1		0.7		17.8		(0.1)		17.7
Total operating margin	31.4		(7.6)		23.8		—		23.8

CONSTANT CURRENCY ADJUSTED RESULTS OF OPERATIONS

The following discussion of our ~~products. Refer~~results is presented on a constant currency adjusted basis. These adjusted financial results are calculated on a constant currency basis by converting our current-period local currency financial results using the prior-period foreign currency exchange rates

Consolidated Operations

Constant Currency Net Sales. Constant currency net sales increased 6.1% in the first quarter of 2022 compared to ~~Item 1A, "Risk Factors"~~the prior year period, driven by favorable net price realization of 6.3%, partially offset by lower volume/mix of 0.2%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations decreased 1.2% compared to the prior year period, primarily driven by the impact of broad-based inflation and increases in other operating costs, partially offset by the strong growth in net sales. Other drivers of the change included a $38 million gain on an asset sale-leaseback transaction related to our strategic asset investment program, the benefit of productivity, a $28 million recovery of litigation expenses included in our gain on litigation settlement with BodyArmor, and $28 million of the impact of the change in our accounting policy related to the recognition of forfeitures for our stock awards not associated with matching awards made to employees who made an initial investment in KDP.

Constant Currency Adjusted Interest Expense. Constant currency adjusted interest expense decreased 20.1% compared to the prior year period, driven by reduced interest expense on our senior unsecured notes as a result of our ~~Annual Report, combined~~2021 strategic refinancing and continued deleveraging.

Constant Currency Adjusted Effective Tax Rate. The constant currency adjusted effective tax rate was 22.9% for the first quarter of 2022 compared to 22.1% for the prior year period, primarily driven by the unfavorable comparison to the tax benefit received from excess tax deductions that were generated from the vesting of RSUs during the first quarter of 2021, partially offset by our incremental income in low tax jurisdictions during the first quarter of 2022.

Constant Currency Adjusted Net Income Attributable to KDP. Constant currency adjusted net income attributable to KDP increased 0.8% compared to the prior year period, as lower interest expense was partially offset by the decline in income from operations and the increase in our effective tax rate.

Constant Currency Adjusted Diluted EPS. Constant currency adjusted diluted EPS was even with the prior year period.

Results of Operations by Segment

Coffee Systems

Constant currency net sales decreased 4.3%, driven by unfavorable volume/mix of 7.5%, which was partially offset by higher net price realization of 3.2%.

~~Uncertainties~~Constant currency adjusted income from operations for the first quarter of 2022 decreased 24.2% compared to the prior year period, driven by increased costs due to the impacts of broad-based inflation and ~~Trends Affecting Liquidity~~volume/mix declines as we prioritized production to rebuild inventory levels. These decreases were partially offset by the benefit of pricing actions, primarily on owned and licensed pods, and the benefit of productivity. ~~section below,~~

Packaged Beverages

Constant currency net sales increased 13.2%, reflecting favorable net price realization of 8.3% and volume/mix growth of 4.9%.

Constant currency adjusted income from operations for ~~more information about risks~~the first quarter of 2022 increased 16.9% compared to the prior year period, driven primarily by the impact of net sales growth, the benefit of asset sale-leaseback activity in the current period relating to our strategic asset initiative, and ~~uncertainties facing us.~~the benefit of productivity. These increases were partially offset by the impacts of broad-based inflation.

Beverage Concentrates

Constant currency net sales increased 9.5%, reflecting higher net price realization of 7.6% and volume/mix growth of 1.9%.

Constant currency adjusted income from operations for the first quarter of 2022 increased 3.3% compared to the prior year period. This performance reflected the impact of net sales growth, partially offset by the impacts of broad-based inflation and higher marketing expense.

Latin America Beverages

Constant currency net sales increased 17.6%, driven by favorable net price realization of 9.6% and volume/mix growth of 8.0%.

Constant currency adjusted income from operations for the first quarter of 2022 increased 13.0% compared to the prior year period, driven by higher net price realization and favorable volume/mix, partially offset by broad-based inflation and higher marketing expense.

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 Part II, Item 7 of our Annual Report.

LIQUIDITY AND CAPITAL RESOURCES

Overview

~~Our~~We believe our financial condition and liquidity remain strong. Net cash provided by operations was $1,139 million for the first six months of 2021 compared to $1,062 million for the prior year period. Although there is continued uncertainty related to the impact of the ongoing COVID-19 pandemic on our future results, we believe we are uniquely positioned, with our broad portfolio and unmatched distribution network, to successfully navigate through this pandemic, and the steps we have taken over the course of the pandemic to strengthen our balance sheet leave us well positioned to manage our business. We continue to manage all aspects of our business, including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies through our integration and productivity initiatives, and developing new opportunities for growth such as innovation and agreements with partners to distribute brands that are accretive to our portfolio.

The following summarizes our cash activity for the first ~~six months~~quarter of ~~2021~~2022 and ~~2020:~~2021:

Cash, cash equivalents, restricted cash and restricted cash equivalents ~~decreased $85~~increased $26 million from December 31, ~~2020~~2021 to ~~June 30, 2021~~March 31, 2022 primarily as a result of ~~deleveraging, dividend payments and investments in property, plant and equipment,~~proceeds from the cash settlement with BodyArmor, which ~~outpaced cash generated from our operations.~~was used to continue to de-lever.

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 ~~$83~~$214 million and ~~$165~~$216 million as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

Additionally, in April 2022, we chose to undertake a strategic refinancing initiative, issuing approximately $3 billion of senior unsecured notes and using the net proceeds to voluntarily prepay and retire several tranches of existing senior unsecured notes with higher interest rates, which reduced our overall interest payments and our annual cash requirements. As part of this transaction, we additionally unwound approximately $1.5 billion of our outstanding designated forward starting swaps and received cash proceeds of approximately $125 million. Refer to Note 17 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information about the 2022 strategic refinancing initiative.

Principal Sources of Capital Resources

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from our operations and borrowing capacity currently available under our ~~KDP Revolver and 2021 364-Day~~2022 Revolving Credit Agreement. Additionally, we have an uncommitted commercial paper program where we can issue unsecured commercial paper notes on a private placement basis. 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.

Sources of Liquidity - Operations

Net cash provided by operating activities increased ~~$77~~$117 million for the first ~~six months~~quarter of ~~2021,~~2022, as compared to the first ~~six months~~quarter of ~~2020,~~2021, driven by the increase in net income adjusted for non-cash items, led by the $349 million gain from BodyArmor, partially offset by a decline in working capital.

Cash Conversion Cycle

Our cash conversion cycle is defined as DIO and DSO less 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 improved 15 days to approximately 67 days as of June 30, 2021 as compared to 52 days in the prior year period.~~ The following table summarizes our cash conversion cycle:


		June 30,			March 31,
		2021	2020		2022	2021
DIO	DIO	57	52	DIO	60	55
DSO	DSO	32	33	DSO	34	33
DPO	DPO	156	137	DPO	164	154
Cash conversion cycle	Cash conversion cycle	(67)	(52)	Cash conversion cycle	(70)	(66)

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~~agreements with a third party ~~administrator~~administrators 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 through this program with the financial institutions. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. We have been informed by the third party ~~administrator~~administrators that as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020, $2,901~~2021, $3,409 million and ~~$2,578~~$3,194 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 ~~$1,572~~$876 million and ~~$1,245~~$698 million for the first ~~six months~~quarter of ~~2021~~2022 and ~~2020,~~2021, respectively.

Impact of the ~~Cares~~CARES Act

Beginning in the second quarter of 2020, we deferred payments of employer-related payroll taxes as allowed under the ~~U.S. Coronavirus Aid, Relief and Economic Security Act, commonly known as the~~ CARES Act. Payment of at least 50% of the deferred amount iswas due on January 3, 2022, with the remainder due by January 3, 2023. ~~As of June 30, 2021, we have~~We deferred a total of $59 million in such ~~payments.~~payments since the CARES Act was implemented, and we timely paid approximately $30 million as of January 3, 2022.

Sources of Liquidity - Financing

In ~~March 2021,~~February 2022, we undertook a strategic refinancing and issued $2,150 million aggregate face value of Notes, consisting of $1,150 million aggregate principal amount of 0.750% 2024 Notes, $500 million aggregate principal amount of 2.250% 2031 Notes, and $500 million aggregate principal amount of 3.350% 2051 Notes. The proceeds from the issuance were used to voluntarily prepay several tranches of our existing Notes and our 2019 KDP Term Loan in order to take advantage of current market conditions to refinance our debt maturities at more attractive interest rates, while also extending the duration of our debt. We also terminated ~~our 2020 364-Day Credit Agreement, which would have expired in April 2021, and replaced it with~~ our 2021 364-Day Credit Agreement and our KDP Revolver and replaced them with the 2022 Revolving Credit Agreement, which ~~has~~provides for a ~~term-out option allowing us to extend the maturity date by converting the facility into a term loan agreement for an additional one-year term.~~$4 billion revolving credit facility.

4339

Additionally, in March 2021, we filed a prospectus supplement with the SEC in order to sell up to 4,300,000 shares to or through Goldman in at-the-market offerings, known as an ATM Program. The ATM Program was completed effective March 15, 2021, and the net proceeds of approximately $140 million were primarily used to cover our obligation to remit cash to local, state and federal tax authorities in connection with the net settlement of vesting restricted stock units during the first quarter of 2021. Commissions and fees paid under the ATM program were less than $1 million for the ~~first six months of 2021.~~

Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of our financing arrangements.

We also have an active shelf registration statement, filed with the SEC on August 27, 2019, which allows us to issue an indeterminate number or amount of common stock, preferred stock, debt securities and warrants from time to time in one or more offerings at the direction of our Board of Directors.

~~Debt Ratings~~

~~As of June 30, 2021, 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~~

~~Stable~~

~~February 26, 2021~~

~~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.

~~As of June 30, 2021, we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.~~

Principal Uses of Capital Resources

~~Our~~Over the past several years, our principal uses of our capital resources ~~following the DPS Merger are~~were deleveraging, providing shareholder return to our investors through regular quarterly dividends, and investing in KDP to capture market share and drive growth through innovation and routes to market.

Now that we have met our post-merger goals, we plan to invest in inorganic value creation through M&A, including portfolio expansion, distribution scale, geographic expansion, and new capabilities. In addition to M&A, we may consider share repurchases and special dividends to our investors. Our Board of Directors authorized a four-year share repurchase program of up to $4 billion of our outstanding common stock potentially enabling us to return value to shareholders.

Deleveraging and Other Debt Repayments

~~In 2018, management set deleveraging targets for a 2-3 year time period following~~During the ~~DPS Merger in order to optimize~~first quarter of 2022, we made debt repayments of $350 million, which includes the redemption and retirement of the remainder of our ~~balance sheet, and we continue to be focused on achieving those targets within that time frame. Since~~2038 Notes.

Regular Quarterly Dividends

For the ~~DPS Merger,~~first quarter of 2022, we have ~~made net repayments of $3,722 million of our Notes, our commercial paper and our other credit agreements, including $547 million for the first six months of 2021.~~

~~In May 2021, our 2021 Merger Notes were repaid at maturity, using cash generated from operations and the issuance of commercial paper.~~

~~Dividends~~

In February 2021, we announced that our Board of Directors approved a 25% increase in our annualized dividend rate to $0.75 per share, from the current annualized rate of $0.60 per share, effective with the Company’s regular quarterly dividend for the second quarter of 2021. On May 25, 2021, our Board of Directors declared ~~a regular quarterly dividend~~total dividends of $0.1875 per ~~share, which was paid on July 15, 2021 to shareholders of record as of July 1, 2021.~~

share.

Capital Expenditures

We ~~have significantly invested~~are investing in state-of-the-art manufacturing and warehousing facilities, including expansive investments in ~~new~~ facilities in Newbridge, Ireland; Spartanburg, South Carolina; ~~Newbridge, Ireland;~~ and Allentown, Pennsylvania, in 2022 and 2021, in order to optimize our supply chain network through integration and productivity ~~projects.~~projects and to mitigate risk of business interruption.

Purchases of property, plant and equipment were ~~$204~~$109 million and ~~$276~~$95 million for the first ~~six months~~quarter of ~~2021~~2022 and ~~2020,~~2021, respectively.

Capital expenditures, which includes both purchases of property, plant and equipment and amounts included in accounts payable and accrued expenses, for the first ~~six months~~quarter of 2022 and 2021 primarily related to ~~our continued investment in~~ the ~~build-out of our Allentown~~ manufacturing ~~facility, the build out of the Ireland facility~~ and ~~build-out of our Spartanburg manufacturing facility.~~warehousing facilities discussed above. Capital expenditures included in accounts payable and accrued expenses were ~~$213~~$139 million and $259 million for the first ~~six months~~quarter of 2022 and 2021, respectively, which primarily related to these investments.

Capital expenditures for the first six months of 2020 primarily related to manufacturing equipment, our continued investment in the build-out of our Spartanburg and Allentown facilities, and the purchase of real estate in Ireland. Capital expenditures included in accounts payable and accrued expenses were $180 million for the first six months of 2020, which primarily related to these investments.

~~As we begin to move past the three-year period after the DPS Merger, we expect that total capital expenditures will be approximately 3% of net sales on an annualized basis.~~

Purchases of Intangible Assets

We have invested in the expansion of our DSD network through transactions with strategic independent bottlers to ensure competitive distribution scale for our brands. These transactions are generally accounted for as an asset acquisition, as the majority of the transaction price represents the reacquisition of our distribution rights. Purchases of intangible assets were ~~$12~~$10 million and ~~$15~~$12 million for the first ~~six months~~quarter of ~~2021~~2022 and ~~2020,~~2021, respectively.

Uncertainties and Trends Affecting Liquidity

Disruptions in global financial and credit markets, including those caused by the ongoing COVID-19 pandemic and Russia’s invasion of Ukraine, 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 flow, or the ability of our vendors to timely supply materials.

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

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

•~~Our intention to drive significant cash flow generation to enable continued deleveraging;~~

•~~Our ability to access our committed financing arrangements, including our KDP Revolver and our 2021 364-Day Credit Agreement~~;

•~~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;~~

•~~A significant downgrade in our credit ratings~~could limit i) 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; or ii) our ability to issue debt at terms that are favorable to us;

•~~Our continued payment of dividends;~~

•~~Our continued capital expenditures;~~

•~~Future mergers or acquisitions, which may include brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage;~~

•~~Future equity investments;~~

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

•~~Fluctuations in our tax obligations.~~

SUPPLEMENTAL 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 Parent Holdings Corp. 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 summarized financial information for Keurig Dr Pepper Inc. (the “Parent”) and the Guarantors on a combined basis after intercompany eliminations; the Parent and the Guarantors' amounts due from and amounts due to Non-Guarantors are disclosed separately. 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.

The summarized financial information for the Parent and Guarantors were as follows:


(in millions)	For the First ~~Six Months~~Quarter of ~~2021~~2022
Net sales	$	~~3,473~~1,822

Income from operations	~~702~~678
Net income attributable to KDP	~~773~~585


(in millions)	(in millions)	June 30, 2021		December 31, 2020		(in millions)	March 31, 2022		December 31, 2021
Current assets	Current assets	$	1,887	$	1,810	Current assets	$	1,910	$	1,594
Non-current assets	Non-current assets	43,692		43,333		Non-current assets	44,303		43,972
Total assets(1)	Total assets(1)	$	45,579	$	45,143	Total assets(1)	$	46,213	$	45,566

Current liabilities	Current liabilities	4,303		5,148		Current liabilities	$	3,681	$	3,470
Non-current liabilities	Non-current liabilities	17,034		16,164		Non-current liabilities	17,021		17,125
Total liabilities(2)	Total liabilities(2)	$	21,337	$	21,312	Total liabilities(2)	$	20,702	$	20,595

(1)Includes ~~$243~~$173 million and ~~$423~~$209 million of intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

(2)Includes ~~$35~~$43 million and ~~$30~~$40 million of intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

~~NON-GAAP FINANCIAL MEASURES~~

To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented for the second quarter and first six months of 2021 and 2020 (i) Adjusted income from operations, (ii) Adjusted interest expense, (iii) Adjusted provision for income taxes, (iv) Adjusted net income attributable to KDP and (v) Adjusted diluted EPS, which are considered non-GAAP financial measures. 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 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. The Company uses these non-GAAP financial measures, in addition to U.S. GAAP financial measures, to evaluate its operating and financial performance and to compare such performance to that of prior periods and to the performance of its competitors. Additionally, the Company uses these non-GAAP financial measures in making operational and financial decisions and in the Company’s budgeting and planning process. The Company believes that providing these non-GAAP financial measures to investors helps investors evaluate the Company’s operating performance, profitability and business trends in a way that is consistent with how management evaluates such performance and consistent with guidance previously provided by the Company.

For the second quarter and first six months of 2021 and 2020, we define our Adjusted non-GAAP financial measures as certain 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; (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 and the associated windfall tax benefit attributable to the matching awards made to employees who made an initial investment in KDP; (vi) non-cash changes in deferred tax liabilities related to goodwill and other intangible assets as a result of tax rate or apportionment changes; and (vii) other certain items that are excluded for comparison purposes to prior year periods.

For the second quarter and first six months of 2021, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant non-routine legal matters; (iv) the loss on early extinguishment of debt related to the redemption of debt; (v) incremental costs to our operations related to risks associated with the COVID-19 pandemic; and (vi) gains from insurance recoveries related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment.

For the second quarter and first six months of 2020, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) transaction costs for significant business combinations (completed or abandoned) excluding the DPS Merger; (iv) costs related to significant non-routine 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 our 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. See ~~Impact of COVID-19 on our Financial Statements~~ ~~for further information.~~

For the second quarter and first six months of 2021 and 2020, the supplemental financial data set forth below includes reconciliations of Adjusted income from operations, Adjusted interest expense, Adjusted provision for income taxes, Adjusted net income attributable to KDP and Adjusted diluted EPS to the applicable financial measure presented in the unaudited condensed consolidated financial statement for the same period.

~~KEURIG DR PEPPER INC.~~

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

~~For the Second Quarter of 2021~~

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

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Income from operations Operating margin
Reported $ 1,370 $ 1,770 56.4 % $ 1,039 $ 734 23.4 %
Items Affecting Comparability:
Mark to market 17 (17) 21 (38)
Amortization of intangibles — — (34) 34
Stock compensation — — (5) 5
Restructuring and integration costs — — (49) 49
Productivity (14) 14 (24) 38
Nonroutine legal matters — — (6) 6
COVID-19 (7) 7 (4) 11
Adjusted $ 1,366 $ 1,774 56.5 % $ 938 $ 839 26.7 %

Interest expense Income before provision for income taxes Provision for income taxes Effective tax rate Net income attributable to KDP Diluted earnings per share
Reported $ 125 $ 613 $ 165 26.9 % $ 448 $ 0.31
Items Affecting Comparability:
Mark to market (1) (37) (9) (28) (0.02)
Amortization of intangibles — 34 9 25 0.02
Amortization of deferred financing costs (1) 1 — 1 —
Amortization of fair value debt adjustment (4) 4 — 4 —
Stock compensation — 5 2 3 —
Restructuring and integration costs — 49 11 38 0.03
Productivity — 38 10 28 0.02
Nonroutine legal matters — 6 1 5 —
COVID-19 — 11 3 8 0.01
Change in deferred tax liabilities related to goodwill and other intangible assets — — (6) 6 —
Adjusted $ 119 $ 724 $ 186 25.7 % $ 538 $ 0.38

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

~~KEURIG DR PEPPER INC.~~

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

~~For the Second Quarter of 2020~~

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

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Income from operations Operating margin
Reported $ 1,302 $ 1,562 54.5 % $ 1,001 $ 561 19.6 %
Items Affecting Comparability:
Mark to market (29) 29 16 13
Amortization of intangibles — — (33) 33
Stock compensation — — (8) 8
Restructuring and integration costs — — (52) 52
Productivity (2) 2 (17) 19
Nonroutine legal matters — — (26) 26
COVID-19 (18) 18 (45) 63
Adjusted $ 1,253 $ 1,611 56.3 % $ 836 $ 775 27.1 %

Interest expense Loss on early extinguishment of debt Income before provision for income taxes Provision for income taxes Effective tax rate Net income attributable to KDP Diluted earnings per share
Reported $ 157 $ 2 $ 406 $ 108 26.6 % $ 298 $ 0.21
Items Affecting Comparability:
Mark to market (3) — 16 5 11 0.01
Amortization of intangibles — — 33 9 24 0.02
Amortization of deferred financing costs (3) — 3 — 3 —
Amortization of fair value debt adjustment (6) — 6 1 5 —
Stock compensation — — 8 2 6 —
Restructuring and integration costs — — 52 12 40 0.03
Productivity — — 19 4 15 0.01
Loss on early extinguishment of debt — (2) 2 1 1 —
Nonroutine legal matters — — 26 7 19 0.01
COVID-19 — — 63 16 47 0.03
Adjusted $ 145 $ — $ 634 $ 165 26.0 % $ 469 $ 0.33

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

~~KEURIG DR PEPPER INC.~~

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

~~For the First Six Months of 2021~~

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

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Income from operations Operating margin
Reported $ 2,672 $ 3,370 55.8 % $ 2,000 $ 1,374 22.7 %
Items Affecting Comparability:
Mark to market 26 (26) 50 (76)
Amortization of intangibles — — (67) 67
Stock compensation — — (11) 11
Restructuring and integration costs — — (92) 92
Productivity (22) 22 (49) 71
Nonroutine legal matters — — (16) 16
COVID-19 (19) 19 (8) 27
Malware incident — — 2 (2)
Adjusted $ 2,657 $ 3,385 56.0 % $ 1,809 $ 1,580 26.2 %

Interest expense Loss on early extinguishment of debt Income before provision for income taxes Provision for income taxes Effective tax rate Net income attributable to KDP Diluted earnings per share
Reported $ 265 $ 105 $ 1,011 $ 238 23.5 % $ 773 $ 0.54
Items Affecting Comparability:
Mark to market 7 — (83) (20) (63) (0.04)
Amortization of intangibles — — 67 17 50 0.04
Amortization of deferred financing costs (4) — 4 — 4 —
Amortization of fair value debt adjustment (10) — 10 2 8 —
Stock compensation — — 11 14 (3) —
Restructuring and integration costs — — 92 22 70 0.05
Productivity — — 71 18 53 0.04
Loss on early extinguishment of debt — (105) 105 25 80 0.06
Nonroutine legal matters — — 16 3 13 0.01
COVID-19 — — 27 7 20 0.01
Malware incident — — (2) — (2) —
Change in deferred tax liabilities related to goodwill and other intangible assets — — — (6) 6 —
Adjusted $ 258 $ — $ 1,329 $ 320 24.1 % $ 1,009 $ 0.71

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

~~KEURIG DR PEPPER INC.~~

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

~~For the First Six Months of 2020~~

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

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Income from operations Operating margin
Reported $ 2,463 $ 3,014 55.0 % $ 2,029 $ 1,027 18.8 %
Items Affecting Comparability:
Mark to market (44) 44 (27) 71
Amortization of intangibles — — (66) 66
Stock compensation — — (15) 15
Restructuring and integration costs — — (104) 104
Productivity (18) 18 (55) 73
Nonroutine legal matters — — (35) 35
COVID-19 (19) 19 (49) 68
Adjusted $ 2,382 $ 3,095 56.5 % $ 1,678 $ 1,459 26.6 %

Interest expense Loss on early extinguishment of debt Impairment of investment and note receivable Income before provision for income taxes Provision for income taxes Effective tax rate Net income attributable to KDP Diluted earnings per share
Reported $ 310 $ 4 $ 86 $ 611 $ 157 25.7 % $ 454 $ 0.32
Items Affecting Comparability:
Mark to market (27) — — 98 26 72 0.05
Amortization of intangibles — — — 66 18 48 0.03
Amortization of deferred financing costs (6) — — 6 1 5 —
Amortization of fair value debt adjustment (12) — — 12 3 9 0.01
Stock compensation — — — 15 3 12 0.01
Restructuring and integration costs — — 104 26 78 0.05
Productivity — — — 73 19 54 0.04
Loss on early extinguishment of debt — (4) — 4 1 3 —
Impairment of investment and note receivable — — (86) 86 21 65 0.05
Nonroutine legal matters — — — 35 9 26 0.02
COVID-19 — — — 68 17 51 0.04
Adjusted $ 265 $ — $ — $ 1,178 $ 301 25.6 % $ 877 $ 0.62

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

~~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 second quarter of 2021:
Income from Operations
Coffee Systems $ 322 $ 49 $ 371
Packaged Beverages 258 28 286
Beverage Concentrates 254 2 256
Latin America Beverages 36 1 37
Unallocated corporate costs (136) 25 (111)
Total income from operations $ 734 $ 105 $ 839
For the second quarter of 2020:
Income from Operations
Coffee Systems $ 290 $ 73 $ 363
Packaged Beverages 208 61 269
Beverage Concentrates 220 2 222
Latin America Beverages 21 2 23
Unallocated corporate costs (178) 76 (102)
Total income from operations $ 561 $ 214 $ 775

~~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 six months of 2021:
Income from Operations
Coffee Systems $ 658 $ 102 $ 760
Packaged Beverages 433 50 483
Beverage Concentrates 492 3 495
Latin America Beverages 58 2 60
Unallocated corporate costs (267) 49 (218)
Total income from operations $ 1,374 $ 206 $ 1,580
For the first six months of 2020:
Income from Operations
Coffee Systems $ 562 $ 148 $ 710
Packaged Beverages 397 75 472
Beverage Concentrates 417 2 419
Latin America Beverages 48 2 50
Unallocated corporate costs (397) 205 (192)
Total income from operations $ 1,027 $ 432 $ 1,459

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

~~We are exposed~~There have been no material changes to the disclosures on 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 lossesrisk made in our income statement as incurred. As of June 30, 2021, 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 $46 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 June 30, 2021, we had derivative contracts outstanding with a notional value of $956 million maturing at various dates through September 25, 2024.

~~INTEREST RATE RISK~~

We centrally manage our debt portfolio through the use of interest rate contracts and monitor our mix of fixed-rate and variable-rate debt. As of June 30, 2021, the carrying value of our fixed-rate debt, excluding lease obligations, was $11,721 million and our variable-rate debt was $1,323 million, comprised entirely of commercial paper. Additionally, as of June 30, 2021, the total notional value of receive-variable, pay-fixed interest rate swaps was $450 million and the total notional value of receive-fixed, pay-variable interest rate swaps was $250 million. Our variable-rate instruments are generally based on LIBOR and a credit spread.

We estimate that the potential impact to our interest rate expense associated with variable rate debt and derivative instruments resulting from a hypothetical interest rate change of 1%, based on variable-rate debt and derivative instrument levels as of June 30, 2021, would be an increase of approximately $11 million or decrease of approximately $6 million. Our estimate of the annual impact to interest expense reflects our assumption that LIBOR will not fall below 0%.

~~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).

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 June 30, 2021, we had derivative contracts outstanding with a notional value of $518 million maturing at various dates through January 8, 2024. The fair market value of these contracts as of June 30, 2021 was a net asset of $127 million.

As of June 30, 2021, 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 $6 million impact to our income from operations for the remainder of the year ending December 31, 2021.Annual Report.

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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) our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, as of ~~June 30, 2021,~~March 31, 2022, 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 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.

No change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the quarter ended ~~June 30, 2021~~March 31, 2022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

We are occasionally subject to litigation or other legal proceedings relating to our business. See Note 15 of the Notes to our Unaudited Condensed Consolidated Financial Statements for more information related to commitments and contingencies, which is incorporated herein by reference.

BODYARMOR LITIGATION

On March 6, 2019, ABC, a subsidiary of KDP, filed suit against BodyArmor and Mike Repole in the Superior Court for the State of Delaware. The complaint asserted claims for breach of contract and promissory estoppel against BodyArmor and asserted a claim for tortious interference against Mr. Repole, in each case in connection with ~~BodyArmor~~'sBodyArmor's attempted early termination of the distribution contract between BodyArmor and ABC. The complaint ~~seeks~~sought monetary damages relating to lost distribution revenues, disgorgement of profits, liquidated and punitive damages, attorneys' fees and costs. ABC filed an amended complaint which added Coca-Cola as a defendant to the suit and asserted a claim for tortious interference against Coca-Cola. In December 2020, the court dismissed the individual claim against Mr. Repole, but ABC's claims against BodyArmor and Coca-Cola ~~continue. Fact and expert discovery in~~continued. In December 2021, the ~~case is ongoing and~~Court granted summary judgment to ABC on its breach of contract claim against BodyArmor, finding, as a ~~trial date is set for February 2022. ABC intends to continue to vigorously prosecute the action. We are unable to predict the outcome~~matter of law, that BodyArmor’s termination constituted a breach of the ~~lawsuit,~~distribution agreement.

In January 2022, KDP agreed to a $350 million payment from BodyArmor for a full settlement of all of the ~~potential recovery, if any, associated~~claims under the existing litigation against BodyArmor and in complete satisfaction of the holdback amount owed to ABC in association with the ~~resolution~~sale of ABC’s equity interest in BodyArmor in 2021. ABC received the settlement payment in January 2022 and the lawsuit ~~or any potential effect it may have on us or our operations.~~was dismissed.

ITEM 1A. Risk Factors

There have been no material changes from the risk factors set forth in Part I, Item 1A in our Annual Report.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

On October 1, 2021, our Board of Directors authorized a share repurchase program of up to $4 billion of our outstanding common stock, enabling us to opportunistically return value to shareholders. The $4 billion authorization is effective for four years, beginning on January 1, 2022 and expiring on December 31, 2025, and does not require the purchase of any minimum number of shares. We did not repurchase any shares under this program during the first quarter of 2022.

ITEM 6. Exhibits


~~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~~			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).
~~4.11~~			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).
~~4.12~~			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).
~~4.13~~			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).
~~4.14~~			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).
~~4.15~~			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).


~~4.16~~			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).
~~4.17~~			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).
~~4.18~~			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).
~~4.19~~			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).
~~4.20~~			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).
~~4.21~~			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).
~~4.22~~			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).
~~4.24~~			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).
~~4.25~~			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).
~~4.26~~			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).
~~4.27~~			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).
~~4.28~~			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).
~~4.29~~			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).
~~4.30~~			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).
~~4.31~~			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).
~~4.32~~			~~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).~~
~~4.33~~			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).
~~4.34~~			Eleventh Supplemental Indenture (including 0.750% Senior Notes Due 2024, 2.250% Senior Notes Due 2031, and 3.350% Senior Notes Due 2051 (in global form)), dated as of March 15, 2021, 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 March 15, 2021) and incorporated herein by reference).
10.1			~~Amended and Restated Employment~~Letter Agreement ~~dated as of July 2, 2018,~~ by and between ~~Keurig Green Mountain, Inc.~~the Company 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). ++~~


~~10.2~~			~~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). ++
~~10.3~~			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). ++
~~10.4~~			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). ++
~~10.5~~			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). ++
~~10.6~~			~~Keurig Dr Pepper Inc. Omnibus Stock Incentive Plan of 2019~~5, 2022 (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).++~~
~~10.7~~			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).++
~~10.8~~			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).++
~~10.9~~			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).++
~~10.10~~			Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019 (retention incentive awards for three of the Company’s Named Executive Officers) (filed as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q (filed on October 29, 2020) and incorporated herein by reference).
~~10.11~~			Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019, amended and restated as of December 7, 2020 (retention incentive award for one of the Company’s Named Executive Officers) (filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K (filed on February 25, 2021) and incorporated herein by reference).++
~~10.12~~			Credit Agreement, dated as of March 24, 2021, among Keurig Dr Pepper Inc., the lenders party thereto, and Bank of America, N.A., as administrative agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (filed on March 26, 2021)April 5, 2022) and incorporated herein by reference).
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.
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.
101*			The following financial information from Keurig Dr Pepper Inc.'s Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2021,~~March 31, 2022, formatted in Inline XBRL: (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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