What changed in this filing

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Item 1. Financial Statements

2020-07-30 compared with 2020-04-30 · 302 added, 198 removed, 612 unchanged (45% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the First Quarter of 2020 and 2019

( Unaudited )

First Quarter

Second Quarter

First Six Months

(in millions, except per share data)

1 unchanged sentence

Selling, general and administrative expenses

Other operating income, net

Other operating (income) expense, net

Income from operations

2 unchanged sentences

Impairment on investment and note receivable

Other expense, net

Other (income) expense, net

Income before provision for income taxes

4 unchanged sentences

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

For the First Quarter of 2020 and 2019

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

( Unaudited )

First Quarter

Second Quarter

First Six Months

(in millions)

Comprehensive (loss) income

Comprehensive income

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

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2020 and December 31, 2019

( Unaudited )

26 unchanged sentences

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, 1,407,079,951 and 1,406,852,305 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,407,193,674 and 1,406,852,305 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

6 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the First Quarter of 2020 and 2019

( Unaudited )

First Quarter

First Six Months

(in millions)

22 unchanged sentences

Investing activities:

Acquisitions of businesses

Issuance of related party note receivable

Investments in unconsolidated affiliates

Purchases of property, plant and equipment

1 unchanged sentence

Purchases of intangibles

Net cash provided by (used in) investing activities

Net cash used in investing activities

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

( Unaudited , Continued)

First Six Months

(in millions)

Financing activities:

Proceeds from controlling shareholder stock transactions

Proceeds from unsecured credit facility

Proceeds from senior unsecured notes

Proceeds from term loan

Net (repayment) issuance of commercial paper

Net (payment) issuance of commercial paper

Proceeds from structured payables

1 unchanged sentence

Payments on senior unsecured notes

Repayment of term loan

Payment on unsecured credit facility

Payments on term loan

Payments on finance leases

6 unchanged sentences

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period

Supplemental cash flow disclosures of non-cash investing activities:

Measurement period adjustment of Core purchase price

Capital expenditures included in accounts payable and accrued expenses

Purchases of intangibles

Supplemental cash flow disclosures of non-cash financing activities:

Dividends declared but not yet paid

Finance lease additions

Supplemental cash flow disclosures:

Cash paid for interest

Cash paid for income taxes

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

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

For the First Quarter of 2020 and 2019

( Unaudited )

11 unchanged sentences

Balance as of March 31, 2020

Other comprehensive income

Dividends declared, $0.15 per share

Proceeds from controlling shareholder stock transactions

Shares issued under employee stock-based compensation plans and other

Stock-based compensation and stock options exercised

Balance as of June 30, 2020

Balance as of January 1, 2019

6 unchanged sentences

Balance as of March 31, 2019

Other comprehensive income

Dividends declared, $0.15 per share

Stock-based compensation and stock options exercised

Balance as of June 30, 2019

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

15 unchanged sentences

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 to the " first quarter " indicate the Company 's quarterly periods ended March 31, 2020 and 2019 .

Except as otherwise specified, references to the " second quarter " indicate the Company 's quarterly periods ended June 30, 2020 and 2019 .

PRINCIPLES OF CONSOLIDATION

11 unchanged sentences

Actual amounts may differ from these estimates .

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

RECLASSIFICATIONS

The Company reclassified the following amounts in the unaudited condensed consolidated Statement of Cash Flows for the first quarter of 2019 in order to conform to current year presentation:

The Company reclassified the following amounts in the unaudited condensed consolidated Statement of Cash Flows for the first six months of 2019 in order to conform to current year presentation:

(in millions)

1 unchanged sentence

Revised Presentation

First Quarter of 2019

For the First Six Months of 2019

Net cash provided by operating activities:

5 unchanged sentences

Other amortization expense

Gain on disposal of property, plant and equipment

Amortization of deferred financing fees

2 unchanged sentences

Amortization expense

Equity in loss of unconsolidated affiliates

Net cash provided by (used in) investing activities:

Proceeds from sales of property, plant and equipment

Purchase of intangibles

Purchases of intangibles

Net cash provided by (used in) financing activities:

Proceeds from stock options exercised

Primarily includes amortization of customer rebates and upfront payments.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

RECENTLY ISSUED ACCOUNTING STANDARDS

6 unchanged sentences

GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022.

ASU 2020-04 is effective and can be elected for all entities from the issuance date of the ASU through December 31, 2022.

The Company is currently evaluating the impact of ASU 2020-04 to KDP 's consolidated financial statements.

10 unchanged sentences

The adoption of ASU 2018-13 did not have an impact on the Company 's unaudited condensed consolidated financial statements.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Long-term Obligations and Borrowing Arrangements

1 unchanged sentence

(in millions)

March 31, 2020

June 30, 2020

December 31, 2019

3 unchanged sentences

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

Fair Value Hierarchy Level

March 31, 2020

December 31, 2019

(in millions)

Carrying Value

June 30, 2020

December 31, 2019

Commercial paper notes

3 unchanged sentences

Short-term borrowings and current portion of long-term obligations

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

SENIOR UNSECURED NOTES

1 unchanged sentence

(in millions)

Fair Value Hierarchy Level

March 31, 2020

December 31, 2019

Maturity Date

Carrying Value

June 30, 2020

December 31, 2019

2020 Notes (1)

11 unchanged sentences

2028 Merger Notes

2030 Notes (2)

2038 Merger Notes

2 unchanged sentences

2048 Merger Notes

2050 Notes (2)

Principal amount

Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger

Adjustment from principal amount to carrying amount (3)

Carrying amount

On January 15, 2020, the Company repaid the 2020 Notes at maturity, using commercial paper notes.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

The fair value amounts of the Notes were based on current market rates available to the Company .

The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all the Notes and related unamortized costs to be incurred at such date.

The carrying amount includes the unamortized discounts, debt issuance costs and the fair value adjustment for the DPS Merger .

On April 13, 2020, the Company completed the issuance of $ 1.5 billion aggregate principal amount of senior unsecured notes consisting of $ 750 million aggregate principal amount of 3.200 % senior unsecured notes due May 1, 2030 and $ 750 million aggregate principal amount of 3.800 % senior unsecured notes due May 1, 2050 .

The discount associated with the 2030 Notes and the 2050 Notes was approximately $ 6 million .

The net proceeds from the issuance were used to repay outstanding borrowings under the KDP Revolver.

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

BORROWING ARRANGEMENTS

1 unchanged sentence

(in millions)

Fair Value Hierarchy Level

March 31, 2020

June 30, 2020

December 31, 2019

8 unchanged sentences

2019 364-Day Credit Agreement

2020 364-Day Credit Agreement

Principal amount

1 unchanged sentence

Carrying amount

The Company borrowed $ 380 million of commercial paper to voluntarily prepay a portion of its outstanding obligations under the 2019 KDP Term Loan.

As a result of these voluntary prepayments, the Company recorded a $ 2 million loss on early extinguishment during the first quarter of 2020

The KDP Revolver has $ 200 million letters of credit availability and none utilized as of March 31, 2020 .

As of March 31, 2020 , the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements .

During t he first quarter of 2020, the Company borrowed $ 380 million of commercial paper to voluntarily prepay a portion of its outstanding obligations under the 2019 KDP Term Loan.

During the second quarter of 2020, the Company voluntarily prepaid an additional $ 300 million of its outstanding obligations with cash on hand.

As a result of these voluntary prepayments, the Company recorded $ 2 million and $ 4 million losses on early extinguishment during the second quarter and first six months of 2020 , respectively.

The KDP Revolver has $ 200 million letters of credit availability and none utilized as of June 30, 2020 .

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

On April 14, 2020, the Company terminated the 2019 364-Day Credit Agreement and replaced it with the 2020 364-Day Credit Agreement in order to increase the commitment from $ 750 million to $ 1.5 billion .

The 2020 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes.

The interest rate applicable to borrowings under the 2020 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 2.250 % to 2.750 % or a base rate plus a margin of 1.250 % to 1.750 % , depending on the rating of certain index debt of the Company.

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

As of June 30, 2020 , the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements .

Commercial Paper Program

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

First Quarter

T he following table provides information about the Company 's weighted average borrowings under its commercial paper program:

Second Quarter

First Six Months

(in millions, except %)

3 unchanged sentences

In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility.

Under this facility, $ 100 million is available for the issuance of letters of credit, $ 44 million of which was utilized as of March 31, 2020 and $ 56 million of which remains available for use.

Under this facility, $ 100 million is available for the issuance of letters of credit, $ 44 million of which was utilized as of June 30, 2020 and $ 56 million of which remains available for use.

FAIR VALUE DISCLOSURES

The fair values of each of the Company 's commercial paper notes, the 2019 KDP Term Loan, the KDP Revolver , the 2019 364-Day Credit Agreement and the 2020 364-Day Credit Agreement approximate the carrying value and are considered Level 2 within the fair value hierarchy.

The fair values of the Company 's Notes are based on current market rates available to the Company and are considered Level 2 within the fair value hierarchy.

The fair value of the Company 's Notes was $ 14,990 million and $ 12,898 million as of June 30, 2020 and December 31, 2019 , respectively.

Goodwill and Other Intangible Assets

7 unchanged sentences

Foreign currency translation

Balance as of March 31, 2020

Balance as of June 30, 2020

KEURIG DR PEPPER INC.

4 unchanged sentences

(in millions)

March 31, 2020

June 30, 2020

December 31, 2019

1 unchanged sentence

Distribution rights

The decrease of $ 379 million in brands with indefinite lives was due to foreign currency translation during the first quarter of 2020 .

The decrease of $ 275 million in brands with indefinite lives was due to foreign currency translation during the first six months of 2020 .

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

March 31, 2020

June 30, 2020

December 31, 2019

7 unchanged sentences

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

First Quarter

Second Quarter

First Six Months

(in millions)

7 unchanged sentences

KDP conducts impairment tests on goodwill and all indefinite lived intangible assets annually, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company did not identify any circumstances, which included the recent COVID-19 pandemic, that indicated that the carrying amount of any goodwill or any intangible asset may not be recoverable as of March 31, 2020 .

The Company did not identify any circumstances, including the ongoing COVID-19 pandemic, that indicated that the carrying amount of any goodwill or any intangible asset may not be recoverable as of June 30, 2020 .

KEURIG DR PEPPER INC.

2 unchanged sentences

Investments in Unconsolidated Affiliates

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

The following table summarizes investments in unconsolidated affiliates as of June 30, 2020 and December 31, 2019 :

(in millions)

7 unchanged sentences

The credit agreement with Bedford matures on March 3, 2024.

During the first quarter of 2020 , the Company reduced its expectation of future operating performance for Bedford based on COVID-19 and a new revised five-year projection during the first quarter of 2020 from the management of Bedford that projected the possibility of profitability two years later than previously anticipated.

In March 2020, the Company reduced its expectation of future operating performance for Bedford based on COVID-19 and a new revised five-year projection from the management of Bedford that projected the possibility of profitability two years later than previously anticipated.

As a result of these indicators of impairment, the Company tested the Bedford investment for an other-than-temporary impairment using a discounted cash flow framework with multiple scenarios, including the conversion of the note receivable into equity.

The results of its analysis indicated that the note receivable of $ 55 million was fully impaired and the investment in unconsolidated affiliates was impaired by $ 31 million on the impairment on investment line in the Condensed Consolidated Statements of Income.

The results of its analysis indicated that the note receivable of $ 55 million was fully impaired and the investment in unconsolidated affiliates was impaired by $ 31 million , which was recorded on the Impairment on investment and note receivable line in the Condensed Consolidated Statements of Income.

As a result of the other-than-temporary impairment, the Company has placed the note receivable in non-accrual status.

5 unchanged sentences

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

First Quarter

Second Quarter

First Six Months

(in millions)

7 unchanged sentences

GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements.

Restructuring liabilities as of March 31, 2020 along with charges to expense, cash payments and non-cash charges for the period specific to the Integration Program were as follows:

Restructuring liabilities as of June 30, 2020 along with charges to expense, cash payments and non-cash charges for the period specific to the DPS Integration Program were as follows:

(in millions)

4 unchanged sentences

Non-cash adjustment items

Balance as of March 31, 2020

Balance as of June 30, 2020

RESTRUCTURING PROGRAMS

2 unchanged sentences

The Company expects to incur total cash expenditures of $ 750 million , comprised of both capital expenditures and expense, and expects to complete the program by 2021.

The restructuring and integration program resulted in cumulative pre-tax charges of approximately $ 440 million , primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through March 31, 2020 .

The effective tax rates for the first quarter of 2020 and 2019 were 23.9 % and 27.0 % , respectively.

For the first quarter of 2020 , the provision for income taxes was lower than the first quarter of 2019 primarily due to the benefit received from the revaluation of the Company ’s deferred tax liabilities and the decrease of income tax reserves due to the lapse in statute of limitations.

The restructuring and integration program resulted in cumulative pre-tax charges of approximately $ 492 million , primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through June 30, 2020 .

Our effective tax rates were as follows:

Second Quarter

First Six Months

(in millions)

Effective tax rate

For the second quarter of 2020 , the provision for income taxes was higher than the second quarter of 2019 primarily due to the decrease in the valuation of the Company's deferred tax liabilities and decrease of income tax reserves in the second quarter of 2019 .

For the first six months of 2020 , the provision for income taxes was higher than the first six months of 2019 primarily due to the tax benefit received in the first six months of 2019 from the valuation allowance release on realizability of foreign net operating loss carryforwards, which was offset by the tax benefit received from the Company ’s jurisdictional income mix through the first six months of 2020 .

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 designate these contracts as hedges for accounting purposes, and KDP does not hold or issue derivative financial instruments for trading or speculative purposes.

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 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.

For derivatives that are not designated or are de-designated as a hedging instrument, the gain or loss on the instrument is recognized in earnings in the period of change.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

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.

INTEREST RATES

Economic Hedges

The Company is exposed t o interest rate risk related to its borrowing arrangements and obligations.

2 unchanged sentences

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 March 31, 2020 , all interest rate swap contracts will mature in March 2025 .

As of June 30, 2020 , all interest rate swap contracts will mature in March 2025 .

FOREIGN EXCHANGE

The Company 's Canadian and Mexican businesses purchase certain inventory under extended payment terms in most cases through transactions denominated and settled in U.S.

The Company 's Canadian and Mexican businesses purchase certain inventory through transactions denominated and settled in U.S.

dollars, a currency different from the functional currency of those businesses.

2 unchanged sentences

The accounts payable related to the inventory purchases and the intercompany notes are subject to exposure from movements in exchange rates.

During the first quarter of 2020 and 2019 , the Company held FX forward contracts to economically manage the exposures resulting from changes in these FX exchange rates.

The intent of these FX contracts is to provide predictability in the Company 's overall cost structure.

Economic Hedges

During the second quarter and first six months of 2020 and 2019 , the Company 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 FX contracts have maturities ranging from April 2020 to September 2024 as of March 31, 2020 .

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

These FX contracts have maturities ranging from July 2020 to September 2024 as of June 30, 2020 .

Cash Flow Hedges

Beginning in the second quarter of 2020, the Company began to designate certain FX forward contracts related to inventory purchases of the 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 FX contracts, carried at fair value, have maturities ranging from October 2020 to December 2020 as of June 30, 2020 .

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.

The intent of these contracts is to provide a certain level of predictability in the Company 's overall cost structure.

During the first quarter of 2020 and 2019 , the Company held forward, future, swap and option contracts that economically hedged certain of its risks.

During the second quarter and first six months of 2020 and 2019 , 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.

1 unchanged sentence

Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company 's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations.

These commodity contracts have maturities ranging from April 2020 to June 2022 as of March 31, 2020 .

These commodity contracts have maturities ranging from July 2020 to December 2022 as of June 30, 2020 .

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS

4 unchanged sentences

Receive-variable, pay-fixed interest rate swaps (2)

Forward contracts, not designated as hedging instruments

Forward contracts, designated as cash flow hedges

Commodity contracts

During the first quarter of 2020 , the Company elected to terminate $ 50 million notional amount of receive-fixed, pay-variable interest rate swaps and received cash of $ 18 million .

During the first quarter of 2020 , the Company elected to terminate $ 575 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $ 2 million .

FAIR VALUE OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

The following table summarizes the fair value hierarchy and the location of the fair value of the Company 's derivative instruments not designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets:

During the first six months of 2020 , the Company elected to terminate $ 50 million notional amount of receive-fixed, pay-variable interest rate swaps and received cash of $ 18 million .

During the first six months of 2020 , the Company elected to terminate $ 575 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $ 2 million .

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 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 fair value hierarchy and 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:

(in millions)

24 unchanged sentences

(Unaudited, Continued)

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.

Designated as Hedging Instruments

The following table summarizes the fair value hierarchy and the location of the fair value of the Company 's derivative instruments which are designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets:

(in millions)

Fair Value Hierarchy Level

Balance Sheet Location

Prepaid expenses and other current assets

IMPACT OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

2 unchanged sentences

Amounts include both realized and unrealized gains and losses.

First Quarter

Second Quarter

First Six Months

(in millions)

3 unchanged sentences

Cost of sales

Other expense, net

Other (income) expense, net

Commodity contracts

2 unchanged sentences

SG&A expenses

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.

IMPACT OF CASH FLOW HEDGES

The following table presents the impact of derivative instruments designated as cash flow hedging instruments under U.S.

Second Quarter

First Six Months

(in millions)

FX contracts designated as hedges:

Amount of gain recognized in other comprehensive income (1)

Amounts expected to be reclassified into net income during the next twelve months.

There was no hedge ineffectiveness during the periods presented.

The Company leases certain facilities and machinery and equipment, including fleet.

1 unchanged sentence

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.

The Company 's lease agreements do not contain any material residual value guarantees or restrictive covenants, except for leases of certain manufacturing properties that contain a residual value guarantee at the end of the term.

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

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

The following table presents the components of lease cost:

First Quarter

Second Quarter

First Six Months

(in millions)

8 unchanged sentences

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

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

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

First Quarter

First Six Months

(in millions)

4 unchanged sentences

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

March 31, 2020

June 30, 2020

December 31, 2019

5 unchanged sentences

Finance leases

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

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, 2020 were as follows:

(in millions)

6 unchanged sentences

SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED

As of March 31, 2020 , the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $ 610 million .

These leases are expected to commence between the second quarter of 2020 and second quarter of 2021 , with initial lease terms ranging from 7 years to 20 years .

As of June 30, 2020 , the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $ 670 million .

These leases are expected to commence between the third quarter of 2020 and first quarter of 2021 , with initial lease terms ranging from 7 years to 20 years .

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

ASSET SALE-LEASEBACK TRANSACTIONS

8 unchanged sentences

The term of the leaseback is expected to end in 2025 and has two three-year renewals.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Earnings Per Share

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

First Quarter

Second Quarter

First Six Months

(in millions, except per share data)

7 unchanged sentences

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

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Stock-Based Compensation

1 unchanged sentence

The components of stock-based compensation expense are presented below:

First Quarter

Second Quarter

First Six Months

(in millions)

10 unchanged sentences

Vested and released

Outstanding as of March 31, 2020

As of March 31, 2020 , there was $ 351 million of unrecognized compensation cost related to unvested RSU s that is expected to be recognized over a weighted average period of 3.97 years .

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Outstanding as of June 30, 2020

As of June 30, 2020 , there was $ 328 million of unrecognized compensation cost related to unvested RSU s that is expected to be recognized over a weighted average period of 3.81 years .

Accumulated Other Comprehensive Income (Loss)

3 unchanged sentences

Pension and PRMB Liabilities

Cash Flow Hedges

Accumulated Other Comprehensive Income (Loss)

Balance as of April 1, 2020

Other comprehensive income

Balance as of June 30, 2020

Balance as of January 1, 2020

Other comprehensive loss

Balance as of March 31, 2020

Other comprehensive income (loss)

Balance as of June 30, 2020

Balance as of April 1, 2019

Other comprehensive income

Balance as of June 30, 2019

Balance as of January 1, 2019

Other comprehensive income

Balance as of March 31, 2019

Supplemental Cash Flow Information

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

(in millions)

March 31, 2020

December 31, 2019

Cash and cash equivalents

Restricted cash and restricted cash equivalents (1)

Non-current restricted cash and restricted cash equivalents included in Other non-current assets

Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows

Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the Core Acquisition , Bai Acquisition and Big Red Acquisition .

Amounts held in escrow are expected to be released within one year.

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

The following table provides supplemental cash flow disclosures:

First Quarter

(in millions)

Supplemental cash flow disclosures of non-cash investing activities:

Measurement period adjustment of Core purchase price

Capital expenditures included in accounts payable and accrued expenses

Supplemental cash flow disclosures of non-cash financing activities:

Dividends declared but not yet paid

Finance lease additions

Supplemental cash flow disclosures:

Cash paid for interest (1)

Cash paid for income taxes

Cash paid for interest includes amounts paid and received related to the Company's interest rate swap contracts and the termination of such contracts.

Refer to Note 7 for additional information .

Balance as of June 30, 2019

KEURIG DR PEPPER INC.

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(Unaudited, Continued)

Trade Accounts Receivable, Net

Trade Accounts Receivables, Net

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

The Company is exposed to potential credit risks associated with its accounts receivable, as it generally does not require collateral on its accounts receivable.

The Company determines the required allowance for expected credit losses using information such as its customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions such as the impacts of COVID-19 in the first quarter of 2020.

Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies or expectations of any such events in a future period when reasonable and supportable.

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Write-offs and adjustments

Balance as of March 31, 2020

Balance as of June 30, 2020

Other Financial Information

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

(in millions)

June 30, 2020

December 31, 2019

Cash and cash equivalents

Restricted cash and restricted cash equivalents (1)

Non-current restricted cash and restricted cash equivalents included in Other non-current assets

Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows

Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the Core Acquisition , the Bai Acquisition and the Big Red Acquisition .

Amounts held in escrow are expected to be released within one year.

KEURIG DR PEPPER INC.

1 unchanged sentence

(Unaudited, Continued)

Other Financial Information

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

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Total other non-current assets

The decrease was due to the assets included in sale-leaseback transactions that closed during the period.

The decrease in assets held for sale was due to the assets included in sale-leaseback transactions that closed during the period.

Refer to Note 8 for additional information about the transactions.

Remainder of amounts were comprised of property, plant and equipment expected to be sold within the next twelve months.

The remaining amounts were comprised of property, plant and equipment expected to be sold within the next twelve months.

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 $ 31 million and $ 40 million as of March 31, 2020 and December 31, 2019 , respectively.

The fair value of marketable securities was $ 37 million and $ 40 million as of June 30, 2020 and December 31, 2019 , respectively.

Refer to Note 4 for additional information .

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ACCOUNTS PAYABLE

KDP entered into an agreement with a third party administrator to allow participating suppliers to track payments from KDP , and if voluntarily elected by the supplier, sell payment obligations from KDP to financial institutions.

KDP has an agreement with a third party administrator which allows 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.

1 unchanged sentence

KDP 's obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted.

As of March 31, 2020 and December 31, 2019 , $ 2,322 million and $ 2,097 million , respectively, of KDP 's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

As of June 30, 2020 and December 31, 2019 , $ 2,487 million and $ 2,097 million , respectively, of KDP 's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

Commitments and Contingencies

6 unchanged sentences

(Unaudited, Continued)

Antitrust Litigation

In February 2014, TreeHouse Foods, Inc.

and certain affiliated entities filed suit against KDP’s wholly-owned subsidiary, KGM , in the U.S.

District Court for the Southern District of New York (“SDNY”) (TreeHouse Foods, Inc.

Green Mountain Coffee Roasters, Inc.

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 monetary damages, declaratory relief, injunctive relief and attorneys’ fees.

In March 2014, JBR, Inc.

filed suit against KGM in the U.S.

District Court for the Eastern District of California (JBR, Inc.

Keurig Green Mountain, Inc.).

The claims asserted and relief sought in the JBR complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint.

Beginning in March 2014, twenty-seven putative class actions asserting similar claims and seeking similar relief were filed on behalf of purported direct and indirect purchasers of KGM ’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, to a single judicial district for coordinated or consolidated pre-trial proceedings (the “Multidistrict Antitrust Litigation”).

Consolidated putative class action complaints by direct purchaser and indirect purchaser plaintiffs were 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.

Keurig Green Mountain, Inc.), was transferred into the Multidistrict Antitrust Litigation in November 2015.

In January 2019, McLane Company, Inc.

filed suit against KGM (McLane Company, Inc.

Keurig Green Mountain, Inc.) in the SDNY asserting similar claims and was also 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 in December 2017.

Separately, a statement of claim was filed in 2014 against KGM and Keurig Canada Inc.

in Ontario, Canada by Club Coffee L.P., a Canadian manufacturer of single serve beverage pods, claiming damages of CDN $ 600 million and asserting a breach of competition law and false and misleading statements by KGM .

In July 2020, KGM 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 and not for purposes of resale, KGM manufactured or licensed single serve beverage portion packs during the applicable class period (beginning in September 2010 for most states).

The agreement remains subject to court approval, prior to which putative class members will be given notice and the opportunity to opt out of the settlement.

KDP intends to vigorously defend the remaining pending lawsuits brought by Treehouse, JBR, McLane, the putative direct purchaser class and Club Coffee.

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.

Proposition 65 Litigation

In May 2011, the Council for Education and Research on Toxics 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 , in addition to nearly one hundred other defendants who manufacture, package, distribute or sell coffee, failed to warn persons in California that KGM 's coffee products expose persons to the chemical acrylamide in violation of Proposition 65 .

Plaintiff seeks equitable relief, including providing warnings to consumers, as well as civil penalties in the amount of the statutory maximum of $2,500 per day per violation of Proposition 65 .

Council for Education and Research on Toxics asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65 .

KGM , as part of a joint defense group organized to defend against the lawsuit, disputes the claims of the Plaintiff.

Acrylamide is not added to coffee, but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process.

KGM has asserted multiple affirmative defenses.

The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees, but the California Court of Appeal granted the defendants request for a stay of the third phase trial in October 2018.

The stay order was prompted by 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 Court of Appeal lifted its stay order and the litigation has continued based on, among other items, CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims.

At this stage of the proceedings, the Company is unable to reasonably estimate the potential loss or effect on the Company or its operations that could be associated with the lawsuit.

The trial court has discretion to impose zero penalties against the Company or to impose significant statutory penalties.

Significant labeling or warning requirements that could potentially be imposed by the trial court may increase the Company's costs and adversely affect sales of coffee products.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Related Parties

IDENTIFICATION OF RELATED PARTIES

The Company is indirectly controlled by a single stockholder, JAB , a privately held investor group.

JAB has ownership control over certain investments that create the following related party transaction types:

Coffee Transactions include transactions with Peet's Coffee, Caribou Coffee, Panera Bread and Krispy Kreme Doughnuts.

The Company manufactures portion packs containing a selection of coffee and tea varieties under Peet’s Coffee brands for sale in the U.S.

As part of this agreement, Peet’s Coffee issues purchase orders to the Company for portion packs to be supplied to Peet’s Coffee and sold in select channels.

In turn, the Company places purchase orders for Peet’s Coffee raw materials to manufacture portion packs for sale by the Company in select channels.

The Company licenses the Caribou Coffee, Panera Bread and Krispy Kreme Doughnuts trademarks for use in the Keurig system in the Company owned channels.

Additionally, the Company manufactures and distributes Peet's RTD Coffee in the U.S.

and pays Peet's Coffee a royalty for use of the brand name.

Restaurant Transactions include transactions with Caribou Coffee, Panera Bread, Einstein Bros Bagels and Krispy Kreme Doughnuts.

The Company sells various beverage concentrates and packaged beverages to these companies.

The Company also has rights in certain territories to bottle and/or distribute various brands that the Company does not own.

The Company holds investments in certain brand ownership companies.

Refer to Note 4 for additional information about the Company 's investments in unconsolidated affiliates.

The Company purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S.

KDP is indirectly controlled by JAB , a privately held investor group.

JAB and its affiliates have controlling investments in a number of other companies that have commercial relationships with the Company, including Peet's , Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc.

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.

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

KDP licenses the Caribou Coffee, Panera Bread and Krispy Kreme trademarks for use in the manufacturing 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, 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, any transactions with significant partners in these investments, such as ABI , are considered related party transactions.

ABI purchases Clamato from the Company and pays the Company a royalty for use of the brand name.

As of March 31, 2020 and December 31, 2019 and for the first quarter of 2020 and 2019 , the Company 's operating structure consisted of the following four reportable segments:

ABI purchases Clamato from KDP and pays the Company a royalty for use of the brand name.

Refer to Note 4 for additional information about KDP 's investments in unconsolidated affiliates.

For all periods presented, the Company 's operating structure consisted of the following four reportable segments:

The Coffee Systems segment reflects sales in the U.S.

10 unchanged sentences

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

First Quarter

Second Quarter

First Six Months

(in millions)

7 unchanged sentences

(Unaudited, Continued)

First Quarter

Second Quarter

First Six Months

(in millions)

13 unchanged sentences

Costs associated with shipping and handling activities, such as merchandising, are included in SG&A expenses as revenue is recognized.

The following table disaggregates the Company 's revenue by portfolio for the first quarter of 2020 and 2019 :

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

The following table disaggregates the Company 's revenue by portfolio:

(in millions)

3 unchanged sentences

Latin America Beverages

For the first quarter of 2020:

For the second quarter of 2020:

K-Cup pods (2)

For the first quarter of 2019:

For the first six months of 2020:

K-Cup pods (2)

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

For the second quarter of 2019:

K-Cup pods (2)

For the first six months of 2019:

K-Cup pods (2)

(1) Represents net sales of owned and partner brands within our portfolio.

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.

Subsequent Events

SENIOR UNSECURED NOTES

On April 13, 2020, the Company completed the issuance of $ 1,500 million aggregate principal amount of senior unsecured notes consisting of $ 750 million aggregate principal amount of 3.20 % senior unsecured notes due May 1, 2030 and $ 750 million aggregate principal amount of 3.80 % senior unsecured notes due May 1, 2050.

The discount associated with the 2030 Notes and 2050 Notes was approximately $ 6 million .

The net proceeds from the issuance were used to repay approximately $ 1,000 million of outstanding borrowings under the KDP Revolver and approximately $ 481 million of commercial paper notes.

KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

BORROWING ARRANGEMENTS

The 2020 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes.

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements