What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-30 compared with 2020-04-30 · 485 added, 181 removed, 436 unchanged (60% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

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

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 27, 2020.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act , including, in particular, statements about anticipated benefits and expenses of the DPS Merger and other transactions, including estimated synergies, deleveraging and associated cash management, and cost savings, the impact of COVID-19, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters and availability of raw materials.

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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 and our subsequent filings with the SEC .

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 and in Part II, Item 1A of this Quarterly Report on Form 10-Q, 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.

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KDP has some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers.

KDP offers more than 125 owned, licensed, partner and allied brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S.

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 , available nearly everywhere people shop and consume beverages.

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In this segment, we primarily manufacture and distribute packaged beverages of our brands.

Additionally, in order to maximize the size and scale of our manufacturing and distribution operations, we also distribute packaged beverages for our allied brands and manufacture packaged beverages for other third parties in the U.S.

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 parties in the U.S.

Our larger NCB brands in this segment include Snapple, Mott's, Bai, Clamato, Hawaiian Punch, Core, Yoo-Hoo, ReaLemon, Vita Coco coconut water, evian water, Mr and Mrs T mixers, and Forto Coffee.

Our larger CSD brands in this segment include Dr Pepper, Canada Dry, 7UP, A&W, Sunkist soda, Squirt, Big Red, RC Cola, Vernors and A Shoc .

Approximately 95% of our 2019 Packaged Beverages net sales come from the manufacturing and distribution of our own brands and the contract manufacturing of certain private label and emerging brand beverages.

The remaining portion of our 2019 Packaged Beverages net sales came from the distribution of our allied brands such as Vita Coco coconut water, evian water, Neuro drinks, High Brew RTD Coffee, Forto Coffee shots, A Shoc energy drinks, Peet's RTD Coffee and Runa energy drinks.

Approximately 95% of our 2019 Packaged Beverages net sales came from the manufacturing and distribution of our own brands and the contract manufacturing of certain private label and emerging brand beverages.

The remaining portion of our 2019 Packaged Beverages net sales came from the distribution of our partner brands such as Vita Coco coconut water, evian water, Neuro drinks, High Brew RTD Coffee, Forto Coffee shots, A Shoc energy drinks, Peet's RTD Coffee and Runa energy drinks.

We provide a route-to-market for third party brand owners seeking effective distribution for their new and emerging brands.

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EXECUTIVE SUMMARY

Impact of COVID-19 on our Financial Statements

The impact of COVID-19 on our second quarter net sales performance presented both headwinds and tailwinds across the business and within the segments, requiring strong portfolio and channel mix management to optimize overall performance.

The diversity of the Company’s broad portfolio and extensive route to market network enabled it to successfully navigate these mix impacts posed by the pandemic to optimize overall performance and deliver a strong second quarter.

Coffee Systems experienced significant growth in brewers and K-Cup coffee pods for at-home consumption, which more than offset a significant drop-off in the office coffee and hospitality businesses.

E-commerce demonstrated particular strength during the quarter, reflecting an acceleration of consumers shifting some of their purchases to the on-line channel, including at the Keurig.com retail site.

Packaged Beverages experienced a net benefit from strong in-market execution, leading to share growth in the majority of our cold beverage segments, more than offset the decline in convenience and gas channels due to reduced consumer mobility.

Beverage Concentrates experienced a decline due to the fountain foodservice component of the business, which services restaurants and hospitality, reflecting changes in consumer behavior.

Latin America Beverages experienced a modest negative impact due to limited consumer mobility in Mexico.

In addition to strong portfolio and channel mix management to optimize overall net sales performance, we instituted strong cost discipline to protect our profitability for the benefit of all of our stakeholders.

For example, as certain parts of our business experienced positive net benefits in the net sales performance, we have increased our operating costs.

For other parts of the business where negative impacts have occurred in the net sales performance, those impacts will materialize through to net income.

In order to offset these impacts, we focused on cost discipline to manage these impacts and did the following:

Reduced our marketing expense, partially because in the current COVID-19 landscape, we are not obtaining the same return on investment previously achieved;

Paused substantially all other discretionary costs, such as travel and entertainment expenses, within the business.

As a result of these items, COVID-19 is impacting our results, both positively and negatively, and should be taken into account when reviewing Management's Discussion and Analysis.

Refer to the section COVID-19 Pandemic Disclosures below for further information.

The following table sets forth our reconciliation of significant COVID-19-related expenses.

However, 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 is 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)

(in millions)

Employee Compensation Expense (2)

Employee Protection Costs (3)

Allowances for Expected Credit Losses (4)

Inventory Write-Downs (5)

For the second quarter of 2020:

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Unallocated corporate costs

For the first six months of 2020:

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Unallocated corporate costs

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.

Reflects temporary incremental frontline incentive pay and the associated taxes in order to maintain essential operations during the COVID-19 pandemic.

Impacts both cost of sales and SG&A expenses.

Includes costs associated with personal protective equipment, temperature scans, cleaning and other sanitization services.

Impacts both cost of sales and SG&A expenses.

Allowances reflect 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.

Impacts SG&A expenses.

Inventory write-downs include obsolescence charges of $8 million for both the second quarter and first six months of 2020 .

Impacts cost of sales.

Financial Overview

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

Adjusted net income increased 12.7% to $408 million for the first quarter of 2020 as compared to Adjusted net income of $362 million in the prior year period, driven primarily by productivity and merger synergies and strong volume/mix growth, which reflected particular strength in the Packaged Beverages segment, which included a benefit from the impact of COVID-19 late in the quarter, partially offset by a slowdown in the Beverages Concentrates and Coffee Systems segments, both of which experienced a modest unfavorable impact from COVID-19 late in the quarter.

Net sales increased $52 million , or 1.8% , to $2,864 million for the second quarter of 2020 compared with $2,812 million in the prior year period.

This performance reflected higher volume/mix of 4.3% , reflecting the impact of COVID-19, partially offset by lower net price realization of 1.4% and unfavorable FX translation of 1.1% , primarily in our Latin America Beverages segment.

Net income decreased $16 million to $298 million for the second quarter of 2020 as compared to $314 million in the prior year period, driven primarily by $75 million of additional pre-tax expenses associated with COVID-19 and lower net price realization, partially offset by the reduction of our marketing expense and the benefit of lower indebtedness due to continued deleveraging.

Adjusted net income increased 10.9% to $469 million for the second quarter of 2020 as compared to Adjusted net income of $423 million in the prior year period, driven primarily by the reduction of our marketing expense, productivity and merger synergies, and volume/mix growth, which were partially offset by lower net price realization, $12 million of additional pre-tax expenses associated with COVID-19 and higher operating costs associated with increased consumer retail demand for our products.

Diluted EPS decreased 4.5% to $0.21 per diluted share as compared to $0.22 in the prior year period.

Adjusted diluted EPS increased 10.0% to $0.33 per diluted share as compared to Adjusted diluted EPS of $0.30 per diluted share in the prior year period.

During the first quarter of 2020 , we made net repayments of $42 million related to our commercial paper notes, KDP Revolver , 2019 KDP Term Loan and our 2020 Notes.

Additionally, we repaid $107 million and added $44 million of structured payables during the first quarter of 2020 .

During the first six months of 2020 , we made net repayments of $316 million related to our commercial paper notes, KDP Revolver , 2019 KDP Term Loan and our Notes.

Additionally, we repaid $227 million and added $86 million of structured payables during the first six months of 2020 .

In April 2020, we completed a strategic refinancing that extended our debt maturities and enhanced our liquidity profile, including a $1.5 billion senior unsecured notes issuance and the refinancing and upsizing of our 2019 364-Day Credit Agreement .

The proactive refinancing, which did not change our total debt balance or deleveraging commitments, increased our excess liquidity to a level that we believe will exceed our liquidity needs, even in the event of a protracted downturn.

The proactive refinancing, which did not change our total debt balance or deleveraging commitments, increased our liquidity to a level that we believe will exceed our near-term liquidity needs, even in the event of a protracted downturn.

RESULTS OF OPERATIONS

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References in the financial tables to percentage changes that are not meaningful are denoted by "NM".

First Quarter of 2020 Compared to First Quarter of 2019

See COVID-19 Pandemic Disclosures for more information about the specific costs related to COVID-19.

Second Quarter of 2020 Compared to Second Quarter of 2019

Consolidated Operations

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

First Quarter

The following table sets forth our unaudited condensed consolidated results of operations for the second quarter of 2020 and 2019 :

Second Quarter

($ in millions, except per share amounts)

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Selling, general and administrative expenses

Other operating income, net

Other operating (income) expense, net

Income from operations

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Loss on early extinguishment of debt

Other (income) expense, net

Income before provision for income taxes

Provision for income taxes

Earnings per common share:

Operating margin

Effective tax rate

Sales volume.

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

Increase / (Decrease)

K-Cup pod volume

Brewer volume

CSD sales volume

NCB sales volume

Net sales increased $52 million , or 1.8% , to $2,864 million for the second quarter of 2020 compared with $2,812 million in the prior year period.

Gross Profit.

Gross profit decreased $64 million for the second quarter of 2020 compared with the prior year period.

This performance primarily reflected the unfavorable change in commodity mark-to-market impacts, unfavorable net price realization, $26 million in COVID-19 charges, unfavorable net price realization, unfavorable FX translation and an increase in other manufacturing costs.

These decreases were partially offset by productivity and merger synergies and the impact of higher volume/mix.

Gross margin decreased 330 bps versus the year ago period to 54.5%

Selling, General and Administrative Expenses.

SG&A expenses decreased $27 million , or 2.6% , to $1,001 million for the second quarter of 2020 compared with $1,028 million for the second quarter of 2019 .

The decrease was driven by the reduction in marketing expense, productivity and merger synergies and the favorable change in commodity mark-to-market impacts, which were partially offset by $49 million in COVID-19 charges, an increase in our litigation reserve, expenses associated with productivity and integration projects and higher operating costs, such as logistics and labor, associated with the strong consumer demand.

See Note 14 of the Notes to our Unaudited Condensed Consolidated Financial Statements for more information related to the antitrust litigation.

Other operating (income) expense, net .

Other operating (income) expense, net had a favorable change of $11 million for the second quarter of 2020 compared with the second quarter of 2019 , primarily due to a charge related to the renegotiation of a distribution contract in the prior year period.

Income from Operations.

Income from operations decreased $26 million to $561 million for the second quarter of 2020 compared to $587 million in the prior year period due to the decrease in gross profit, partially offset by lower SG&A expenses and the favorable change in other operating (income) expense, net.

Operating margin declined 130 bps versus the year ago period to 19.6% .

Interest Expense.

Interest expense decreased $13 million , or 7.6% , to $157 million for the second quarter of 2020 compared with $170 million in the prior year period.

This change was primarily the result of the benefit of lower indebtedness due to continued deleveraging.

Other (income) expense, net .

Other (income) expense, net had a favorable change of $5 million for the second quarter of 2020 compared with the prior year period, primarily driven by reduced losses from equity-method investees.

Beginning in the second quarter of 2020, we discontinued recognizing our share of losses related to Bedford as the investment's carrying value is zero.

Effective Tax Rate.

The effective tax rates for the second quarter of 2020 and 2019 were 26.6% and 24.5% , respectively.

For the second quarter of 2020 , the provision for income taxes was higher than the second quarter of 2019 primarily due to the benefits recognized in the second quarter of 2019 related to a decrease in the valuation of our deferred tax liabilities and the decrease of income tax reserves.

Adjusted Results of Operations

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

Second Quarter

(in millions, except per share amounts)

Adjusted income from operations

Adjusted interest expense

Adjusted provision for income taxes

Adjusted net income

Adjusted diluted EPS

Adjusted operating margin

Adjusted effective tax rate

Adjusted Income from Operations.

Adjusted income from operations increased $73 million , or 10.4% , to $775 million for the second quarter of 2020 as compared to Adjusted income from operations of $702 million in the prior year period.

Driving this performance in the quarter were the reduction of our marketing expense, productivity and merger synergies, and volume/mix growth.

These increases were partially offset by lower net price realization, $12 million of COVID-19 charges and higher operating costs associated with increased consumer retail demand for our products.

Adjusted operating margin grew 210 bps versus the year ago period to 27.1% .

Adjusted Interest Expense.

Adjusted interest expense increased $7 million , or 5.1% , to $145 million for the second quarter of 2020 compared to Adjusted interest expense of $138 million in the prior year period.

This change was primarily the result of a $13 million benefit from unwinding interest rate swap contracts in the prior year period and amortization of deferred financing costs associated with the bond issuance in April 2020, partially offset by the benefit of lower indebtedness due to continued deleveraging.

Adjusted Effective Tax Rate.

The Adjusted effective tax rate increased 90 bps to 26.0% for the second quarter of 2020 , compared to Adjusted effective tax rate of 25.1% in the prior year.

This increase in our Adjusted effective tax rate was primarily due to the decrease in benefit received from the revaluation of our deferred tax liabilities and the decrease of income tax reserves in the second quarter of 2019 .

Adjusted Net Income.

Adjusted net income increased 10.9% to $469 million for the second quarter of 2020 as compared to Adjusted net income of $423 million in the prior year period.

This performance was primarily driven by strong growth in Adjusted income from operations partially offset by a higher Adjusted effective tax rate and higher Adjusted interest expense.

Adjusted Diluted EPS.

Adjusted diluted EPS increased 10.0% to $0.33 per diluted share for the second quarter of 2020 as compared to Adjusted diluted EPS of $0.30 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 2020 and 2019 , as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S.

Second Quarter

(in millions)

Segment Results — Net sales

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Second Quarter

(in millions)

Segment Results — Income from Operations

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Unallocated corporate costs

Income from operations

COFFEE SYSTEMS

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

Second Quarter

(in millions)

Income from operations

Operating margin

Adjusted income from operations

Adjusted operating margin

Sales Volume.

Volume growth for the Coffee Systems segment reflected strong K-Cup pod volume growth of 9.5% reflecting the impact of COVID-19.

Brewer volume increased 11.6% in the quarter, despite a comparison to 19.4% growth in the year-ago period, reflecting successful innovation introduced over the past 12 months and investments to drive household penetration.

Also benefitting the brewer comparison was the expected shift of shipments into the second quarter, due to COVID-19-related pressure on brewer supply from Asia.

Net sales increased 5.4% to $1,043 million for the second quarter of 2020 compared to net sales of $990 million in the prior year period, driven by strong volume/mix growth of 8.3% , which was driven by sales volume growth.

This growth was partially offset by lower net price realization of 2.5% , resulting from strategic price investments.

Unfavorable FX translation also impacted the period by 0.4% .

Income from Operations.

Income from operations increased $3 million , or 1.0% , to $290 million for the second quarter of 2020 , compared to $287 million for the prior year period, driven by strong volume/mix growth, productivity and merger synergies, which impacted both cost of sales and SG&A, a reduction in expenses associated with productivity projects and a decrease in other operating costs.

These impacts were partially offset by strategic pricing, an increase in our litigation reserve and $17 million in COVID-19 charges.

Operating margin declined 120 bps versus the year ago period to 27.8% .

Adjusted Income from Operations.

Adjusted income from operations increased $32 million , or 9.7% , to $363 million for the second quarter of 2020 , compared with Adjusted income from operations of $331 million for the prior year period, driven by strong volume/mix growth, continued productivity and merger synergies, which impacted both SG&A and cost of sales, partially offset by strategic pricing and $8 million in COVID-19 charges.

Adjusted operating margin increased 140 bps versus the year ago period to 34.8% .

PACKAGED BEVERAGES

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

Second Quarter

(in millions)

Income from operations

Operating margin

Adjusted income from operations

Adjusted operating margin

Sales Volume.

Sales volume for the second quarter of 2020 increased 8.2% due primarily to the net benefits of COVID-19, as strength in CSDs, juice and juice drinks and apple sauce were partially offset by lower volume in water (enhanced and premium) and teas.

Contract manufacturing also contributed to the increase during the quarter.

Net sales increased 6.2% to $1,392 million for the second quarter of 2020 , compared with net sales of $1,311 million in the prior year period, driven by higher volume/mix of 6.6% , reflecting the impact of COVID-19, and lower net price realization of 0.3% .

Unfavorable FX translation also impacted the period by 0.1% .

Income from Operations.

Income from operations increased $22 million , or 11.8% , to $208 million for the second quarter of 2020 , compared with $186 million for the prior year period, reflecting higher volume/mix, continued productivity and merger synergies and a reduction in our marketing expense.

These growth drivers were partially offset by $54 million in COVID-19 charges and higher manufacturing and operating costs, such as logistics and labor, associated with the strong consumer demand.

Operating margin grew 70 bps versus the year ago period to 14.9%

Adjusted Income from Operations.

Adjusted income from operations increased $79 million , or 41.6% , to $269 million for the second quarter of 2020 , compared with Adjusted income from operations of $190 million for the prior year period, largely driven by strong volume/mix, a reduction in our marketing expense and continued productivity and merger synergies.

These growth drivers were partially offset by inflation in input costs and logistics and an increase in other manufacturing costs.

Adjusted operating margin grew 480 bps versus the year ago period to 19.3% .

BEVERAGE CONCENTRATES

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

Second Quarter

(in millions)

Income from operations

Operating margin

Adjusted income from operations

Adjusted operating margin

Sales volume.

Sales volume for the second quarter of 2020 decreased 10.5% , primarily reflecting the impact of COVID-19.

Net sales decreased 16.5% to $309 million for the second quarter of 2020 compared to $370 million for the prior year period, driven by unfavorable volume/mix of 11.4% primarily reflecting a significant impact on our fountain foodservice business, as demand was significantly impacted in the quarter due to COVID-19 and shelter in place guidelines.

Lower net price realization of 4.8% , primarily driven by the annual true-ups of our prior year estimated customer incentive liability, and unfavorable foreign currency translation of 0.3% also drove the decrease in net sales.

Income from Operations.

Income from operations decreased $24 million , or 9.8% , to $220 million for the second quarter of 2020 compared to $244 million for the prior year period.

This performance reflected the net sales decline partially offset by a reduction in marketing expense.

Operating margin grew 530 bps from versus the year ago period to 71.2% .

Adjusted Income from Operations.

Adjusted income from operations decreased $24 million , or 9.8% , to $222 million for the second quarter of 2020 compared with Adjusted income from operations of $246 million for the prior year period.

This performance reflected the net sales decline partially offset by a reduction in marketing expense.

Adjusted operating margin grew 530 bps versus the year ago period to 71.8% .

LATIN AMERICA BEVERAGES

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

Second Quarter

(in millions)

Income from operations

Operating margin

Adjusted income from operations

Adjusted operating margin

Sales Volume.

Sales volume for the second quarter of 2020 increased 5.8% compared to the prior year period, reflecting the impact of COVID-19.

Net sales decreased 14.9% to $120 million for the second quarter of 2020 compared to $141 million for the prior year period, driven completely by unfavorable FX translation of 16.3% .

Excluding the unfavorable impact of FX translation, net sales increased as a result of higher net price realization of 6.1% partially offset by unfavorable volume/mix of 4.7% .

Income from Operations .

Income from operations decreased 19.2% to $21 million for the second quarter of 2020 compared to $26 million for the prior year period, driven by unfavorable FX effects (FX transaction and translation), the comparison to a real estate gain in the prior year and unfavorable volume/mix, partially offset by higher net price realization, continued productivity and a reduction in our marketing expense.

Operating margin decreased 90 bps versus the year ago period to 17.5% .

Adjusted Income from Operations.

Adjusted income from operations increased $3 million , or 15.0% , to $23 million for the second quarter of 2020 , compared with Adjusted income from operations of $20 million in the prior year period.

This performance reflected higher net price realization, continued productivity and a reduction in our marketing expense, partially offset by unfavorable FX transaction impact and unfavorable volume/mix.

Adjusted operating margin increased 500 bps versus the year ago period to 19.2% .

First Six Months of 2020 Compared to First Six Months of 2019

Consolidated Operations

The following table sets forth our unaudited condensed consolidated results of operations for the first six months of 2020 and 2019 :

First Six Months

($ in millions, except per share amounts)

Cost of sales

Selling, general and administrative expenses

Other operating (income) expense, net

Income from operations

Interest expense

Loss on early extinguishment of debt

Impairment on investment and note receivable

Other expense, net

Other (income) expense, net

Income before provision for income taxes

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Sales volume.

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

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

Increase / (Decrease)

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NCB sales volume

Net sales increased $109 million , or 4.4% , to $2,613 million for the first quarter of 2020 compared to $2,504 million in the prior year period.

This performance reflected higher volume/mix of 5.0% driven by strong volume/mix growth, which reflected particular strength in the Packaged Beverage segment, which included a benefit from the impact of COVID-19 late in the quarter, partially offset by a slowdown in the Beverages Concentrates and Coffee Systems segments, both of which experienced a modest unfavorable impact from COVID-19 late in the quarter.

The volume/mix growth was partially offset by lower net price realization of 0.5% and unfavorable foreign currency translation, which also impacted the period by 0.1% .

Net sales increased $161 million , or 3.0% , to $5,477 million for the first six months of 2020 compared to $5,316 million in the prior year period.

This performance reflected higher volume/mix of 4.7% , reflecting the impact of COVID-19, partially offset by lower net price realization of 1.0% and unfavorable foreign currency translation of 0.7% , primarily in our Latin America Beverages segment.

Gross Profit.

Gross profit increased $54 million , or 3.9% , to $1,452 million for the first quarter of 2020 compared to $1,398 million in the prior year period.

This performance primarily reflected the impact of higher volume/mix and productivity and merger synergies, partially offset by tariffs, unfavorable net price realization and inflation in input costs, led by packaging.

Gross margin decreased 20 bps to 55.6% in the first quarter of 2020 .

Gross profit decreased $10 million , or 0.3% , to $3,014 million for the first six months of 2020 compared to $3,024 million in the prior year period.

This performance primarily reflected unfavorable net price realization, an unfavorable change in commodity mark-to-market impacts, $27 million in COVID-19 charges, tariffs and an increase in other manufacturing costs.

These decreases were partially offset by the impact of higher volume/mix and productivity and merger synergies.

Gross margin decreased 190 bps versus the year ago period to 55.0% .

Selling, General and Administrative Expenses.

SG&A expenses increased $117 million , or 12.8% , to $1,028 million for the first quarter of 2020 compared to $911 million in the prior year period.

The increase was driven by the unfavorable change in commodity mark-to-market impacts, expenses associated with productivity and integration projects, higher operating costs associated with the increased shipment volume and an increase in other operating costs.

These increases were partially offset by strong productivity and merger synergies.

Other Operating Income, net.

Other operating income, net increased $31 million to $42 million for the first quarter of 2020 compared to $11 million in the prior year period due to the network optimization program gain of $42 million on the asset sale-leaseback of four facilities in the current year versus a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period.

SG&A expenses increased $90 million , or 4.6% , to $2,029 million for the first six months of 2020 compared to $1,939 million in the prior year period.

The increase was driven by $63 million in COVID-19 charges, the unfavorable change in commodity mark-to-market impacts, expenses associated with productivity and integration projects, an increase in our litigation reserve for the antitrust litigation and higher operating costs, such as logistics and labor, associated with the strong consumer demand.

These increases were partially offset by strong productivity and merger synergies and a reduction in our marketing expense.

See Note 14 of the Notes to our Unaudited Condensed Consolidated Financial Statements for more information related to the antiitrust litigation.

Other Operating (Income) Expense, net.

Other operating income, net had a favorable change of $42 million for the first six months of 2020 compared to the prior year period due to the network optimization program gain of $42 million on the asset sale-leaseback of four facilities in the current year.

Income from Operations.

Income from operations decreased $32 million , or 6.4% , to $466 million for the first quarter of 2020 compared to $498 million in the prior year period due to the increase in SG&A expenses partially offset by an increase in gross profit and other operating income, net.

Operating margin declined 210 bps to 17.8% in the first quarter of 2020 as compared to the prior year period.

Income from operations decreased $58 million , or 5.3% , to $1,027 million for the first six months of 2020 compared to $1,085 million in the prior year period due to the increase in SG&A expenses partially offset by a favorable change in other operating (income) expense, net.

Operating margin declined 160 bps versus the year ago period to 18.8% .

Interest Expense.

Interest expense decreased $16 million , or 9.5% , to $153 million for the first quarter of 2020 compared to $169 million for the prior year period.

Interest expense decreased $29 million , or 8.6% , to $310 million for the first six months of 2020 compared to $339 million for the prior year period.

This change was primarily the result of the benefit of lower indebtedness due to continued deleveraging.

Impairment on Investment and Note Receivable.

Impairment on investment and note receivable reflected a non-cash impairment charge of $86 million for the first quarter of 2020 associated with our Bedford investment.

Impairment on investment and note receivable reflected a non-cash impairment charge of $86 million for the first six months of 2020 associated with our Bedford investment.

Refer to Note 4 for additional information regarding the impairment charge.

Other Expense, net.

Other expense, net increased $15 million to $20 million for the first quarter of 2020 compared to $5 million in the prior year period primarily driven by losses related to our deferred compensation plan in the current year versus gains recorded in the prior year period.

Other (Income) Expense, net.

Other (income) expense, net had an unfavorable change of $10 million for the first six months of 2020 compared to the prior year period primarily driven by the activity related to our deferred compensation plan in the current year as gains recorded in the prior year period were higher than in the current year period.

The deferred compensation plan activity is fully offset by the same amount in SG&A expenses.

Effective Tax Rate.

The effective tax rates for the 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 prior year period 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.

Net income decreased $74 million to $156 million for the first quarter of 2020 as compared to $230 million in the prior year period.

This performance was primarily driven by a non-cash impairment charge of $86 million associated with our Bedford investment.

The effective tax rates for the first six months of 2020 and 2019 were 25.7% and 25.6% , respectively.

Refer to Note 6 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Net income decreased $90 million to $454 million for the first six months of 2020 as compared to $544 million in the prior year period.

This performance was primarily driven by a non-cash impairment charge during the first six months of 2020 of $86 million associated with our Bedford investment.

Diluted EPS decreased 15.8% to $0.32 per diluted share as compared to $0.38 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 quarter of 2020 and 2019 :

First Quarter

The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the first six months of 2020 and 2019 :

First Six Months

(in millions, except per share amounts)

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Adjusted Income from Operations.

Adjusted income from operations increased $63 million , or 10.1% , to $684 million for the first quarter of 2020 compared to Adjusted income from operations of $621 million in the prior year period.

Driving this performance in the quarter were productivity and merger synergies, which impacted both SG&A and cost of sales, the strong growth in net sales and a network optimization program gain of $42 million on the asset-sale leaseback of four facilities.

Partially offsetting these positive drivers were inflation in input costs, led by packaging, and logistics, higher operating costs associated with the increased shipment volume, tariffs and the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period.

Adjusted operating margin grew 140 bps to 26.2% in the first quarter of 2020 .

Adjusted income from operations increased $136 million , or 10.3% , to $1,459 million for the first six months of 2020 compared to Adjusted income from operations of $1,323 million in the prior year period.

Driving this performance in the current period were productivity and merger synergies, which impacted both SG&A and cost of sales, higher volume/mix, a reduction in our marketing expense and a network optimization program gain of $42 million on the asset-sale leaseback of four facilities.

Partially offsetting these positive drivers were $22 million of additional COVID-19 charges, tariffs and higher manufacturing and operating costs, such as logistics and labor, associated with the strong consumer demand.

Adjusted operating margin grew 170 bps versus the year ago period to 26.6% .

Adjusted Interest Expense.

Adjusted interest expense decreased $4 million , or 3.2% , to $120 million for the first quarter of 2020 compared to Adjusted interest expense of $124 million in the prior year period.

This change was the result of the benefit of lower indebtedness due to continued deleveraging and the $20 million benefit of unwinding several interest rate swap contracts.

Partially offsetting these factors was a $27 million benefit of unwinding several interest rate swap contracts in the prior year period.

Adjusted interest expense increased $3 million , or 1.1% , to $265 million for the first six months of 2020 compared to Adjusted interest expense of $262 million in the prior year period.

This change was the result of a $27 million unfavorable comparison between the gains recorded in each year for unwinding several interest rate swap contracts and amortization of deferred financing costs associated with the bond issuance in April 2020, partially offset by the benefit of lower indebtedness resulting from continued deleveraging.

Adjusted Effective Tax Rate.

The Adjusted effective tax rate decreased 110 bps to 25.0% for the first quarter of 2020 , compared to the Adjusted effective tax rate of 26.1% in the prior year period.

This decrease in our adjusted effective tax rate was 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 during the first quarter of 2020 .

The Adjusted effective tax rate remained constant at 25.6% for the first six months of 2020 to the first six months of 2019.

Adjusted Net Income.

Adjusted net income increased 12.7% to $408 million for the first quarter of 2020 as compared to Adjusted net income of $362 million in the prior year period.

This performance was driven primarily by strong growth in Adjusted income from operations, a lower Adjusted effective tax rate and lower Adjusted interest expense.

Adjusted net income increased 11.7% to $877 million for the first six months of 2020 as compared to Adjusted net income of $785 million in the prior year period.

This performance was driven primarily by strong growth in Adjusted income from operations.

Adjusted Diluted EPS.

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Results of Operations by Segment

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

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

(in millions)

First Quarter

First Six Months

Segment Results — Net sales

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Latin America Beverages

First Quarter

First Six Months

(in millions)

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COFFEE SYSTEMS

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

First Quarter

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

First Six Months

(in millions)

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Sales Volume.

The volume growth in the first quarter of 2020 compared to the prior year period for the Coffee Systems segment reflected strong K-Cup pod volume growth of 5.6% despite a significant decline late in the quarter in the away-from-home coffee business due to both office closures and hospitality slowdown caused by COVID-19.

Brewer volume declined 2.4% in the quarter, reflecting comparison to the double-digit growth recorded in the prior year period, as well as the expected shift of brewer shipments from the first quarter to later in the year as a result of the timing impact of COVID-19 on brewer supply from certain regions in Asia.

Net sales increased $5 million , or 0.5% , to $973 million for the first quarter of 2020 compared to $968 million for the prior year period due to volume/mix growth of 3.7% , driven by the increase in K-Cup pod volume and partially offset by unfavorable pod sales mix.

This growth was partially offset by lower net price realization of 3.3% .

Favorable foreign currency translation also impacted the period by 0.1% .

The volume growth in the first six months of 2020 compared to the prior year period for the Coffee Systems segment reflected strong K-Cup pod volume growth of 7.6% reflecting the impact of COVID-19.

Brewer volume increased 5.8% the first six months of 2020 , despite a comparison to 16.4% growth in the year-ago period, reflecting successful innovation introduced over the past 12 months and investments to drive household penetration.

Net sales increased $58 million , or 3.0% , to $2,016 million for the first six months of 2020 compared to $1,958 million for the prior year period due to volume/mix growth of 6.0% , which was driven by sales volume growth partially offset by lower net price realization of 2.9% .

Unfavorable FX translation also impacted the period by 0.1% .

Income from Operations.

Income from operations decreased $21 million , or 7.2% , to $272 million for the first quarter of 2020 , compared to $293 million in the prior year period, driven by expenses associated with productivity projects and strategic pricing.

These impacts were partially offset by strong productivity and merger synergies, which impacted both SG&A and cost of sales, a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility and strong growth in K-Cup pod volume.

Operating margin declined 230 bps to 28.0% during the first quarter of 2020 .

Income from operations decreased $18 million , or 3.1% , to $562 million for the first six months of 2020 , compared to $580 million in the prior year period, driven by strategic pricing, expenses associated with productivity projects, $19 million in COVID-19 charges, tariffs and an increase in our litigation reserve.

These impacts were partially offset by strong productivity and merger synergies, which impacted both cost of sales and SG&A, strong volume/mix growth and a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility.

Operating margin declined 170 bps versus the year ago period to 27.9% .

Adjusted Income from Operations.

Adjusted income from operations increased $12 million , or 3.6% , to $347 million for the first quarter of 2020 , compared to $335 million in the prior year period, driven by continued productivity and merger synergies, which impacted both SG&A and cost of sales, a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility and strong growth in K-Cup pod volume.

Partially offsetting these factors was strategic pricing, tariffs and an increase in other operating costs.

Adjusted income from operations increased $44 million , or 6.6% , to $710 million for the first six months of 2020 , compared to $666 million in the prior year period, driven by continued productivity and merger synergies, which impacted both cost of sales and SG&A, strong volume/mix and a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility.

Partially offsetting these factors was strategic pricing and tariffs.

Adjusted operating margin grew 120 bps versus the year ago period to 35.2% .

PACKAGED BEVERAGES

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

First Quarter

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

First Six Months

(in millions)

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Sales Volume.

Sales volume for the first quarter of 2020 compared to the prior year period increased 7.0% due to higher water sales, led by evian and Core Hydration, higher CSD volume, and growth in Mott's.

The increase in volume in the quarter was partially driven by heightened consumer demand due to stock-up behavior late in the quarter related to COVID-19.

Net sales increased $101 million , or 9.1% , to $1,217 million for the first quarter of 2020 compared to $1,116 million for the prior year period, driven by higher volume/mix of 8.7% , in part as a result of the COVID-19 impact, and higher net price realization of 0.4% .

Sales volume for the first six months of 2020 compared to the prior year period increased 16.4% , reflecting the impact of COVID-19 which displayed strength in CSDs, juice and juice drinks, premium water and apple sauce, driven by heightened consumer demand the first six months of 2020 .

These increases were partially offset by lower volume in enhanced water and teas during the current period.

Contract manufacturing also contributed to the increase during the current period.

Net sales increased $182 million , or 7.5% , to $2,609 million for the first six months of 2020 compared to $2,427 million for the prior year period, driven by higher volume/mix of 7.6% , reflecting the impact of COVID-19, partially offset by an unfavorable foreign currency translation of 0.1% .

Income from Operations.

Income from operations increased $40 million , or 26.8% , to $189 million for the first quarter of 2020 compared to $149 million for the prior year period, reflecting strong net sales growth, continued productivity and merger synergies and a network optimization program gain of $26 million on the asset sale-leaseback of three facilities.

These growth drivers were partially offset by higher operating costs associated with the surge in consumer demand late in the quarter, inflation in input costs, primarily in packaging, and labor and logistics, the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period and an increase in other operating costs.

Operating margin grew 210 bps versus the prior year period to 15.5% .

Income from operations increased $62 million , or 18.5% , to $397 million for the first six months of 2020 compared to $335 million for the prior year period, reflecting strong volume/mix, reflecting the impact of COVID-19.

Other favorable drivers included continued productivity and merger synergies, a reduction in our marketing expense and a network optimization program gain of $26 million on the asset sale-leaseback of three facilities.

These growth drivers were partially offset by $67 million in COVID-19 charges, higher manufacturing and operating costs, such as logistics and labor, associated with the strong consumer demand and the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period.

Operating margin grew 140 bps versus the year ago period to 15.2% .

Adjusted Income from Operations.

Adjusted income from operations increased $43 million , or 26.9% , to $203 million for the first quarter of 2020 compared to $160 million for the prior year period, largely driven by strong volume/mix, partially driven by increased shipment volume as a result of COVID-19.

Other favorable drivers included productivity and merger synergies and a network optimization program gain of $26 million on the asset sale-leaseback of three facilities.

These drivers were partially offset by higher operating costs associated with the surge in consumer demand late in the quarter, inflation in input costs, primarily in packaging, and labor and logistics, the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period and an increase in other operating costs.

Adjusted income from operations increased $122 million , or 34.9% , to $472 million for the first six months of 2020 compared to $350 million for the prior year period, largely driven by strong volume/mix, reflecting the impact of COVID-19.

These drivers were partially offset by higher manufacturing and operating costs, such as logistics and labor, associated with the strong consumer demand and the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period.

Adjusted operating margin grew 370 bps versus the year ago period to 18.1% .

BEVERAGE CONCENTRATES

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

First Quarter

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

First Six Months

(in millions)

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Sales Volume.

Sales volume for the first quarter of 2020 as compared to the prior year period declined 2.4% reflecting an immediate impact of COVID-19 on the fountain foodservice business late in the quarter, partially offset by growth in the concentrate shipment volume for retail product.

Net sales increased $2 million , or 0.7% , to $306 million for the first quarter of 2020 compared to $304 million in the prior year period, driven by net price realization of 2.4% , partially offset by unfavorable volume/mix of 1.7% reflecting a significant channel shift away from on-premise business, which is shipped directly, as demand dropped off quickly late in the quarter due to COVID-19, partially offset by a slower build of the at-home business, as inventories in our partner bottling network were worked down.

Sales volume for the first six months of 2020 as compared to the prior year period declined 14.8% reflecting the impact of COVID-19.

Net sales decreased $59 million , or 8.8% , to $615 million for the first six months of 2020 compared to $674 million in the prior year period, driven by unfavorable volume/mix of 7.0% reflecting the impact of COVID-19.

Lower net price realization of 1.6% and unfavorable foreign currency translation of 0.2% also drove the decrease in net sales.

Income from Operations.

Income from operations decreased $4 million , or 2.0% , to $197 million for the first quarter of 2020 compared to $201 million in the prior year period.

This performance reflected the benefit of the net sales growth, which was more than offset by increased marketing investment.

Operating margin declined 170 bps versus the year ago period to 64.4% .

Income from operations decreased $28 million , or 6.3% , to $417 million for the first six months of 2020 compared to $445 million in the prior year period.

This performance reflected the net sales decline partially offset by a reduction in our marketing expense.

Operating margin increased 180 bps versus the year ago period to 67.8% .

Adjusted Income from Operations.

Income from operations decreased $4 million , or 2.0% , to $197 million for the first quarter of 2020 compared to $201 million in the prior year period.

This performance reflected the benefit of the net sales growth, which was more than offset by increased marketing investment.

Operating margin declined 170 bps versus the year ago period to 64.4% .

Adjusted income from operations decreased $28 million , or 6.3% , to $419 million for the first six months of 2020 compared to $447 million in the prior year period.

This performance reflected the net sales decline partially offset by a reduction in our marketing expense.

Adjusted operating margin increased 180 bps versus the year ago period to 68.1% .

LATIN AMERICA BEVERAGES

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

First Quarter

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

First Six Months

(in millions)

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Sales Volume.

Sales volume for the first quarter of 2020 as compared to the prior year period increased 1.5% , driven by Squirt.

Net sales increased $1 million , or 0.9% , to $117 million for the first quarter of 2020 compared to $116 million in the prior year period, driven by higher net price realization of 5.9% , partially offset by unfavorable volume/mix of 0.7% .

Unfavorable foreign currency translation also impacted the period by 4.3% .

Sales volume for the first six months of 2020 as compared to the prior year period increased 3.9% , driven by Squirt.

Net sales decreased $20 million , or 7.8% , to $237 million for the first six months of 2020 compared to $257 million in the prior year period, driven completely by unfavorable FX translation of 10.9% .

Excluding the unfavorable impact of FX translation, net sales increased as a result of higher net price realization of 6.0% , partially offset by unfavorable volume/mix of 2.9% .

Income from Operations .

Income from operations increased $16 million , or 145.5% , to $27 million for the first quarter of 2020 compared to $11 million in the prior year period, driven by a favorable F/X transaction impact, net sales growth and continued productivity.

These benefits were partially offset by inflation in input costs, manufacturing and logistics.

Income from operations increased $11 million , or 29.7% , to $48 million for the first six months of 2020 compared to $37 million in the prior year period, driven by higher net price realization, continued productivity and a reduction in our marketing expense, partially offset by unfavorable volume/mix, the comparison to a real estate gain in the prior year and unfavorable FX effects (FX translation and transaction).

Operating margin increased 590 bps versus the year ago period to 20.3% .

Adjusted Income from Operations.

Adjusted income from operations increased $15 million , or 125.0% , to $27 million in the first quarter of 2020 compared to $12 million in the prior year period.

This performance reflected a favorable F/X transaction impact, net sales growth and continued productivity, which was partially offset by inflation on input costs, manufacturing, and logistics.

Adjusted income from operations increased $18 million , or 56.3% , to $50 million in the first six months of 2020 compared to $32 million in the prior year period.

This performance reflected higher net price realization, continued productivity and a reduction in our marketing expense, partially offset by unfavorable volume/mix and unfavorable FX effects (FX translation and transaction).

Adjusted operating margin grew 860 bps versus the year ago period to 21.1% .

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We believe the North American beverage market is influenced by certain key trends and uncertainties.

Some of these items, such as the recent outbreak of COVID-19, increased health consciousness and changes in consumer preferences and economic factors, have previously created and may continue in the future to create category headwinds for a number of our products.

Some of these items, such as the ongoing outbreak of COVID-19, increased health consciousness and changes in consumer preferences and economic factors, have previously created and may continue in the future to create category headwinds for a number of our products.

Refer to Item 1A, "Risk Factors", of our Annual Report and this Quarterly Report on Form 10-Q, combined with the Uncertainties and Trends Affecting Liquidity section below, for more information about risks and uncertainties facing us.

The impacts and volatility of COVID-19 are expected to be significant in 2020, and the timing and pacing of re-opening the economy and ultimately transitioning into what is likely to be a new normal are highly uncertain.

Nevertheless, given our broad portfolio and unmatched distribution network that spans seven distinct routes to market, we are reaffirming our guidance for 2020.

Specifically, for the full-year 2020, we expect constant currency net sales growth in the range of 3% to 4%, with performance likely at the low end of the range.

We expect full-year 2020 Adjusted diluted EPS growth in the range of 13% to 15%, or $1.38 to $1.40 per diluted share, given the significant visibility and control we maintain over our cost structure, including aggressive cost management, productivity programs and merger synergies.

As such, we continue to expect our management leverage ratio in the range of 3.5x to 3.8x at year end 2020 and our management leverage ratio to be below 3.0x in two to three years from the July 2018 merger closing.

Given our diverse brand portfolio and extensive distribution network, which combined, has enabled us to successfully navigate the volatility caused by COVID-19 to date, we have confidence in our ability to deliver continued growth in the second half of the year.

Specifically, for the full-year 2020, we continue to expect constant currency net sales growth in the range of 3% to 4%.

We also continue to expect full-year 2020 Adjusted diluted EPS growth in the range of 13% to 15%, or $1.38 to $1.40 per diluted share, given the significant visibility and control we maintain over our cost structure, including aggressive cost management, productivity programs and merger synergies.

Finally, we continue to expect our management leverage ratio in the range of 3.5x to 3.8x at year end 2020 and our management leverage ratio to be below 3.0x within two to three years of the July 2018 merger closing.

COVID-19 Pandemic Disclosures

Our priorities during the COVID-19 pandemic are protecting the health and safety of our employees, maximizing the availability of our products for our consumers and Fueling the Frontline to provide our products to first responders who are fighting the COVID-19 pandemic.

Because we sell products that are essential to the daily lives of consumers, the COVID-19 pandemic has not had a material net impact to our consolidated operating results for the first quarter of 2020.

However, the pandemic is having offsetting impacts within our business.

For example, we experienced a significant increase in demand and consumption of our products in our at-home business caused in part by changing consumer habits and pantry stocking in response to COVID-19, contributing to increases in net sales.

At the same time, we experienced declines in our away-from-home business due to office closures and the slowdown of hospitality and fountain foodservice.

Our first priority, always, is to keep our employees safe and healthy.

We’ve taken extraordinary precautions to do this and to provide the support our employees and their families may need during this unprecedented time.

We continue to deliver for our customers and consumers, working hard around the clock to fulfill strong demand.

We are finding innovative ways to quickly adapt to changes in shopping behaviors, with more than half of North America impacted by stay-at-home, shelter-in-place and closure of non-essential business orders.

We are also focused on providing for our communities by supporting frontline healthcare workers who are fighting this crisis day in and day out head on.

We don’t make masks or medical equipment at our Company, but we do make beverages and, through our Fueling The Frontline program, we are donating Keurig brewers, coffee and other beverages to hospitals in need, as our way to say thank you for the unwavering commitment and courage of the entire medical community.

As discussed in the Impact of COVID-19 on our Financial Statements , the pandemic is having offsetting impacts within our business.

For example, we experienced a significant increase in demand and consumption of our products in our at-home business caused in part by changing consumer habits in response to COVID-19, contributing to increases in net sales.

At the same time, we experienced declines in our away-from-home business due to office closures and the slowdown of hospitality and fountain foodservice as a result of shelter-in-place guidelines and restaurant capacity limits in the early stages of reopening.

In the future, the economic effects of the pandemic, including higher levels of unemployment, lower wages or a recessionary environment, may cause reduced demand for our products.

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We intend to continue to work with government authorities and implement our employee safety measures;

however, disruptions to our supply chain, measures taken to protect employees or other local effects of the pandemic could impact our operations.

For our corporate employees, participating in a remote work environment is familiar to us as we work in a multi-location environment, and we do not believe that the remote work environment has had any significant impact on our internal controls over financial reporting.

however, disruptions to our supply chain, measures taken to protect employees, increased absenteeism or other local effects of the pandemic could impact our operations.

For our corporate employees, participating in a remote work environment is familiar to us as we work in a multi-location environment.

As such, we do not believe that the remote work environment has had any significant impact on our internal controls over financial reporting.

With the health and safety of our employees remaining our top priority, we are diligently working on plans to safely bring our employees back to office locations with enhanced safety and health protocols.

We do not believe these plans will impact our near-term liquidity needs.

The pandemic has not materially impacted our liquidity position.

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The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary.

These critical accounting estimates are discussed in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2019 .

These critical accounting estimates are discussed in greater detail in our Annual Report .

LIQUIDITY AND CAPITAL RESOURCES

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Our financial condition and liquidity remain strong.

Net cash provided by operations was $414 million for the first quarter of 2020 compared to $591 million for the prior year period.

Net cash provided by operations was $1,062 million for the first six months of 2020 compared to $1,203 million for the prior year period.

Although there is uncertainty related to the anticipated impact of the recent 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 recent steps we have taken to strengthen our balance sheet leave us well positioned to manage our business as the crisis continues to unfold.

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In April 2020, we took steps to further strengthen our balance sheet by increasing excess liquidity in order to better position us to navigate the uncertainty of the COVID-19 pandemic.

On April 13, 2020, we issued $1,500 million of senior unsecured notes and used the net proceeds from these senior unsecured notes to repay $1,000 million on our KDP Revolver and $481 million towards commercial paper notes, effectively refinancing short-term borrowings with efficient long-term bonds to free up excess short-term liquidity.

On April 13, 2020, we issued $1,500 million of senior unsecured notes and used the net proceeds from these senior unsecured notes to repay our KDP Revolver , effectively refinancing short-term borrowings with efficient long-term bonds to free up excess short-term liquidity.

On April 14, 2020, we terminated the 2019 364-Day Credit Agreement and replaced it with the new 2020 364-Day Credit Agreement and increased total commitments under the facility from $750 million to $1,500 million.

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

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

As of June 30, 2020 , we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.

Based on our current and anticipated level of operations, we believe that our operating cash flows will be sufficient to meet our anticipated obligations for the next twelve months.

To the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may utilize cash on hand or amounts available under our financing arrangements, if necessary.

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

First Quarter

The following table summarizes our cash activity for the first six months of 2020 and 2019 :

First Six Months

(in millions)

Net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash used in investing activities

Net cash used in financing activities

NET CASH PROVIDED BY OPERATING ACTIVITIES

Net cash provided by operating activities decreased $177 million for the first quarter of 2020 , as compared to the first quarter of 2019 , driven by the decline in working capital primarily driven by the payment and deferral of customer incentives, offset by the slight increase in net income adjusted for non-cash items.

Net cash provided by operating activities decreased $141 million for the first six months of 2020 , as compared to the first six months of 2019 , driven by the decline in working capital, as extended payment terms have normalized across the Company's operations, offset by the slight increase in net income adjusted for non-cash items.

Cash Conversion Cycle

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(Accounts payable * Number of days in the period) divided by cost of sales and SG&A expenses

Our cash conversion cycle declined 12 days to approximately (47) days as of March 31, 2020 as compared to (35) days in the prior year period.

Our cash conversion cycle declined 19 days to approximately (52) days as of June 30, 2020 as compared to (33) days in the prior year period.

The change was primarily driven by a increase of 17 days in our DPO as the DPS operations had significantly shorter terms than the legacy KGM business, which have been steadily increasing as we continue to focus on our accounts payable program.

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Our obligations to our 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 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 $557 million and $352 million for the first quarter of 2020 and 2019 , respectively.

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

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

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

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

Cash used in financing activities for the first quarter of 2020 consisted primarily of the net repayment of $387 million for commercial paper notes, which was primarily a result of the decision to repay $1,000 million of commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver .

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

The amounts settled through the program and paid to the financial institutions were $1,245 million and $723 million for the first six months of 2020 and 2019 , respectively.

NET CASH USED IN INVESTING ACTIVITIES

Cash used in investing activities for the first six months of 2020 consisted primarily of purchases of property, plant and equipment of $276 million , mostly offset by proceeds of $202 million from sales of property, plant and equipment, primarily driven by our asset sale-leaseback transactions.

Cash used in investing activities for the first six months of 2019 consisted primarily of purchases of property, plant and equipment of $118 million .

NET CASH USED IN FINANCING ACTIVITIES

Cash used in financing activities for the first six months of 2020 consisted primarily of the net repayment of $836 million for commercial paper notes, which was primarily a result of the decision to repay commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver .

The KDP Revolver was subsequently repaid through the issuance of our 2030 Notes and 2050 Notes.

Additionally, we made voluntary and mandatory repayments on the term loan facility of $730 million , repayment of the 2020 Notes of $250 million , dividend payments of $423 million and net payments on structured payables of $141 million .

Net cash used in financing activities for the first quarter of 2019 consisted primarily of the voluntary and mandatory repayments on the term loan facility of $758 million , repayment of the 2019 Notes of $250 million and dividend payments of $211 million .

We also received $22 million from controlling shareholder stock transactions, which related to the disgorgement of short-swing profits pursuant to Section 16(b) of the Exchange Act .

Net cash used in financing activities for the first six months of 2019 consisted primarily of the voluntary and mandatory repayments on the term loan facility of $848 million , repayment of the 2019 Notes of $250 million and dividend payments of $423 million .

These cash outflows from financing activities were partially offset by net issuance of commercial paper notes of $381 million and net proceeds from structured payables of $69 million .

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

Customer and consumer demand for our products may also be impacted by all risk factors discussed under "Risk Factors" in Part 1, Item 1A of our Annual Report and in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as subsequent filings with the SEC , that could have a material effect on production, delivery and consumption of our products in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume.

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

Our ability to access our committed financing arrangements, including our KDP Revolver and our 2020 364-Day Credit Agreement , which have availability of $3,900 million as of April 30, 2020;

Our ability to access our committed financing arrangements, including our KDP Revolver and our 2020 364-Day Credit Agreement , which have availability of $3,900 million as of July 30, 2020;

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

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

As of March 31, 2020 , our credit ratings were as follows:

As of June 30, 2020 , our credit ratings were as follows:

Rating Agency

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Capital Expenditures

Capital expenditures were $151 million and $62 million for the first quarter of 2020 and 2019 , respectively.

Capital expenditures for the first quarter of 2020 primarily related to manufacturing equipment, our continued investment in the build-out of our Spartanburg facility and Allentown facility, the purchase of real estate in Ireland and logistics equipment.

Capital expenditures included in accounts payable and accrued expenses were $177 million for the first quarter of 2020 , which primarily related to our investment in the build-out of our new Allentown manufacturing facility and Spartanburg manufacturing facility.

Capital expenditures for the first quarter of 2019 primarily related to machinery and equipment, logistics equipment, information technology infrastructure and replacement of existing cold drink equipment.

Capital expenditures were $276 million and $118 million for the first six months of 2020 and 2019 , respectively.

Capital expenditures for the first six months of 2020 primarily related to our continued investment in the build-out of our Spartanburg manufacturing facility, purchase of real estate in Ireland and build out of the facility and the build-out of our Allentown manufacturing facility.

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.

Capital expenditures for the first six months of 2019 primarily related to machinery and equipment, our continued investment in the build-out of our Spartanburg facility, information technology infrastructure, logistics equipment and replacement of existing cold drink equipment.

Capital expenditures included in accounts payable and accrued expenses was $205 million for the first six months of 2019 , which primarily related to our continued investment in the build-out of our Spartanburg facility.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $112 million from December 31, 2019 to March 31, 2020 due to the Company's focus on preserving liquidity rather than making voluntary prepayments on our term loan.

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $66 million from December 31, 2019 to June 30, 2020 as cash generated from our operations outpaced our voluntary repayments on our term loan facility and other financing transactions.

Our cash balances are used to fund working capital requirements, scheduled debt and interest payments, capital expenditures, income tax obligations, dividend payments and business combinations.

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periodically as working capital funding requirements in those jurisdictions allow.

Foreign cash balances were $110 million and $70 million as of March 31, 2020 and December 31, 2019 , respectively.

Foreign cash balances were $104 million and $70 million as of June 30, 2020 and December 31, 2019 , respectively.

We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.

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Based on our current and anticipated level of operations, we believe that our proceeds from operating cash flows combined with cash on hand and amounts available under our financing arrangements will be sufficient to meet our anticipated obligations.

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

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

Payments Due in Year

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

There are no material changes in off-balance sheet arrangements from those disclosed in our Annual Report .

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

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

GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION

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.

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The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of our other indebtedness, our exercise of the legal defeasance option with respect to the Notes and the discharge of our obligations under the applicable indenture.

The following schedules present the financial information for (i) the Parent and the Guarantors on a combined basis after intercompany eliminations, (ii) the Non-Guarantors and (iii) the eliminations necessary to arrive at our consolidated results.

The following schedules present the summarized financial information for the Parent and the Guarantors on a combined basis after intercompany eliminations;

the Parent and the Guarantors' amounts due from;

amounts due to, and transactions with 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 consolidating results of operations were as follows:

For the First Quarter of 2020

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

(in millions)

Parent and Guarantors

Non-Guarantors

Income before equity in earnings of consolidated subsidiaries

For the First Six Months of 2020

Income from operations

Equity in earnings of subsidiaries, net of tax

The summarized consolidating balance sheets were as follows:

March 31, 2020

(in millions)

Parent and Guarantors

Non-Guarantors

Current assets

Non-current assets

Investments in Non-Guarantors

LIABILITIES AND EQUITY

Current liabilities

Non-current liabilities

Total liabilities

Stockholders' equity

Total liabilities and equity

June 30, 2020

December 31, 2019

(in millions)

Parent and Guarantors

Non-Guarantors

Current assets (1)

Non-current assets

Investments in Non-Guarantors

LIABILITIES AND EQUITY

Current liabilities (2)

Non-current liabilities

Total liabilities

Stockholders' equity

Total liabilities and equity

The tables above reflect $273 million and $241 million of current intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of March 31, 2020 and December 31, 2019 , respectively.

Additionally, the tables above reflect $22 million and $20 million of current intercompany payables due to the Non-Guarantors from the Parent and Guarantors within current assets held and used as of March 31, 2020 and December 31, 2019 .

Includes $313 million and $241 million of current intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of June 30, 2020 and December 31, 2019 , respectively.

Includes $24 million and $20 million of current intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of June 30, 2020 and December 31, 2019 , respectively.

NON-GAAP FINANCIAL MEASURES

To supplement the consolidated financial statements presented in accordance with U.S.

GAAP , we have presented for the first quarter of 2020 and 2019 (i) Adjusted income from operations, (ii) Adjusted net income and (iii) Adjusted diluted EPS, which are considered non-GAAP financial measures.

GAAP , we have presented for the second quarter and first six months of 2020 and 2019 (i) Adjusted income from operations, (ii) Adjusted net income and (iii) 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.

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GAAP , and there are limitations to using non-GAAP financial measures.

For the first quarter of 2020 and 2019 , we define our Adjusted non-GAAP financial measures as certain financial statement captions and metrics adjusted for certain items affecting comparability.

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

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and (vi) other certain items that are excluded for comparison purposes to prior year periods.

Prior to the second quarter of 2019, we did not add back the amortization of the fair value adjustment of the senior unsecured debt recognized as a result of the purchase price allocation for the DPS Merger .

As this item is similar to the amortization of intangibles, we changed our method of computing Adjusted results to exclude the amortization of the fair value adjustment of the senior unsecured notes in order to reflect how management views our business results on a consistent basis.

For the first quarter of 2020 , the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition ;

For 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;

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(v) the loss on early extinguishment of debt related to the redemption of debt;

(vi) incremental costs to our operations related to risks associated with the COVID-19 pandemic and (vii) impairment recognized on equity method investment with Bedford.

(vi) incremental temporary costs to our operations related to risks associated with the COVID-19 pandemic and (vii) impairment recognized on equity method investment with Bedford.

Incremental costs to our operations related to risks associated with the COVID-19 pandemic include incremental expenses incurred to either maintain the health and safety of our front-line employees or temporarily increase compensation to such employees to ensure essential operations continue during the pandemic.

We believe removing these costs reflects how management views our business results on a consistent basis.

For the first quarter of 2019 , the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition ;

See Impact of COVID-19 on our Financial Statements for further information.

For the second quarter and first six months of 2019 , the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations;

(ii) productivity expenses;

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(vi) the loss on early extinguishment of debt related to the redemption of debt and (vii) the loss related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment.

For first quarter of 2020 and 2019 , the supplemental financial data set forth below includes reconciliations of Adjusted income from operations, Adjusted net income and Adjusted diluted EPS to the applicable financial measure presented in the unaudited condensed consolidated financial statement for the same period.

For the second quarter and first six months of 2020 and 2019 , the supplemental financial data set forth below includes reconciliations of Adjusted income from operations, Adjusted net income and Adjusted diluted EPS to the applicable financial measure presented in the unaudited condensed consolidated financial statement for the same period.

KEURIG DR PEPPER INC.

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

For the First Quarter of 2020

For the Second Quarter of 2020

(Unaudited, in millions, except per share data)

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Loss on early extinguishment of debt

Income before provision for income taxes

Provision for income taxes

Effective tax rate

Weighted Average Diluted shares

Diluted earnings per share

Items Affecting Comparability:

Mark to market

Amortization of intangibles

Amortization of deferred financing costs

Amortization of fair value debt adjustment

Stock compensation

Restructuring and integration costs

Loss on early extinguishment of debt

Investment Impairment

Nonroutine legal matters

Adjusted GAAP

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 2019

(Unaudited, in millions, except per share data)

Cost of sales

Selling, general and administrative expenses

Other operating (income) expense, net

Income from operations

Operating margin

Items Affecting Comparability:

Mark to market

Amortization of intangibles

Stock compensation

Restructuring and integration costs

Transaction costs

Nonroutine legal matters

Malware Incident

Adjusted GAAP

Interest expense

Other (income) expense, net

Income before provision for income taxes

Provision for income taxes

Effective tax rate

Weighted Average Diluted shares

Diluted earnings per share

Items Affecting Comparability:

Mark to market

Amortization of intangibles

Amortization of deferred financing costs

Amortization of fair value debt adjustment

Stock compensation

Restructuring and integration costs

Transaction costs

Nonroutine legal matters

Malware Incident

Adjusted GAAP

Numbers 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

Selling, general and administrative expenses

Income from operations

Operating margin

Items Affecting Comparability:

Mark to market

Amortization of intangibles

Stock compensation

Restructuring and integration costs

Nonroutine legal matters

Adjusted GAAP

Interest expense

Loss on early extinguishment of debt

Impairment on investment and note receivable

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

For the First Quarter of 2019

For the First Six Months of 2019

(Unaudited, in millions, except per share data)

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Selling, general and administrative expenses

Other operating expense (income), net

Income from operations

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Restructuring and integration costs

Transaction costs

Nonroutine legal matters

4 unchanged sentences

Loss on early extinguishment of debt

Other expense (income), net

Income before provision for income taxes

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Adjusted GAAP

For the first quarter of 2020:

For the second quarter of 2020:

Income from Operations

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Total income from operations

For the second quarter of 2019:

Income from Operations

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Unallocated corporate costs

Total income from operations

KEURIG DR PEPPER INC.

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

(in millions)

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Adjusted GAAP

For the first quarter of 2019:

For the first six months of 2020:

Income from Operations

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Total income from operations

For the first six months of 2019:

Income from Operations

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Unallocated corporate costs

Total income from operations

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 2. Management’s Discussion and Analysis