Keurig Dr Pepper Inc. 10-Q

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency exchange rates, interest rates and commodity prices. From time to time, we may enter into derivatives or other financial instruments to hedge or mitigate commercial risks. We do not enter into derivative instruments for speculation, investing or trading. FOREIGN EXCHANGE RISK The majority of our net sales, expenses and capital purchases are transacted in U.S. dollars. However, we have exposure with respect to foreign exchange rate fluctuations. Our primary exposure to foreign exchange rates is the Canadian dollar and Mexican peso against the U.S. dollar. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred. As of June 30, 2020 , the impact to our income from operations of a 10% change (up or down) in exchange rates is estimated to be an increase or decrease of approximately $25 million on an annual basis. We use derivative instruments such as foreign exchange forward contracts to manage a portion of our exposure to changes in foreign exchange rates. As of June 30, 2020 , we had derivative contracts outstanding with a notional value of $485 million maturing at various dates through September 25, 2024 . INTEREST RATE RISK We centrally manage our debt portfolio through the use of interest rate swaps and monitor our mix of fixed-rate and variable-rate debt. As of June 30, 2020 , the carrying value of our fixed-rate debt, excluding lease obligations, was $13,049 million and our variable-rate debt was $1,056 million , inclusive of commercial paper. Additionally, as of June 30, 2020 , the total notional value of receive-variable, pay-fixed interest rate swaps was $450 million . The following table is an estimate of the impact to our interest rate expense based upon our variable rate debt and derivative instruments that could result from hypothetical interest rate changes during the term of the financial instruments, based on debt levels as of June 30, 2020 : Hypothetical Change in Interest Rates (1) Annual Impact to Interest Expense 1-percent decrease $6 million decrease 1-percent increase $6 million increase (1) We pay an average floating rate, which fluctuates periodically, based on LIBOR and a credit spread, as a result of variable rate debt instruments. See Notes 2 and 7 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information. COMMODITY RISKS We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. Our principal commodities risks relate to our purchases of aluminum, natural gas (for use in processing and packaging), resin, PET, corn (for high fructose corn syrup), pulp, coffee beans, diesel fuel, apple juice concentrate, apples and sucrose. We utilize commodities derivative instruments and supplier pricing agreements to hedge the risk of adverse movements in commodity prices for limited time periods for certain commodities. As of June 30, 2020 , we had derivative contracts outstanding with a notional value of $580 million maturing at various dates through December 31, 2022 . The fair market value of these contracts as of June 30, 2020 was a net liability of $51 million . As of June 30, 2020 , the impact of a 10% change (up or down) in market prices for these commodities where the risk of adverse movements has not been hedged is estimated to have a $2 million impact to our income from operations for the remainder of the year ending December 31, 2020 . 54 Table of Contents