What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-29 compared with 2020-07-30 · 245 added, 257 removed, 664 unchanged (43% of the section changed)

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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.

Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend" or the negative of these terms or similar expressions in this Quarterly Report on Form 10-Q.

Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as “outlook,” “guidance,” “anticipate,” “expect,” “believe,” “could,” “estimate,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar words, phrases or expressions and variations or negatives of these words in this Quarterly Report on Form 10-Q.

We have based these forward-looking statements on our current views with respect to future events and financial performance.

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See Non-GAAP Financial Measures for further information on the certain items affecting comparability used in the preparation of the financial information.

These items are referred to within Management's Discussion and Analysis discussion as Adjusted income from operations, Adjusted interest expense, Adjusted provision for income taxes, Adjusted net income and Adjusted diluted EPS.

These items are referred to within this Management's Discussion and Analysis discussion as Adjusted income from operations, Adjusted interest expense, Adjusted provision for income taxes, Adjusted net income and Adjusted diluted EPS.

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 impact of COVID-19 on our third quarter net sales performance presented both headwinds and tailwinds across the business and within the segments, requiring strong portfolio, package 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 drive overall performance and deliver a strong third quarter compared to the prior year period.

Coffee Systems experienced growth in K-Cup coffee pods for at-home consumption and strong double-digit growth in brewers, which more than offset the continued significant decline in away-from-home consumption due to weaknesses in the office coffee channel, as elevated work-from-home trends persisted throughout the quarter.

Sales in the e-commerce channel were again very strong, as consumers continue to shift purchases to the on-line channel, including at the Keurig.com retail site.

Packaged Beverages experienced a net benefit from strong in-market execution, driven by net sales and market share growth in the majority of the segment's beverage portfolio.

Performance in large-format channels continued to be strong across multi-pack and take-home packages, and performance in the convenience and gas channels improved during the quarter, as consumer mobility increased.

Beverage Concentrates experienced a decline due to the fountain foodservice component of the business, which services restaurants and hospitality, as a result of the impact of shutdowns and reductions in occupant capacity, which improved throughout the quarter, reflecting a modest reopening of quick-serve and other fast-casual restaurants.

Latin America Beverages experienced a modest decline in sales volumes driven by limited consumer mobility in Mexico.

The current environment has increased operating costs, requiring us to take deliberate action.

In addition to strong portfolio, package and channel mix management to optimize overall net sales performance, we maintained our strong cost discipline, which included the following:

Reduced marketing expense, given the current COVID-19 landscape which has reduced the effectiveness and return on these marketing investments;

Significantly reduced 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 this Management's Discussion and Analysis.

Refer to the section Uncertainties and Trends Affecting our Business - 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.

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.

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Inventory Write-Downs (5)

For the second quarter of 2020:

For the third quarter of 2020:

Coffee Systems

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Latin America Beverages

Unallocated corporate costs

For the first six months of 2020:

For the first nine months of 2020:

Coffee Systems

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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.

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Impacts both cost of sales and SG&A expenses.

Beginning in mid-September 2020, we have discontinued the incremental frontline incentive pay program.

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

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Impacts SG&A expenses.

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

Inventory write-downs include obsolescence charges of $8 million for the first nine months of 2020 .

Impacts cost of sales.

Financial Overview

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.

Net sales increased $150 million , or 5.2% , to $3,020 million for the third quarter of 2020 compared with $2,870 million in the prior year period.

This performance reflected higher volume/mix of 6.6% , partially offset by lower net price realization of 0.8% and unfavorable FX translation of 0.6% , primarily in our Latin America Beverages segment.

Net income increased $139 million to $443 million for the third quarter of 2020 as compared to $304 million in the prior year period, reflecting strong growth in income from operations, driven primarily by the continued benefit of productivity and merger synergies, lower marketing expense and higher volume/mix, partially offset by $49 million of additional pre-tax expenses associated with COVID-19.

Other favorable drivers included lower interest expense due to continued deleveraging and the impact of a lower effective tax rate, partially offset by a non-cash impairment on an equity investment.

Adjusted net income increased $106 million to $557 million for the third quarter of 2020 as compared to Adjusted net income of $451 million in the prior year period, reflecting the continued benefit of productivity and merger synergies, lower marketing expense and volume/mix growth, which were partially offset by lower net price realization and higher manufacturing and operating costs associated with increased consumer retail demand for our products.

Other drivers included lower interest expense due to continued deleveraging and the impact of a lower effective tax rate.

Diluted EPS increased 47.6% to $0.31 per diluted share as compared to $0.21 in the prior year period.

Adjusted diluted EPS increased 21.9% to $0.39 per diluted share as compared to Adjusted diluted EPS of $0.32 per diluted share in the prior year period.

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 liquidity to a level that we believe will exceed our near-term liquidity needs, even in the event of a protracted downturn.

During the first nine months of 2020 , we made net repayments of $541 million related to our commercial paper notes, KDP Revolver , 2019 KDP Term Loan and our Notes.

Additionally, we repaid $290 million and added $128 million of structured payables during the first nine months of 2020 .

In July 2020, we entered into a long-term franchise agreement with Polar Beverages to manufacture and distribute Polar Seltzer sparkling seltzer waters.

The manufacture and distribution of Polar Beverages products will launch in early markets in the fourth quarter of 2020 and is anticipated to reach nationwide distribution throughout our DSD network in the first half of 2021.

Effective September 18, 2020, at market close, our common stock ceased to be listed on the New York Stock Exchange and on September 21, 2020, the following business day, our common stock began trading on Nasdaq 's Global Select Market at market open.

Our stock ticker remains "KDP".

Effective October 19, 2020, we were added to the Nasdaq-100 Index.

On October 28, 2020, we announced an agreement that will allow us to sell and distribute certain KDP brands in 18 counties in New York and New Jersey.

Honickman is selling these rights to a third party and we will enter into a simultaneous transaction with the third-party to gain long-term access to these rights in exchange for the payment of an annual fee.

RESULTS OF OPERATIONS

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

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

See Uncertainties and Trends Affecting our Business - COVID-19 Pandemic Disclosures for more information about the specific costs related to COVID-19.

Non-GAAP financial measures are provided in addition to U.S.

GAAP measures.

Such non-GAAP financial measures are excluded from the Results of Operations by Segment when there is no difference between the non-GAAP and the corresponding U.S.

GAAP measure.

See Non-GAAP Financial Measures for more information, including reconciliations to the corresponding U.S.

GAAP measures.

Third Quarter of 2020 Compared to Third Quarter of 2019

Consolidated Operations

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

Second Quarter

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

Third Quarter

($ in millions, except per share amounts)

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Selling, general and administrative expenses

Other operating (income) expense, net

Other operating expense (income), net

Income from operations

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Loss on early extinguishment of debt

Other (income) expense, net

Impairment on investments and note receivable

Other 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 second quarter of 2020 compared to the prior year period:

Increase / (Decrease)

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

K-Cup pod volume

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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.

Net sales increased $150 million , or 5.2% , to $3,020 million for the third quarter of 2020 compared with $2,870 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 profit increased $79 million for the third quarter of 2020 compared with the prior year period.

This performance primarily reflected the impact of higher volume/mix, the favorable change in commodity mark-to-market impacts and the benefit of productivity and merger synergies.

These benefits were partially offset by lower net price realization, $19 million in COVID-19 charges, increases in other manufacturing costs and unfavorable FX translation.

Gross margin decreased 20 bps versus the year ago period to 56.4%

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.

SG&A expenses decreased $63 million , or 6.2% , to $949 million for the third quarter of 2020 compared with $1,012 million in the prior year period.

The decrease was driven by lower marketing expense, the benefit of productivity and merger synergies and reduced travel and entertainment expenses, which were partially offset by $30 million in COVID-19 charges and higher operating costs, such as logistics and labor, associated with the strong consumer demand for our products.

Other Operating Expense (Income), Net.

Other operating expense (income), net had a favorable change of $31 million for the third quarter of 2020 compared with the prior year period, primarily due to integration expenses in the third quarter of 2019 related to unfavorable fair value adjustments on real estate assets.

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% .

Income from operations increased $173 million to $753 million for the third quarter of 2020 compared to $580 million in the prior year period due to the increase in gross profit, lower SG&A expenses and the favorable change in other operating (income) expense, net.

Operating margin increased 470 bps versus the year ago period to 24.9% .

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.

Interest expense decreased $10 million , or 6.3% , to $148 million for the third quarter of 2020 compared with $158 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.

Impairment on Investments and Note Receivable.

Impairment on investments and note receivable reflected a non-cash impairment charge of $16 million for the third quarter of 2020 associated with our LifeFuels investment.

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

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.

The effective tax rate decreased 230 bps to 24.1% for the third quarter of 2020 , compared to 26.4% in the prior year period.

This decrease was primarily due to a decrease in our uncertain tax positions as a result of examination settlements, slightly offset by an increase of U.S.

taxation of foreign earnings in the current period.

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

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

Third Quarter

(in millions, except per share amounts)

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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 income from operations increased $120 million , or 15.9% , to $874 million for the third quarter of 2020 as compared to Adjusted income from operations of $754 million in the prior year period.

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

These increases were partially offset by lower net price realization and higher manufacturing and operating costs associated with increased consumer demand for our products.

Adjusted operating margin grew 260 bps versus the year ago period to 28.9% .

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 interest expense decreased $6 million , or 4.1% , to $139 million for the third quarter of 2020 compared to Adjusted interest expense of $145 million in the prior year period.

This benefit was primarily the result 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 .

The Adjusted effective tax rate decreased 110 bps to 23.7% for the third quarter of 2020 , compared to the Adjusted effective tax rate of 24.8% in the prior year period.

This decrease was primarily due to a decrease in our uncertain tax positions as a result of examination settlements, slightly offset by an increase of U.S.

taxation of foreign earnings in the current period.

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 net income increased 23.5% to $557 million for the third quarter of 2020 as compared to Adjusted net income of $451 million in the prior year period.

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

Adjusted diluted EPS increased 21.9% to $0.39 per diluted share for the third quarter of 2020 as compared to Adjusted diluted EPS of $0.32 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

The following tables set forth net sales and income from operations for our segments for the third 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.

Third Quarter

(in millions)

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Latin America Beverages

Second Quarter

Third Quarter

(in millions)

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

Second Quarter

Third Quarter

(in millions)

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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.

Volume growth for the Coffee Systems segment included K-Cup pod volume growth of 2.4% , reflecting continued strength in at-home consumption, which was significantly offset by ongoing softness in the away-from-home business as return to offices and hospitality remained depressed, despite increased consumer mobility.

Brewer volume increased 33.7% in the quarter, as compared to 8.0% in the year ago period, reflecting successful innovation introduced over the past two years and investments to drive household penetration, as well as retailer inventory stocking ahead of the holiday season.

Net sales increased 3.0% to $1,097 million for the third quarter of 2020 compared to net sales of $1,065 million in the prior year period, driven by strong volume/mix growth of 6.0% , which was partially offset by lower net price realization of 2.8% , resulting from strategic price investments.

Unfavorable FX translation also impacted the period by 0.2% .

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% .

Income from operations increased $10 million , or 3.2% , to $320 million for the third quarter of 2020 , compared to $310 million for the prior year period, driven by the continued benefit of productivity and merger synergies, which impacted both cost of sales and SG&A, an increase in sales volume, a reduction in expenses associated with productivity projects and a decrease in people costs.

These impacts were partially offset by unfavorable product mix related to the strong brewer growth, strategic price investments and $12 million in COVID-19 charges.

Operating margin increased 10 bps versus the year ago period to 29.2% .

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% .

Adjusted income from operations increased $6 million , or 1.6% , to $373 million for the third quarter of 2020 , compared with Adjusted income from operations of $367 million for the prior year period, driven by the continued benefit of productivity and merger synergies, which impacted both SG&A and cost of sales, an increase in sales volume and decreases in people costs and marketing expense.

These impacts were partially offset by unfavorable product mix related to the strong brewer growth, strategic price investments and higher manufacturing costs.

Adjusted operating margin decreased 50 bps versus the year ago period to 34.0% .

PACKAGED BEVERAGES

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

Second Quarter

Third Quarter

(in millions)

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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% .

Sales volume for the third quarter of 2020 increased 8.7% due primarily to strength in CSDs, driven by the broad flavor portfolio and the strength of our DSD system, juice and juice drinks, and apple sauce, which were partially offset by lower volume in enhanced flavored water, driven by Bai, due to continued softness in convenience and gas channels, and reductions in contract manufacturing.

Net sales increased 10.7% to $1,447 million for the third quarter of 2020 , compared with net sales of $1,307 million in the prior year period, driven by strong volume/mix growth of 11.4% , partially offset by lower net price realization of 0.7% .

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.

Income from operations increased $64 million , or 32.7% , to $260 million for the third quarter of 2020 , compared with $196 million for the prior year period, reflecting higher volume/mix, the continued benefit of productivity and merger synergies and lower marketing expense.

These growth drivers were partially offset by $36 million in COVID-19 charges, higher manufacturing and operating costs associated with the strong consumer demand, lower net price realization, inflation in logistics, and reserves for inventory obsolescence.

Operating margin grew 300 bps versus the year ago period to 18.0% .

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 income from operations increased $103 million , or 51.2% , to $304 million for the third quarter of 2020 , compared with Adjusted income from operations of $201 million for the prior year period, largely driven by strong volume/mix, the continued benefit of productivity and merger synergies and lower marketing expense.

These growth drivers were partially offset by higher manufacturing and operating costs associated with the strong consumer demand, lower net price realization, inflation in logistics, and reserves for inventory obsolescence.

Adjusted operating margin grew 560 bps versus the year ago period to 21.0% .

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

Second Quarter

Third Quarter

(in millions)

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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.

Sales volume for the third quarter of 2020 decreased 3.9% , primarily reflecting the decline in our fountain foodservice component of the business, which services restaurants and hospitality, reflecting the impact of shutdowns and reductions in occupant capacity, which improved throughout the quarter.

Net sales decreased 2.2% to $352 million for the third quarter of 2020 compared to $360 million for the prior year period, driven by unfavorable volume/mix of 4.8% partially offset by higher net price realization of 2.6% .

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.

Income from operations increased $17 million , or 6.9% , to $262 million for the third quarter of 2020 compared to $245 million for the prior year period, driven by lower marketing expense, partially offset by the net sales decline.

Operating margin grew 630 bps from versus the year ago period to 74.4% .

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 income from operations increased $21 million , or 8.6% , to $265 million for the third quarter of 2020 compared with Adjusted income from operations of $244 million for the prior year period, driven by lower marketing expense, partially offset by the net sales decline.

Adjusted operating margin grew 750 bps versus the year ago period to 75.3% .

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

Second Quarter

Third Quarter

(in millions)

1 unchanged sentence

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% .

Sales volume for the third quarter of 2020 decreased 3.9% compared to the prior year period, driven by Penafiel and Aguafiel due to limited consumer mobility in Mexico, partially offset by an increase in Clamato.

Net sales decreased 10.1% to $124 million for the third quarter of 2020 compared to $138 million for the prior year period, driven primarily by unfavorable FX translation of 10.8% .

Excluding the unfavorable impact of FX translation, net sales increased as a result of higher net price realization of 5.2% partially offset by unfavorable volume/mix of 4.5% .

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

Income from operations remained flat at $25 million for the third quarter of 2020 compared to the prior year period, driven by higher net price realization, continued productivity, lower marketing expense and lower operating costs, completely offset by unfavorable FX effects (FX transaction and translation) and unfavorable volume/mix.

Operating margin increased 210 bps versus the year ago period to 20.2% .

First Nine Months of 2020 Compared to First Nine 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

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

First Nine Months

($ in millions, except per share amounts)

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Selling, general and administrative expenses

Other operating (income) expense, net

Other operating expense (income), net

Income from operations

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Loss on early extinguishment of debt

Impairment on investment and note receivable

Other (income) expense, net

Impairment on investments and note receivable

Other 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 six months of 2020 compared to the prior year period:

Increase / (Decrease)

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

K-Cup pod volume

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NCB sales volume

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.

Net sales increased $311 million , or 3.8% , to $8,497 million for the first nine months of 2020 compared to $8,186 million in the prior year period.

This performance reflected higher volume/mix of 5.3% , partially offset by lower net price realization of 0.9% and unfavorable foreign currency translation of 0.6% , primarily in our Latin America Beverages segment.

Gross Profit.

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 profit increased $69 million , or 1.5% , to $4,718 million for the first nine months of 2020 compared to $4,649 million in the prior year period.

This performance primarily reflected the impact of higher volume/mix and the benefit of productivity and merger synergies.

These benefits were partially offset by unfavorable net price realization, unfavorable FX translation, $46 million in COVID-19 charges and an increase in other manufacturing costs.

Gross margin decreased 130 bps versus the year ago period to 55.5% .

Selling, General and Administrative Expenses.

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.

SG&A expenses increased $27 million , or 0.9% , to $2,978 million for the first nine months of 2020 compared to $2,951 million in the prior year period.

The increase was driven by $93 million in COVID-19 charges, the unfavorable change in commodity mark-to-market impacts, expenses associated with productivity and integration projects, and higher operating costs, such as logistics and labor, associated with the strong consumer demand.

These increases were partially offset by lower marketing expenses, the benefit of strong productivity and merger synergies, lower travel and entertainment expense and favorable FX translation.

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.

Other operating income, net had a favorable change of $73 million for the first nine months of 2020 compared to the prior year period, largely driven by the network optimization program gain of $42 million on the asset sale-leaseback of four facilities in the current year and the favorable comparison to integration expenses in the third quarter of 2019 related to unfavorable fair value adjustments on real estate assets.

Income from Operations.

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% .

Income from operations increased $115 million , or 6.9% , to $1,780 million for the first nine months of 2020 compared to $1,665 million in the prior year period, driven by the favorable change in other operating (income) expense, net and the increase in gross profit, partially offset by the increase in SG&A expenses.

Operating margin increased 60 bps versus the year ago period to 20.9% .

Interest Expense.

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.

Interest expense decreased $39 million , or 7.8% , to $458 million for the first nine months of 2020 compared to $497 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 six months of 2020 associated with our Bedford investment.

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

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.

Impairment on Investments and Note Receivable.

Impairment on investments and note receivable reflected a non-cash impairment charge of $102 million for the first nine months of 2020 associated with our Bedford and LifeFuels investments.

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

Effective Tax Rate.

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.

The effective tax rate decreased 100 bps to 24.9% for the first nine months of 2020 , compared to 25.9% in the prior year period.

This decrease primarily related to the tax benefit received in the current period due to a decrease in our uncertain tax positions as a result of examination settlements.

Net income increased $49 million , or 5.8% , to $897 million for the first nine months of 2020 as compared to $848 million in the prior year period, driven by improved income from operations and reduced interest expense, which were partially offset by the impairment on investments and note receivable in the first nine months of 2020 .

Diluted EPS increased 5.0% to $0.63 per diluted share as compared to $0.60 in the prior year period.

Adjusted Results of Operations

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

First Six Months

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

First Nine Months

(in millions, except per share amounts)

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Adjusted Income from Operations.

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.

Adjusted income from operations increased $256 million , or 12.3% , to $2,333 million for the first nine months of 2020 compared to Adjusted income from operations of $2,077 million in the prior year period.

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

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.

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Adjusted Interest Expense.

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 interest expense decreased $3 million , or 0.7% , to $404 million for the first nine months of 2020 compared to Adjusted interest expense of $407 million in the prior year period.

This benefit was primarily driven by lower indebtedness resulting from continued deleveraging, which was partially offset by the unfavorable comparison to realized gains in the first nine months of 2019 resulting from the termination of interest rate swaps and amortization of deferred financing costs incurred since the DPS Merger.

Adjusted Effective Tax Rate.

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

The Adjusted effective tax rate decreased by 50 bps to 24.8% for the first nine months of 2020 , compared to 25.3% in the prior year period.

This decrease primarily related to the tax benefit received in the current period due to a decrease in our uncertain tax positions as a result of examination settlements.

Adjusted Net Income.

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.

Adjusted net income increased 16.0% to $1,434 million for the first nine months of 2020 as compared to Adjusted net income of $1,236 million in the prior year period.

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

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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 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.

The following tables set forth net sales and income from operations for our segments for the first nine 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 Six Months

First Nine Months

Segment Results — Net sales

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Latin America Beverages

First Six Months

First Nine Months

(in millions)

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

First Six Months

First Nine Months

(in millions)

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Sales Volume.

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% .

Sales volume growth in the first nine months of 2020 compared to the prior year period for the Coffee Systems segment included strong K-Cup pod volume growth of 5.8% , reflecting strength in at-home consumption which was significantly offset by softness in the away-from-home business due to the pandemic.

Brewer volume increased 17.7% in the first nine months of 2020 , as compared to 12.7% growth in the year-ago period, reflecting successful innovation introduced over the past two years and investments to drive household penetration.

Net sales increased $90 million , or 3.0% , to $3,113 million for the first nine months of 2020 compared to $3,023 million for the prior year period due to volume/mix growth of 5.9% , which was partially offset by lower net price realization of 2.8% .

Unfavorable FX translation also impacted the period by 0.1% .

Income from Operations.

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.

Income from operations decreased $8 million , or 0.9% , to $882 million for the first nine months of 2020 , compared to $890 million in the prior year period, driven by strategic pricing, expenses associated with productivity projects, $31 million in COVID-19 charges, an increase in our litigation reserve and tariffs.

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

Operating margin declined 110 bps versus the year ago period to 28.3% .

Adjusted Income from Operations.

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 income from operations increased $50 million , or 4.8% , to $1,083 million for the first nine months of 2020 , compared to $1,033 million in the prior year period, driven by the continued benefit of productivity and merger synergies, which impacted both cost of sales and SG&A, strong volume/mix, reductions in people costs, a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility and lower travel and entertainment expenses.

Partially offsetting these factors was strategic pricing, tariffs and $10 million in COVID-19 charges.

Adjusted operating margin grew 60 bps versus the year ago period to 34.8% .

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

First Six Months

First Nine Months

(in millions)

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Sales Volume.

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% .

Sales volume for the first nine months of 2020 increased 8.0% compared to the prior year period, 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 nine months of 2020 .

These increases were partially offset by lower volume in enhanced flavored water, driven by Bai, due to continued softness in convenience and gas channels during the current period.

Net sales increased $322 million , or 8.6% , to $4,056 million for the first nine months of 2020 compared to $3,734 million for the prior year period, driven by higher volume/mix of 8.9% , partially offset by unfavorable net price realization of 0.2% and foreign currency translation of 0.1% .

Income from Operations.

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.

Income from operations increased $126 million , or 23.7% , to $657 million for the first nine months of 2020 compared to $531 million for the prior year period, driven primarily by strong volume/mix, reflecting the impact of COVID-19.

Other favorable drivers included the benefit of continued productivity and merger synergies and lower marketing expense.

These growth drivers were partially offset by $103 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.

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Adjusted Income from Operations.

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.

Adjusted income from operations increased $225 million , or 40.8% , to $776 million for the first nine months of 2020 compared to $551 million for the prior year period, largely driven by strong volume/mix, reflecting the impact of COVID-19.

Other favorable drivers included the benefit of continued productivity and merger synergies and lower marketing expense.

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.

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

First Six Months

First Nine Months

(in millions)

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Sales Volume.

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.

Sales volume for the first nine months of 2020 as compared to the prior year period declined 5.8% , primarily reflecting the decline in our fountain foodservice component of the business, which services restaurants and hospitality, reflecting the impact of shutdowns and reductions in occupant capacity.

Net sales decreased $67 million , or 6.5% , to $967 million for the first nine months of 2020 compared to $1,034 million in the prior year period, driven by unfavorable volume/mix of 6.3% partially offset by lower net price realization of 0.1% and unfavorable foreign currency translation of 0.1% .

Income from Operations.

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.

Income from operations decreased $11 million , or 1.6% , to $679 million for the first nine months of 2020 compared to $690 million in the prior year period.

This performance reflected the net sales decline, partially offset by lower marketing expense and lower operating costs.

Operating margin increased 350 bps versus the year ago period to 70.2% .

Adjusted Income from Operations.

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 income from operations decreased $7 million , or 1.0% , to $684 million for the first nine months of 2020 compared to $691 million in the prior year period.

This performance reflected the net sales decline, partially offset by lower marketing expense and lower operating costs.

Adjusted operating margin increased 390 bps versus the year ago period to 70.7% .

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

First Six Months

First Nine Months

(in millions)

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Sales Volume.

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% .

Sales volume for the first nine months of 2020 as compared to the prior year period increased 1.1% , driven by Squirt.

Net sales decreased $34 million , or 8.6% , to $361 million for the first nine months of 2020 compared to $395 million in the prior year period, driven primarily 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 5.7% , partially offset by unfavorable volume/mix of 3.4% .

Income from Operations .

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).

Income from operations increased $11 million , or 17.7% , to $73 million for the first nine months of 2020 compared to $62 million in the prior year period, driven by higher net price realization, continued productivity and lower marketing expense, partially offset by unfavorable FX effects (FX translation and transaction), unfavorable volume/mix, and the comparison to a real estate gain in the prior year.

Operating margin increased 450 bps versus the year ago period to 20.2% .

Adjusted Income from Operations.

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 income from operations increased $18 million , or 31.6% , to $75 million in the first nine months of 2020 compared to $57 million in the prior year period.

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

Adjusted operating margin grew 640 bps versus the year ago period to 20.8% .

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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.

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

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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.

In the future, the economic effects of the pandemic, including

higher levels of unemployment, lower wages or a recessionary environment, may result in reduced demand for our products.

It could also lead to volatility in demand due to government actions, such as shelter-in-place notices, which impact consumers’ movements and access to our products.

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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, increased absenteeism or other local effects of the pandemic could impact our operations.

however, disruptions to our supply chain, measures taken to protect employees, increased absenteeism or other local effects of the pandemic have impacted and could continue to 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.

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Our financial condition and liquidity remain strong.

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.

Net cash provided by operations was $1,666 million for the first nine months of 2020 compared to $1,803 million for the prior year period.

Although there is uncertainty related to the anticipated impact of the ongoing COVID-19 pandemic on our future results, we believe we are uniquely positioned, with our broad portfolio and unmatched distribution network, to successfully navigate through this pandemic, and the recent steps we have taken to strengthen our balance sheet leave us well positioned to manage our business as the crisis continues to unfold.

We continue to manage all aspects of our business, including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth.

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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 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.

As of September 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 six months of 2020 and 2019 :

First Six Months

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

First Nine Months

(in millions)

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NET CASH PROVIDED BY OPERATING ACTIVITIES

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.

Net cash provided by operating activities decreased $137 million for the first nine months of 2020 , as compared to the first nine months of 2019 , driven by the decline in working capital and an increase in income tax payments partially offset by the increase in net income adjusted for non-cash items.

As of September 30, 2020, we had no deferred tax payments as compared to $85 million of deferred tax payments as of September 30, 2019.

Additionally, beginning in the second quarter of 2020 and continuing through the rest of the year, we have deferred payments of employer-related payroll taxes as allowed under the U.S.

Coronavirus Aid, Relief and Economic Security Act, commonly known as the CARES Act.

Payment of at least 50% of the deferred amount is due on December 31, 2021 with the remainder due by December 31, 2022.

As of September 30, 2020, we have deferred a total of $41 million in such payments.

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 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.

Our cash conversion cycle declined 20 days to approximately (56) days as of September 30, 2020 as compared to (36) days in the prior year period.

The change was primarily driven by an increase of 19 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.

DIO and DSO were relatively consistent as compared to the prior year period.

September 30,

Cash conversion cycle

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Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted.

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.

We have been informed by the third party administrator that as of September 30, 2020 and December 31, 2019 , $2,442 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 $2,022 million and $1,208 million for the first nine 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 .

Cash used in investing activities for the first nine months of 2020 consisted primarily of purchases of property, plant and equipment of $356 million , mostly offset by proceeds of $203 million from sales of property, plant and equipment, primarily driven by our asset sale-leaseback transactions.

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

Cash used in financing activities for the first nine months of 2020 consisted primarily of the net repayment of $911 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.

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We also received $29 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 .

Net cash used in financing activities for the first nine months of 2019 consisted primarily of the voluntary and mandatory repayments on the term loan facility of $873 million , repayment of the 2019 Notes of $250 million , repayments of structured payables of $432 million and dividend payments of $633 million .

These cash outflows from financing activities were partially offset by net issuance of commercial paper notes of $335 million and proceeds from structured payables of $246 million .

Uncertainties and Trends Affecting Liquidity

Disruptions in financial and credit markets, including those caused by the COVID-19 pandemic, may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors.

Disruptions in financial and credit markets, including those caused by the ongoing COVID-19 pandemic, may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors.

These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials.

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

Our 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 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 October 29, 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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Our continued payment of dividends;

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

Future equity investments;

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

Fluctuations in our tax obligations.

Future equity investments;

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

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

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

Rating Agency

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Capital Expenditures

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.

Capital expenditures were $356 million and $208 million for the first nine months of 2020 and 2019 , respectively.

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

Capital expenditures included in accounts payable and accrued expenses were $255 million for the first nine months of 2020 , which primarily related to these investments.

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

Capital expenditures included in accounts payable and accrued expenses was $236 million for the first nine 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 $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.

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $107 million from December 31, 2019 to September 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 $104 million and $70 million as of June 30, 2020 and December 31, 2019 , respectively.

Foreign cash balances were $89 million and $70 million as of September 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 June 30, 2020 , that have significantly changed from the amounts disclosed in our Annual Report:

Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for payments related to our senior unsecured notes and our KDP Credit Agreements .

Refer to Note 8 of the Notes to our Unaudited Condensed Consolidated Financial Statements for future minimum rental commitments.

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

Payments Due in Year

(in millions)

Long-term obligations (1)

Interest payments

Operating leases (2)

Purchase obligations (1)

Amounts represent payments for the senior unsecured notes issued by us and the term loan credit agreement.

Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.

Amounts represent minimum rental commitments under our non-cancelable operating leases.

Refer to Note 8 for additional information .

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 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 .

Through September 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

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(in millions)

For the First Six Months of 2020

For the First Nine Months of 2020

Income from operations

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(in millions)

June 30, 2020

September 30, 2020

December 31, 2019

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Non-current liabilities

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.

Includes $306 million and $241 million of current intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of September 30, 2020 and December 31, 2019 , respectively.

Includes $28 million and $20 million of current intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of September 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 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.

GAAP , we have presented for the third quarter and first nine 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 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.

For the third quarter and first nine 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.

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;

For third quarter and first nine months of 2020 , the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations;

(ii) productivity expenses;

(iii) transaction costs for significant business combinations (completed or abandoned) excluding the DPS Merger ;

(iv) costs related to significant nonroutine legal matters;

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

(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.

(iii) costs related to significant nonroutine legal matters;

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

(v) incremental temporary costs to our operations related to risks associated with the COVID-19 pandemic;

and (vi) impairment recognized on equity method investments with Bedford and LifeFuels.

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.

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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;

For the third quarter and first nine 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 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.

For the third quarter and first nine 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 Second Quarter of 2020

For the Third Quarter of 2020

(Unaudited, in millions, except per share data)

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Interest expense

Loss on early extinguishment of debt

Impairment on investments and note receivable

Income before provision for income taxes

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Restructuring and integration costs

Loss on early extinguishment of debt

Investment Impairment

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

For the Second Quarter of 2019

For the Third Quarter of 2019

(Unaudited, in millions, except per share data)

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Selling, general and administrative expenses

Other operating (income) expense, net

Other operating expense (income), net

Income from operations

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Nonroutine legal matters

Malware Incident

Adjusted GAAP

Interest expense

Other (income) expense, net

Income before provision for income taxes

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Nonroutine legal matters

Malware Incident

Adjusted GAAP

Numbers may not foot due to rounding.

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

KEURIG DR PEPPER INC.

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

For the First Six Months of 2020

For the First Nine Months of 2020

(Unaudited, in millions, except per share data)

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Loss on early extinguishment of debt

Impairment on investment and note receivable

Impairment on investments and note receivable

Income before provision for income taxes

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

For the First Six Months of 2019

For the First Nine Months of 2019

(Unaudited, in millions, except per share data)

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Adjusted GAAP

For the second quarter of 2020:

For the third quarter of 2020:

Income from Operations

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Total income from operations

For the second quarter of 2019:

For the third quarter of 2019:

Income from Operations

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Adjusted GAAP

For the first six months of 2020:

For the first nine months of 2020:

Income from Operations

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Total income from operations

For the first six months of 2019:

For the first nine months of 2019:

Income from Operations

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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