Keurig Dr Pepper Inc. 10-Q

ITEM 1. Financial Statements ( Unaudited ) KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME ( Unaudited ) Third Quarter First Nine Months (in millions, except per share data) 2020 2019 2020 2019 Net sales $ 3,020 $ 2,870 $ 8,497 $ 8,186 Cost of sales 1,316 1,245 3,779 3,537 Gross profit 1,704 1,625 4,718 4,649 Selling, general and administrative expenses 949 1,012 2,978 2,951 Other operating expense (income), net 2 33 ( 40 ) 33 Income from operations 753 580 1,780 1,665 Interest expense 148 158 458 497 Loss on early extinguishment of debt — — 4 9 Impairment on investments and note receivable 16 — 102 — Other expense, net 5 9 21 15 Income before provision for income taxes 584 413 1,195 1,144 Provision for income taxes 141 109 298 296 Net income 443 304 897 848 Less: Net income attributable to non-controlling interest — — — — Net income attributable to KDP $ 443 $ 304 $ 897 $ 848 Earnings per common share: Basic $ 0.31 $ 0.22 $ 0.64 $ 0.60 Diluted 0.31 0.21 0.63 0.60 Weighted average common shares outstanding: Basic 1,407.3 1,406.8 1,407.2 1,406.6 Diluted 1,422.9 1,419.4 1,421.5 1,418.8 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ( Unaudited ) Third Quarter First Nine Months (in millions) 2020 2019 2020 2019 Comprehensive income attributable to KDP $ 554 $ 226 $ 576 $ 951 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED BALANCE SHEETS ( Unaudited ) September 30, December 31, (in millions, except share and per share data) 2020 2019 Assets Current assets: Cash and cash equivalents $ 191 $ 75 Restricted cash and restricted cash equivalents 27 26 Trade accounts receivable, net 1,051 1,115 Inventories 824 654 Prepaid expenses and other current assets 323 403 Total current assets 2,416 2,273 Property, plant and equipment, net 2,092 2,028 Investments in unconsolidated affiliates 90 151 Goodwill 20,029 20,172 Other intangible assets, net 23,834 24,117 Other non-current assets 889 748 Deferred tax assets 31 29 Total assets $ 49,381 $ 49,518 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,517 $ 3,176 Accrued expenses 1,067 939 Structured payables 160 321 Short-term borrowings and current portion of long-term obligations 2,182 1,593 Other current liabilities 403 445 Total current liabilities 7,329 6,474 Long-term obligations 11,707 12,827 Deferred tax liabilities 5,945 6,030 Other non-current liabilities 1,103 930 Total liabilities 26,084 26,261 Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued — — Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,407,253,294 and 1,406,852,305 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 14 14 Additional paid-in capital 21,654 21,557 Retained earnings 1,845 1,582 Accumulated other comprehensive (loss) income ( 217 ) 104 Total stockholders' equity 23,296 23,257 Non-controlling interest 1 — Total equity 23,297 23,257 Total liabilities and equity $ 49,381 $ 49,518 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ( Unaudited ) First Nine Months (in millions) 2020 2019 Operating activities: Net income attributable to KDP $ 897 $ 848 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 272 271 Amortization of intangibles 100 94 Other amortization expense 118 135 Provision for sales returns 36 25 Deferred income taxes ( 27 ) ( 5 ) Employee stock-based compensation expense 62 47 Loss on early extinguishment of debt 4 9 (Gain) loss on disposal of property, plant and equipment ( 39 ) 11 Unrealized loss (gain) on foreign currency 14 ( 22 ) Unrealized loss on derivatives 47 60 Equity in loss of unconsolidated affiliates 19 38 Impairment on investments and note receivable of unconsolidated affiliate 102 — Other, net 50 33 Changes in assets and liabilities: Trade accounts receivable ( 1 ) 36 Inventories ( 175 ) ( 124 ) Income taxes receivable and payables, net ( 118 ) ( 9 ) Other current and non-current assets ( 387 ) ( 156 ) Accounts payable and accrued expenses 500 561 Other current and non-current liabilities 192 ( 49 ) Net change in operating assets and liabilities 11 259 Net cash provided by operating activities 1,666 1,803 Investing activities: Acquisitions of businesses — ( 8 ) Issuance of related party note receivable ( 6 ) ( 22 ) Investments in unconsolidated affiliates ( 4 ) ( 16 ) Purchases of property, plant and equipment ( 356 ) ( 208 ) Proceeds from sales of property, plant and equipment 203 19 Purchases of intangibles ( 26 ) ( 4 ) Other, net 7 23 Net cash used in investing activities ( 182 ) ( 216 ) 4 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ( Unaudited , Continued) First Nine Months (in millions) 2020 2019 Financing activities: Proceeds from controlling shareholder stock transactions 29 — Proceeds from unsecured credit facility 1,850 — Proceeds from senior unsecured notes 1,500 — Proceeds from term loan — 2,000 Net (payment) issuance of commercial paper ( 911 ) 335 Proceeds from structured payables 128 246 Payments on structured payables ( 290 ) ( 432 ) Payments on senior unsecured notes ( 250 ) ( 250 ) Payment on unsecured credit facility ( 1,850 ) — Payments on term loan ( 880 ) ( 2,873 ) Payments on finance leases ( 35 ) ( 29 ) Cash dividends paid ( 635 ) ( 633 ) Other, net ( 22 ) 10 Net cash used in financing activities ( 1,366 ) ( 1,626 ) Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from: Operating, investing and financing activities 118 ( 39 ) Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents ( 11 ) 12 Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period 111 139 Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 218 $ 112 Supplemental cash flow disclosures of non-cash investing activities: Measurement period adjustment of Core Nutrition LLC purchase price $ — $ ( 11 ) Capital expenditures included in accounts payable and accrued expenses 255 236 Non-cash acquisition of controlling interest 3 — Purchases of intangibles — 2 Supplemental cash flow disclosures of non-cash financing activities: Dividends declared but not yet paid 211 210 Finance lease additions 30 49 Supplemental cash flow disclosures: Cash paid for interest 250 273 Cash paid for income taxes 448 313 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ( Unaudited ) Common Stock Issued Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Stockholders' Equity Non-controlling Interest Total Equity (in millions, except per share data) Shares Amount Balance as of January 1, 2020 1,406.8 $ 14 $ 21,557 $ 1,582 $ 104 $ 23,257 $ — $ 23,257 Net income — — — 156 — 156 — 156 Other comprehensive loss — — — — ( 584 ) ( 584 ) — ( 584 ) Dividends declared, $0.15 per share — — — ( 211 ) — ( 211 ) — ( 211 ) Shares issued under employee stock-based compensation plans and other 0.3 — — — — — — — Stock-based compensation and stock options exercised — — 22 — — 22 — 22 Balance as of March 31, 2020 1,407.1 14 21,579 1,527 ( 480 ) 22,640 — 22,640 Net income — — — 298 — 298 — 298 Other comprehensive income — — — — 152 152 — 152 Dividends declared, $0.15 per share — — — ( 212 ) — ( 212 ) — ( 212 ) Proceeds from controlling shareholder stock transactions — — 22 — — 22 — 22 Shares issued under employee stock-based compensation plans and other 0.1 — — — — — — — Stock-based compensation and stock options exercised — — 23 — — 23 — 23 Balance as of June 30, 2020 1,407.2 14 21,624 1,613 ( 328 ) 22,923 — 22,923 Net income — — — 443 — 443 — 443 Other comprehensive income — — — — 111 111 — 111 Dividends declared, $0.15 per share — — — ( 211 ) — ( 211 ) — ( 211 ) Proceeds from controlling shareholder stock transactions — — 7 — — 7 — 7 Non-cash acquisition of controlling interest — — 3 — — 3 1 4 Shares issued under employee stock-based compensation plans and other 0.1 — — — — — — — Stock-based compensation and stock options exercised — — 20 — — 20 — 20 Balance as of September 30, 2020 1,407.3 $ 14 $ 21,654 $ 1,845 $ ( 217 ) $ 23,296 $ 1 $ 23,297 6 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ( Unaudited , Continued) Common Stock Issued Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (in millions, except per share data) Shares Amount Balance as of January 1, 2019 1,405.9 $ 14 $ 21,471 $ 1,178 $ ( 130 ) $ 22,533 Adoption of new accounting standards — — — ( 5 ) — ( 5 ) Net income — — — 230 — 230 Other comprehensive income — — — — 93 93 Dividends declared, $0.15 per share — — — ( 211 ) — ( 211 ) Measurement period adjustment — — 11 — — 11 Shares issued under stock-based compensation plans and other 0.8 — — — — — Stock-based compensation and stock options exercised — — 23 — — 23 Balance as of March 31, 2019 1,406.7 14 21,505 1,192 ( 37 ) 22,674 Net income — — — 314 — 314 Other comprehensive income — — — — 88 88 Dividends declared, $0.15 per share — — — ( 212 ) — ( 212 ) Stock-based compensation and stock options exercised — — 19 — — 19 Balance as of June 30, 2019 1,406.7 14 21,524 1,294 51 22,883 Net income — — — 304 — 304 Other comprehensive loss — — — — ( 78 ) ( 78 ) Dividends declared, $0.15 per share — — — ( 210 ) — ( 210 ) Shares issued under employee stock-based compensation plans and other 0.1 — — — — — Stock-based compensation and stock options exercised — — 15 — — 15 Balance as of September 30, 2019 1,406.8 $ 14 $ 21,539 $ 1,388 $ ( 27 ) $ 22,914 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1 . General ORGANIZATION References in this Quarterly Report on Form 10-Q to " KDP " or "the Company " refer to Keurig Dr Pepper Inc. and all entities included in the unaudited condensed consolidated financial statements. Definitions of terms used in this Quarterly Report on Form 10-Q are included within the Master Glossary. This Quarterly Report on Form 10-Q refers to some of KDP 's owned or licensed trademarks, trade names and service marks, which are referred to as the Company 's brands. All of the product names included herein are either KDP registered trademarks or those of the Company 's licensors. Effective September 18, 2020, at market close, the Company's common stock ceased to be listed on the New York Stock Exchange and on September 21, 2020, the following business day, KDP's common stock began trading on Nasdaq 's Global Select Market at market open. The Company's stock ticker remains "KDP". BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with KDP 's consolidated financial statements and accompanying notes, included in the Company 's Annual Report . Except as otherwise specified, references to the " third quarter " indicate the Company 's quarterly periods ended September 30, 2020 and 2019 . PRINCIPLES OF CONSOLIDATION KDP consolidates all wholly owned subsidiaries. The Company consolidates investments in companies in which it holds the majority interest. In these cases, the third party equity interest is referred to as non-controlling interest. Non-controlling interests are presented as a separate component within equity in the unaudited Condensed Consolidated Balance Sheets, and net earnings attributable to the non-controlling interests are presented separately in the unaudited Condensed Consolidated Statements of Income. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes KDP 's proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors or similar governing body, participation in policy-making decisions and material intercompany transactions. KDP eliminates from its financial results all intercompany transactions between entities included in the unaudited condensed consolidated financial statements. USE OF ESTIMATES The process of preparing KDP 's unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. These estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates . 8 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) RECLASSIFICATIONS The Company reclassified the following amounts in the unaudited condensed consolidated Statement of Cash Flows for the first nine months of 2019 in order to conform to current year presentation: (in millions) Prior Presentation Revised Presentation For the First Nine Months of 2019 Net cash provided by operating activities: Amortization of intangibles Amortization expense Amortization of intangibles $ 94 Other amortization expense (1) Amortization expense Other amortization expense 135 Loss on disposal of property, plant and equipment Other, net (Gain) loss on disposal of property, plant and equipment 11 Amortization of deferred financing fees Amortization expense Other, net 10 Amortization of bond fair value Amortization expense Other, net 20 (1) Primarily includes amortization of customer rebates and upfront payments. RECENTLY ISSUED ACCOUNTING STANDARDS In January 2020, the FASB issued ASU 2020-01 . The objective of ASU 2020-01 is to clarify the interaction of the accounting for equity securities, investments accounted for under the equity method of accounting and the accounting for certain forward contracts and purchased options accounted for under different topics in U.S. GAAP . ASU 2020-01 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-01 but expects the impact to be immaterial to KDP 's consolidated financial statements. In March 2020, the FASB issued ASU 2020-04 . The objective of ASU 2020-04 is to provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective and can be elected for all entities from the issuance date of the ASU through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04 to KDP 's consolidated financial statements. RECENTLY ADOPTED PROVISIONS OF U.S. GAAP Credit Losses As of January 1, 2020, the Company adopted ASU 2016-13 , which replaced the incurred loss methodology with an expected loss methodology. The objective of ASU 2016-13 was to provide for a new impairment model which requires measurement and recognition of current expected credit losses (CECL) for most financial assets held. The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost, which means that results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption of ASU 2016-13 did not have an impact on the Company 's unaudited condensed consolidated financial statements. Refer to Note 12 for additional information. Other Accounting Standards As of January 1, 2020, the Company adopted ASU 2018-13 . The objective of ASU 2018-13 is to improve the disclosures related to fair value measurement by removing, modifying, or adding disclosure requirements related to recurring and non-recurring fair value measurements. The adoption of ASU 2018-13 did not have an impact on the Company 's unaudited condensed consolidated financial statements. 9 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 2 . Long-term Obligations and Borrowing Arrangements The following table summarizes the Company 's long-term obligations: (in millions) September 30, 2020 December 31, 2019 Senior unsecured notes $ 13,057 $ 11,802 Term loan 497 1,372 Subtotal 13,554 13,174 Less - current portion ( 1,847 ) ( 347 ) Long-term obligations $ 11,707 $ 12,827 The following table summarizes the Company 's short-term borrowings and current portion of long-term obligations: (in millions) September 30, 2020 December 31, 2019 Commercial paper notes $ 335 $ 1,246 Revolving credit facilities — — Current portion of long-term obligations: Senior unsecured notes 1,748 250 Term loan 99 97 Short-term borrowings and current portion of long-term obligations $ 2,182 $ 1,593 10 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) SENIOR UNSECURED NOTES The Company 's Notes consisted of the following: (in millions) Issuance Maturity Date Rate September 30, 2020 December 31, 2019 2020 Notes (1) January 15, 2020 2.000 % $ — $ 250 2021 Merger Notes May 25, 2021 3.551 % 1,750 1,750 2021-A Notes November 15, 2021 3.200 % 250 250 2021-B Notes November 15, 2021 2.530 % 250 250 2022 Notes November 15, 2022 2.700 % 250 250 2023 Merger Notes May 25, 2023 4.057 % 2,000 2,000 2023 Notes December 15, 2023 3.130 % 500 500 2025 Merger Notes May 25, 2025 4.417 % 1,000 1,000 2025 Notes November 15, 2025 3.400 % 500 500 2026 Notes September 15, 2026 2.550 % 400 400 2027 Notes June 15, 2027 3.430 % 500 500 2028 Merger Notes May 25, 2028 4.597 % 2,000 2,000 2030 Notes (2) May 1, 2030 3.200 % 750 — 2038 Notes May 1, 2038 7.450 % 125 125 2038 Merger Notes May 25, 2038 4.985 % 500 500 2045 Notes November 15, 2045 4.500 % 550 550 2046 Notes December 15, 2046 4.420 % 400 400 2048 Merger Notes May 25, 2048 5.085 % 750 750 2050 Notes (2) May 1, 2050 3.800 % 750 — Principal amount $ 13,225 $ 11,975 Adjustment from principal amount to carrying amount (3) ( 168 ) ( 173 ) Carrying amount $ 13,057 $ 11,802 (1) On January 15, 2020, the Company repaid the 2020 Notes at maturity, using commercial paper borrowings. (2) On April 13, 2020, the Company completed the issuance of $ 1.5 billion aggregate principal amount of senior unsecured notes consisting of $ 750 million aggregate principal amount of 3.200 % senior unsecured notes due May 1, 2030 and $ 750 million aggregate principal amount of 3.800 % senior unsecured notes due May 1, 2050 . The discount associated with the 2030 Notes and the 2050 Notes was approximately $ 6 million . The net proceeds from the issuance were used to repay outstanding borrowings under the KDP Revolver. (3) The carrying amount includes unamortized discounts, debt issuance costs and fair value adjustments related to the DPS Merger . 11 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) BORROWING ARRANGEMENTS The KDP Credit Agreements consisted of the following carrying values and estimated fair values that are not required to be measured at fair value in the unaudited Condensed Consolidated Balance Sheets: (in millions) September 30, 2020 December 31, 2019 Issuance Maturity Date Available Balances Carrying Value Carrying Value 2019 KDP Term Loan (1) February 2023 $ — $ 500 $ 1,380 KDP Revolver (2) February 2023 2,400 — — 2019 364-Day Credit Agreement May 2020 — — — 2020 364-Day Credit Agreement April 2021 1,500 — — Principal amount $ 500 $ 1,380 Unamortized discounts and debt issuance costs ( 3 ) ( 8 ) Carrying amount $ 497 $ 1,372 (1) During the first quarter of 2020, the Company borrowed $ 380 million of commercial paper to voluntarily prepay a portion of its outstanding obligations under the 2019 KDP Term Loan. During the second quarter of 2020, the Company voluntarily prepaid an additional $ 300 million of its outstanding obligations with cash on hand. During the third quarter 2020, the Company voluntarily prepaid an additional $ 125 million of its outstanding obligations with commercial paper. As a result of these voluntary prepayments, the Company recorded no loss on early extinguishment during the third quarter of 2020 and $ 4 million loss on early extinguishment during the first nine months of 2020 , respectively. (2) The KDP Revolver has $ 200 million letters of credit availability and none utilized as of September 30, 2020 . On April 14, 2020, the Company terminated the 2019 364-Day Credit Agreement and replaced it with the 2020 364-Day Credit Agreement in order to increase the commitment from $ 750 million to $ 1.5 billion . The 2020 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes. The interest rate applicable to borrowings under the 2020 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 2.250 % to 2.750 % or a base rate plus a margin of 1.250 % to 1.750 % , depending on the rating of certain index debt of the Company. The 2020 364-Day Credit Agreement will mature on April 13, 2021 . As of September 30, 2020 , the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements . Commercial Paper Program T he following table provides information about the Company 's weighted average borrowings under its commercial paper program: Third Quarter First Nine Months (in millions, except %) 2020 2019 2020 2019 Weighted average commercial paper borrowings $ 597 $ 1,726 $ 919 $ 1,746 Weighted average borrowing rates 0.31 % 2.48 % 1.38 % 2.73 % Letter of Credit Facility In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility. Under this facility, $ 100 million is available for the issuance of letters of credit, $ 44 million of which was utilized as of September 30, 2020 and $ 56 million of which remains available for use. FAIR VALUE DISCLOSURES The fair values of each of the Company 's commercial paper notes and the 2019 KDP Term Loan approximate the carrying value and are considered Level 2 within the fair value hierarchy. The fair values of the Company 's Notes are based on current market rates available to the Company and are considered Level 2 within the fair value hierarchy. The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all the Notes and related unamortized costs to be incurred at such date. The fair value of the Company 's Notes was $ 15,072 million and $ 12,898 million as of September 30, 2020 and December 31, 2019 , respectively. 12 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 3 . Goodwill and Other Intangible Assets GOODWILL Changes in the carrying amount of goodwill by reportable segment are as follows: (in millions) Coffee Systems Packaged Beverages Beverage Concentrates Latin America Beverages Total Balance as of January 1, 2020 $ 9,775 $ 5,301 $ 4,526 $ 570 $ 20,172 Foreign currency translation ( 27 ) ( 17 ) ( 10 ) ( 89 ) ( 143 ) Balance as of September 30, 2020 $ 9,748 $ 5,284 $ 4,516 $ 481 $ 20,029 INTANGIBLE ASSETS OTHER THAN GOODWILL The net carrying amounts of intangible assets other than goodwill with indefinite lives are as follows: (in millions) September 30, 2020 December 31, 2019 Brands (1) $ 19,741 $ 19,948 Trade names 2,480 2,479 Contractual arrangements 121 122 Distribution rights 30 16 Total $ 22,372 $ 22,565 (1) The decrease of $ 207 million in brands with indefinite lives was due to foreign currency translation during the first nine months of 2020 . The net carrying amounts of intangible assets other than goodwill with definite lives are as follows: September 30, 2020 December 31, 2019 (in millions) Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount Acquired technology $ 1,146 $ ( 310 ) $ 836 $ 1,146 $ ( 255 ) $ 891 Customer relationships 635 ( 126 ) 509 638 ( 102 ) 536 Trade names 127 ( 66 ) 61 128 ( 55 ) 73 Contractual arrangements 24 ( 4 ) 20 24 ( 3 ) 21 Brands 21 ( 4 ) 17 10 ( 2 ) 8 Distribution rights 24 ( 5 ) 19 24 ( 1 ) 23 Total $ 1,977 $ ( 515 ) $ 1,462 $ 1,970 $ ( 418 ) $ 1,552 Amortization expense for intangible assets with definite lives was as follows: Third Quarter First Nine Months (in millions) 2020 2019 2020 2019 Amortization expense for intangible assets with definite lives $ 34 $ 31 $ 100 $ 94 Amortization expense of these intangible assets over the remainder of 2020 and the next five years is expected to be as follows: Remainder of 2020 For the Years Ending December 31, (in millions) 2021 2022 2023 2024 2025 Expected amortization expense for intangible assets with definite lives $ 33 $ 133 $ 132 $ 132 $ 123 $ 111 IMPAIRMENT TESTING KDP conducts impairment tests on goodwill and all indefinite lived intangible assets annually, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. The Company did not identify any circumstances, including the ongoing COVID-19 pandemic, that indicated that the carrying amount of any goodwill or any intangible asset may not be recoverable as of September 30, 2020 . 13 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 4 . Investments ACQUISITION OF CONTROLLING INTEREST IN REVIVE On July 31, 2020, the Company closed on a stock purchase agreement to obtain a 66.4 % ownership interest in Revive from Peet's for cash consideration of $ 1 , with Peet's retaining a minority ownership interest. Revive is an organic, non-alcoholic kombucha brand, available in both traditional refrigerated and shelf-stable varieties. The transaction is considered a common control transaction due to KDP's relationship with Peet's through certain affiliates of JAB. The investment was accounted for as an acquisition of a controlling interest, and in accordance with the requirements of U.S. GAAP for common control transactions, KDP recognized all of Revive 's assets and liabilities at their carrying values as of July 31, 2020, with the $ 3 million difference between the Company's ownership interest in the net assets and the purchase price recorded to additional paid-in capital. Refer to Note 1 for the Company's accounting policies with respect to consolidation of Revive and accounting for the non-controlling interest. INVESTMENTS IN UNCONSOLIDATED AFFILIATES The following table summarizes investments in unconsolidated affiliates as of September 30, 2020 and December 31, 2019 : September 30, December 31, (in millions) Ownership Interest 2020 2019 BodyArmor 12.5 % $ 51 $ 52 Bedford 30.0 % — 46 Dyla 12.4 % 12 13 Force 33.3 % 5 5 Beverage startup companies (various) 16 30 Other (various) 6 5 Investments in unconsolidated affiliates $ 90 $ 151 Impairments of Investments Bedford Investment and Related Party Note Receivable The Company and ABI , in conjunction with the creation of Bedford, had executed a line of credit agreement with Bedford on March 3, 2017, which was amended on December 7, 2018 to increase the line of credit. The Company committed and funded the $ 51 million capacity, which incurs a fixed interest rate of 8.1 % per annum. The credit agreement with Bedford matures on March 3, 2024. In March 2020, the Company reduced its expectation of future operating performance for Bedford based on COVID-19 and a new revised five-year projection from the management of Bedford that projected the possibility of profitability two years later than previously anticipated. As a result of these indicators of impairment, the Company tested the Bedford investment for an other-than-temporary impairment using a discounted cash flow framework with multiple scenarios, including the conversion of the note receivable into equity. The results of its analysis indicated that the note receivable of $ 55 million was fully impaired and the investment in unconsolidated affiliates was impaired by $ 31 million , which was recorded on the Impairment on investments and note receivable line in the Condensed Consolidated Statements of Income. As a result of the other-than-temporary impairment, the Company has placed the note receivable in non-accrual status. Beverage Startup Companies In September 2020, the Company tested its investment in LifeFuels , which is included in the Beverage startup companies line in the table above, for an other-than-temporary impairment as a result of continued losses, ongoing liquidity concerns and a lack of a buyer for LifeFuels . As a result of this analysis, the Company determined that the investment was fully impaired and recorded an impairment charge of approximately $ 16 million to the Impairment on investments and note receivable line in the Condensed Consolidated Statements of Income. 14 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 5 . Restructuring and Integration Costs The Company implements restructuring programs from time to time and incurs costs that are designed to improve operating effectiveness and lower costs. When the Company implements these programs, the Company incurs expenses, such as employee separations, lease terminations and other direct exit costs, that qualify as exit and disposal costs under U.S. GAAP . The Company also incurs expenses that are an integral component of, and directly attributable to, its restructuring activities, which do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments, implementation costs and other incremental costs. These costs are recorded within SG&A expenses on the income statement and are held primarily within unallocated corporate costs. Restructuring and integration charges incurred on the defined programs were as follows: Third Quarter First Nine Months (in millions) 2020 2019 2020 2019 Keurig 2.0 exit $ — $ — $ — $ 1 DPS integration program 38 76 143 168 Total restructuring and integration charges $ 38 $ 76 $ 143 $ 169 Restructuring liabilities that qualify as exit and disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements. Restructuring liabilities as of September 30, 2020 along with charges to expense, cash payments and non-cash charges for the period specific to the DPS Integration Program were as follows: (in millions) Workforce Reduction Costs Balance as of January 1, 2020 $ 15 Charges to expense 22 Cash payments ( 22 ) Non-cash adjustment items ( 4 ) Balance as of September 30, 2020 $ 11 RESTRUCTURING PROGRAMS DPS Integration Program As part of the DPS Merger , the Company developed a program to deliver $ 600 million in synergies over a three-year period through supply chain optimization, reduction of indirect spend through new economies of scale, elimination of duplicative support functions and advertising and promotion optimization. The Company expects to incur total cash expenditures of $ 750 million , comprised of both capital expenditures and expense, and expects to complete the program by 2021. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $ 530 million , primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through September 30, 2020 . 6 . Income Taxes Our effective tax rates were as follows: Third Quarter First Nine Months (in millions) 2020 2019 2020 2019 Effective tax rate 24.1 % 26.4 % 24.9 % 25.9 % For the third quarter of 2020 , the provision for income taxes was lower than the third quarter of 2019 primarily due to a decrease of uncertain tax positions, which was slightly offset by an increase of U.S. taxation of foreign earnings. For the first nine months of 2020 , the provision for income taxes was lower than the first nine months of 2019 primarily due to the tax benefit received in the first nine months of 2020 from the release of uncertain tax positions. 15 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 7 . Derivatives KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and FX rates. KDP manages these risks through a variety of strategies, including the use of interest rate contracts, FX forward contracts, commodity forward, future, swap and option contracts and supplier pricing agreements. KDP does not hold or issue derivative financial instruments for trading or speculative purposes. KDP formally designates and accounts for certain foreign exchange forward contracts that meet established accounting criteria under U.S. GAAP as cash flow hedges. For such contracts, the effective portion of the gain or loss on the derivative instruments is recorded, net of applicable taxes, in AOCI . When net income is affected by the variability of the underlying transaction, the applicable offsetting amount of the gain or loss from the derivative instrument deferred in AOCI is reclassified to net income. Cash flows from derivative instruments designated in a qualifying hedging relationship are classified in the same category as the cash flows from the hedged items. If a cash flow hedge were to cease to qualify for hedge accounting, or were terminated, the derivatives would continue to be carried on the balance sheet at fair value until settled and hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCI would be reclassified to earnings at that time. For derivatives that are not designated or for which the designated hedging relationship is discontinued, the gain or loss on the instrument is recognized in earnings in the period of change. The Company has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically, the Company has not experienced material credit losses as a result of counterparty nonperformance. The Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines and monitors the market position of the programs upon execution of a hedging transaction and at least on a quarterly basis. INTEREST RATES Economic Hedges The Company is exposed t o interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate swaps to provide predictability in the Company 's overall cost structure, including both receive-fixed, pay-variable and receive-variable, pay-fixed swaps. A natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in interest expense in the unaudited Condensed Consolidated Statements of Income. As of September 30, 2020 , all interest rate swap contracts will mature in March 2025 . FOREIGN EXCHANGE The Company 's Canadian and Mexican businesses purchase certain inventory through transactions denominated and settled in U.S. dollars, a currency different from the functional currency of those businesses. The Company additionally has a subsidiary in Canada with intercompany notes denominated and settled in U.S. dollars, a currency different from the functional currency of the Canadian business. The accounts payable related to the inventory purchases and the intercompany notes are subject to exposure from movements in exchange rates. Economic Hedges During the third quarter and first nine months of 2020 and 2019 , the Company held FX forward contracts to economically manage the balance sheet exposures resulting from changes in the FX exchange rates described above. The intent of these FX contracts is to minimize the impact of FX risk associated with balance sheet positions not in local currency. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same caption of the unaudited Condensed Consolidated Statements of Income as the associated risk. These FX contracts have maturities ranging from October 2020 to September 2024 as of September 30, 2020 . Cash Flow Hedges During 2020, the Company began to designate certain FX forward contracts related to inventory purchases of the Canadian and Mexican businesses as cash flow hedges in order to manage the exposures resulting from changes in the FX rates described above. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. These FX contracts, carried at fair value, have maturities ranging from October 2020 to December 2021 as of September 30, 2020 . 16 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) COMMODITIES Economic Hedges KDP centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. The intent of these contracts is to provide a certain level of predictability in the Company 's overall cost structure. During the third quarter and first nine months of 2020 and 2019 , the Company held forward, future, swap and option contracts that economically hedged certain of its risks. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company 's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations. These commodity contracts have maturities ranging from October 2020 to January 2023 as of September 30, 2020 . NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS The following table presents the notional amounts of the Company 's outstanding derivative instruments by type: September 30, December 31, (in millions) 2020 2019 Interest rate contracts Receive-fixed, pay-variable interest rate swaps (1) $ — $ 50 Receive-variable, pay-fixed interest rate swaps (2) 450 575 FX contracts Forward contracts, not designated as hedging instruments 412 523 Forward contracts, designated as cash flow hedges 382 — Commodity contracts 497 150 (1) During the first nine months of 2020 , the Company elected to terminate $ 50 million notional amount of receive-fixed, pay-variable interest rate swaps and received cash of $ 18 million . (2) During the first nine months of 2020 , the Company elected to terminate $ 575 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $ 2 million . FAIR VALUE OF DERIVATIVE INSTRUMENTS The fair values of commodity contracts, interest rate contracts and FX forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the reporting date. Interest rate contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the Company 's contracts and credit risk of the counterparties. The fair value of FX forward contracts are valued using quoted forward FX prices at the reporting date. Therefore, the Company has categorized these contracts as Level 2. 17 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) Not Designated as Hedging Instruments The following table summarizes the fair value hierarchy and the location of the fair value of the Company 's derivative instruments which are not designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets: (in millions) Fair Value Hierarchy Level Balance Sheet Location September 30, 2020 December 31, 2019 Assets: Interest rate contracts 2 Prepaid expenses and other current assets $ — $ 1 FX contracts 2 Prepaid expenses and other current assets 1 — Commodity contracts 2 Prepaid expenses and other current assets 14 30 Interest rate contracts 2 Other non-current assets — 18 FX contracts 2 Other non-current assets 2 — Commodity contracts 2 Other non-current assets 7 1 Liabilities: Interest rate contracts 2 Other current liabilities $ 2 $ — FX contracts 2 Other current liabilities 2 2 Commodity contracts 2 Other current liabilities 20 10 Interest rate contracts 2 Other non-current liabilities 7 — FX contracts 2 Other non-current liabilities — 3 Commodity contracts 2 Other non-current liabilities 7 1 Designated as Hedging Instruments The following table summarizes the fair value hierarchy and the location of the fair value of the Company 's derivative instruments which are designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets: (in millions) Fair Value Hierarchy Level Balance Sheet Location September 30, 2020 December 31, 2019 Assets: FX contracts 2 Prepaid expenses and other current assets $ 2 $ — FX contracts 2 Other non-current assets 1 — Liabilities: FX contracts 2 Other current liabilities $ 1 $ — IMPACT OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS The following table presents the amount of (gains) losses recognized in the unaudited Condensed Consolidated Statements of Income related to derivative instruments not designated as hedging instruments under U.S. GAAP during the periods presented. Amounts include both realized and unrealized gains and losses. Third Quarter First Nine Months (in millions) Income Statement Location 2020 2019 2020 2019 Interest rate contracts Interest expense $ — $ — $ 9 $ 4 FX contracts Cost of sales 5 ( 2 ) ( 15 ) 1 FX contracts Other expense, net 7 10 ( 5 ) 16 Commodity contracts Cost of sales ( 45 ) 17 6 29 Commodity contracts SG&A expenses 5 3 41 ( 9 ) Total $ ( 28 ) $ 28 $ 36 $ 41 18 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) IMPACT OF CASH FLOW HEDGES The following table presents the impact of derivative instruments designated as cash flow hedging instruments under U.S. GAAP : Third Quarter First Nine Months (in millions) 2020 2019 2020 2019 FX contracts designated as hedges: Amount of gain recognized in other comprehensive income (1) $ 1 $ — $ 2 $ — (1) KDP expects that amounts reclassified from AOCI into net income during the next twelve months will be insignificant. There was no hedge ineffectiveness during the periods presented. 8 . Leases The Company leases certain facilities and machinery and equipment, including fleet. These leases expire at various dates through 2044 . Some lease agreements contain standard renewal provisions that allow the Company to renew the lease at rates equivalent to fair market value at the end of the lease term. The Company 's lease agreements do not contain any material residual value guarantees or restrictive covenants, except for leases of certain manufacturing properties that contain residual value guarantees at the end of the term. KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. The following table presents the components of lease cost: Third Quarter First Nine Months (in millions) 2020 2019 2020 2019 Operating lease cost $ 28 $ 21 $ 84 $ 61 Finance lease cost Amortization of right-of-use assets 12 17 34 37 Interest on lease liabilities 3 4 10 11 Variable lease cost (1) 6 8 19 22 Short-term lease cost — 2 1 5 Sublease income — ( 1 ) ( 1 ) ( 2 ) Total lease cost $ 49 $ 51 $ 147 $ 134 (1) Variable lease cost primarily consists of common area maintenance costs, property taxes, and adjustments for inflation. The following table presents supplemental cash flow information about the Company 's leases: First Nine Months (in millions) 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 75 $ 58 Operating cash flows from finance leases 11 11 Financing cash flows from finance leases 35 29 The following table presents information about the Company 's weighted average discount rate and remaining lease term: September 30, 2020 December 31, 2019 Weighted average discount rate Operating leases 4.4 % 4.6 % Finance leases 4.9 % 5.1 % Weighted average remaining lease term Operating leases 12 years 10 years Finance leases 11 years 12 years 19 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) Future minimum lease payments for non-cancellable leases that have commenced and are reflected on the unaudited Condensed Consolidated Balance Sheets as of September 30, 2020 were as follows: (in millions) Operating Leases Finance Leases Remainder of 2020 $ 22 $ 14 2021 93 50 2022 82 45 2023 74 40 2024 72 37 2025 65 33 Thereafter 444 167 Total future minimum lease payments 852 386 Less: imputed interest ( 187 ) ( 87 ) Present value of minimum lease payments $ 665 $ 299 SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED As of September 30, 2020 , the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $ 640 million . These leases are expected to commence between the fourth quarter of 2020 and third quarter of 2021 , with initial lease terms ranging from 5 years to 17 years . ASSET SALE-LEASEBACK TRANSACTIONS On January 6, 2020 , the Company closed an asset sale-leaseback transaction on two manufacturing properties as the buyer obtained control. The Company received proceeds of approximately $ 150 million , net of selling costs for the properties, which had a carrying value of $ 131 million , and resulted in an approximately $ 19 million gain on the sale transaction. The initial term of the leaseback is expected to end during 2034 and has two 10-year renewal options. The renewal options are not reasonably assured as (i) the Company 's position that the dynamic environment in which it operates precludes the Company 's ability to be reasonably certain of exercising the renewal options in the distant future and (ii) the options are contingent as the Company must remain investment grade and a change-in-control has not occurred as of the end of the lease term. The leaseback has a residual value guarantee; however, the Company concluded it was not probable that the Company will owe an amount at the end of the lease term and will record the lease obligation excluding the residual value guarantee. On January 10, 2020 , the Company closed the asset sale-leaseback transaction on two distribution properties as the buyer obtained control. The Company received proceeds of approximately $ 50 million , net of selling costs for the properties, which had a carrying value of $ 27 million , and resulted in an approximately $ 23 million gain on the sale transaction. The term of the leaseback is expected to end in 2025 and has two three-year renewals. 20 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 9 . Earnings Per Share The following table presents the Company 's basic and diluted EPS and shares outstanding: Third Quarter First Nine Months (in millions, except per share data) 2020 2019 2020 2019 Basic EPS: Net income attributable to KDP $ 443 $ 304 $ 897 $ 848 Weighted average common shares outstanding 1,407.3 1,406.8 1,407.2 1,406.6 Earnings per common share — basic $ 0.31 $ 0.22 $ 0.64 $ 0.60 Diluted EPS: Net income attributable to KDP $ 443 $ 304 $ 897 $ 848 Weighted average common shares outstanding 1,407.3 1,406.8 1,407.2 1,406.6 Effect of dilutive securities: Stock options 0.3 0.5 0.3 0.6 RSUs 15.3 12.1 14.0 11.6 Weighted average common shares outstanding and common stock equivalents 1,422.9 1,419.4 1,421.5 1,418.8 Earnings per common share — diluted $ 0.31 $ 0.21 $ 0.63 $ 0.60 Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation — — 0.1 0.2 10 . Stock-Based Compensation Stock-based compensation expense is primarily recorded in SG&A expenses in the unaudited Condensed Consolidated Statements of Income. The components of stock-based compensation expense are presented below: Third Quarter First Nine Months (in millions) 2020 2019 2020 2019 Total stock-based compensation expense $ 20 $ 13 $ 62 $ 47 Income tax benefit recognized in the Statements of Income ( 3 ) ( 3 ) ( 11 ) ( 10 ) Stock-based compensation expense, net of tax $ 17 $ 10 $ 51 $ 37 RESTRICTED STOCK UNITS The table below summarizes RSU activity : RSUs Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in millions) Outstanding as of December 31, 2019 21,492,786 $ 18.14 2.6 $ 622 Granted 8,027,374 24.67 Vested and released ( 96,082 ) 16.82 3 Forfeited ( 1,804,187 ) 20.65 Outstanding as of September 30, 2020 27,619,891 $ 19.88 2.2 $ 762 As of September 30, 2020 , there was $ 350 million of unrecognized compensation cost related to unvested RSU s that is expected to be recognized over a weighted average period of 3.85 years . 21 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 11 . Accumulated Other Comprehensive (Loss) Income The following table provides a summary of changes in AOCI , net of taxes: (in millions) Foreign Currency Translation Adjustments Pension and PRMB Liabilities Cash Flow Hedges Accumulated Other Comprehensive (Loss) Income Balance as of July 1, 2020 $ ( 328 ) $ ( 1 ) $ 1 $ ( 328 ) Other comprehensive income 111 ( 1 ) 1 111 Balance as of September 30, 2020 $ ( 217 ) $ ( 2 ) $ 2 $ ( 217 ) Balance as of January 1, 2020 $ 104 $ — $ — $ 104 Other comprehensive income (loss) ( 321 ) ( 2 ) 2 ( 321 ) Balance as of September 30, 2020 $ ( 217 ) $ ( 2 ) $ 2 $ ( 217 ) Balance as of July 1, 2019 $ 55 $ ( 4 ) $ — $ 51 Other comprehensive income ( 82 ) 5 — ( 77 ) Amounts reclassified from AOCI (1) — ( 1 ) — ( 1 ) Balance as of September 30, 2019 $ ( 27 ) $ — $ — $ ( 27 ) Balance as of January 1, 2019 $ ( 126 ) $ ( 4 ) $ — $ ( 130 ) Other comprehensive income 99 5 — 104 Amounts reclassified from AOCI (1) — ( 1 ) — ( 1 ) Balance as of September 30, 2019 $ ( 27 ) $ — $ — $ ( 27 ) (1) Amounts reclassified from AOCI during the period represent settlement losses, which are recorded to SG&A expenses within the unaudited Condensed Consolidated Statements of Income. 12 . Trade Accounts Receivables, Net Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company is exposed to potential credit risks associated with its accounts receivable, as it generally does not require collateral on its accounts receivable. The Company determines the required allowance for expected credit losses using information such as its customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions such as the impacts of COVID-19 in the first nine months of 2020 . Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies or expectations of any such events in a future period when reasonable and supportable. Historical information is utilized beyond reasonable and supportable forecast periods. Amounts are charged against the allowance when it is determined that expected credit losses may occur. Activity in the allowance for expected credit loss accounts during the periods presented was as follows: (in millions) Allowance for Expected Credit Loss Balance as of January 1, 2019 $ 8 Charges to bad debt expense 2 Write-offs and adjustments ( 1 ) Balance as of December 31, 2019 9 Charges to bad debt expense 18 Write-offs and adjustments ( 5 ) Balance as of September 30, 2020 $ 22 22 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 13 . Other Financial Information The carrying value of cash, cash equivalents, restricted cash and restricted cash equivalents is valued as of the balance sheet date equating fair value and classified as Level 1. The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the unaudited Condensed Consolidated Balance Sheets to the total of the same amounts shown in the unaudited Condensed Consolidated Statements of Cash Flows: (in millions) September 30, 2020 December 31, 2019 Cash and cash equivalents $ 191 $ 75 Restricted cash and restricted cash equivalents (1) 27 26 Non-current restricted cash and restricted cash equivalents included in Other non-current assets — 10 Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows $ 218 $ 111 (1) Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the acquisitions of Core Nutrition LLC, Bai Brands LLC and Big Red Group Holdings, LLC, which have a corresponding holdback liability recorded in other current liabilities, as shown below. The tables below provide selected financial information from the unaudited Condensed Consolidated Balance Sheets: September 30, December 31, (in millions) 2020 2019 Inventories: Raw materials $ 275 $ 215 WIP 7 8 Finished goods 569 447 Total 851 670 Allowance for excess and obsolete inventories ( 27 ) ( 16 ) Total Inventories $ 824 $ 654 Prepaid expenses and other current assets: Other receivables $ 60 $ 65 Customer incentive programs 64 12 Derivative instruments 17 31 Prepaid marketing 16 17 Spare parts 52 49 Assets held for sale (1) 3 165 Income tax receivable 7 4 Other 104 60 Total prepaid expenses and other current assets $ 323 $ 403 Other non-current assets: Customer incentive programs $ 71 $ 33 Marketable securities - trading (2) 37 40 Operating lease right-of-use assets 659 497 Derivative instruments 10 19 Equity securities without readily determinable fair values 1 1 Non-current restricted cash and restricted cash equivalents — 10 Related party notes receivable (3) — 50 Other 111 98 Total other non-current assets $ 889 $ 748 (1) The decrease in assets held for sale was due to the assets included in sale-leaseback transactions that closed during the period. Refer to Note 8 for additional information about the transactions. The remaining amounts were comprised of property, plant and equipment expected to be sold within the next twelve months. (2) Fair values of marketable securities are determined using quoted market prices from daily exchange traded markets, based on the closing price as of the balance sheet date, and are classified as Level 1. The fair value of marketable securities was $ 37 million and $ 40 million as of September 30, 2020 and December 31, 2019 , respectively. (3) Refer to Note 4 for additional information . 23 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) September 30, December 31, (in millions) 2020 2019 Accrued expenses: Customer rebates & incentives $ 341 $ 362 Accrued compensation 160 183 Insurance reserve 46 39 Accrued interest 187 54 Accrued professional fees 16 31 Other accrued expenses 317 270 Total accrued expenses $ 1,067 $ 939 Other current liabilities: Dividends payable $ 211 $ 212 Income taxes payable 22 75 Operating lease liability 73 69 Finance lease liability 40 41 Derivative instruments 25 12 Holdback liabilities 25 25 Other 7 11 Total other current liabilities $ 403 $ 445 Other non-current liabilities: Pension and post-retirement liability $ 29 $ 29 Insurance reserves 71 66 Operating lease liability 592 427 Finance lease liability 259 269 Derivative instruments 14 4 Deferred compensation liability 37 40 Other 101 95 Total other non-current liabilities $ 1,103 $ 930 ACCOUNTS PAYABLE KDP has an agreement with a third party administrator which allows participating suppliers to track payments from KDP , and if voluntarily elected by the supplier, to sell payment obligations from KDP to financial institutions. Suppliers can sell one or more of KDP 's payment obligations at their sole discretion and the rights and obligations of KDP to its suppliers are not impacted. KDP has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. KDP 's obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted. KDP has been informed by the third party administrator that as of September 30, 2020 and December 31, 2019 , $ 2,442 million and $ 2,097 million , respectively, of KDP 's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions. 24 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 14 . Commitments and Contingencies LEGAL MATTERS The Company is involved from time to time in various claims, proceedings, and litigation. The Company establishes reserves for specific legal proceedings when the Company determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. The Company has also identified certain other legal matters where the Company believes an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. Antitrust Litigation In February 2014, TreeHouse Foods, Inc. and certain affiliated entities filed suit against KDP’s wholly-owned subsidiary, KGM , in the U.S. District Court for the Southern District of New York (“SDNY”) (TreeHouse Foods, Inc. et al. v. Green Mountain Coffee Roasters, Inc. et al). The TreeHouse complaint asserted claims under the federal antitrust laws and various state laws, contending that Keurig had monopolized alleged markets for single serve coffee brewers and single serve coffee pods. The TreeHouse complaint sought monetary damages, declaratory relief, injunctive relief and attorneys’ fees. In March 2014, JBR, Inc. filed suit against KGM in the U.S. District Court for the Eastern District of California (JBR, Inc. v. Keurig Green Mountain, Inc.). The claims asserted and relief sought in the JBR complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint. Beginning in March 2014, twenty-seven putative class actions asserting similar claims and seeking similar relief were filed on behalf of purported direct and indirect purchasers of KGM ’s products in various federal district courts. In June 2014, the Judicial Panel on Multidistrict Litigation granted a motion to transfer these various actions, including the TreeHouse and JBR actions, to a single judicial district for coordinated or consolidated pre-trial proceedings (the “Multidistrict Antitrust Litigation”). Consolidated putative class action complaints by direct purchaser and indirect purchaser plaintiffs were filed in July 2014. An additional class action on behalf of indirect purchasers, originally filed in the Circuit Court of Faulkner County, Arkansas (Julie Rainwater et al. v. Keurig Green Mountain, Inc.), was transferred into the Multidistrict Antitrust Litigation in November 2015. In January 2019, McLane Company, Inc. filed suit against KGM (McLane Company, Inc. v. Keurig Green Mountain, Inc.) in the SDNY asserting similar claims and was also transferred into the Multidistrict Antitrust Litigation. These actions are now pending in the SDNY (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation). Discovery in the Multidistrict Antitrust Litigation commenced in December 2017. Separately, a statement of claim was filed in 2014 against KGM and Keurig Canada Inc. in Ontario, Canada by Club Coffee L.P., a Canadian manufacturer of single serve beverage pods, claiming damages of CDN $ 600 million and asserting a breach of competition law and false and misleading statements by KGM . In July 2020, KGM reached an agreement with the putative indirect purchaser class plaintiffs in the Multidistrict Antitrust Litigation to settle the claims asserted in their complaint for $ 31 million . The settlement class consists of individuals and entities in the United States that purchased, from persons other than KGM and not for purposes of resale, KGM manufactured or licensed single serve beverage portion packs during the applicable class period (beginning in September 2010 for most states). The agreement remains subject to court approval, prior to which putative class members will be given notice and the opportunity to opt out of the settlement. KDP intends to vigorously defend the remaining pending lawsuits brought by Treehouse, JBR, McLane, the putative direct purchaser class and Club Coffee. At this time, the Company is unable to predict the outcome of these lawsuits, the potential loss or range of loss, if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations. Proposition 65 Litigation In May 2011, CERT filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, (Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182), alleging that KGM , and certain other defendants who manufacture, package, distribute or sell coffee, failed to warn persons in California that KGM 's coffee products expose persons to the chemical acrylamide in violation of Proposition 65 . KGM , as part of a joint defense group organized to defend against the lawsuit, disputed CERT 's claims and asserted multiple affirmative defenses. The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees, but such trial did not occur in light of California’s Office of Environmental Health Hazard Assessment proposal of a new Proposition 65 regulation clarifying that cancer warnings are not required for chemicals, such as acrylamide, that are present in coffee as a result of roasting coffee beans. After the regulation took effect in October 2019, the litigation continued based on, among other items, CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims. In August 2020, the court granted the defendants' motion for summary judgment, effectively ending CERT 's Proposition 65 litigation at the trial court level, though CERT may still file an appeal. If necessary, the Company intends to continue to vigorously defend itself in this action. 25 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 15 . Related Parties IDENTIFICATION OF RELATED PARTIES Prior to August 19, 2020, KDP was indirectly controlled by JAB , a privately held investor group. Since August 19, 2020, JAB continues to hold a significant but non-controlling interest in KDP. As of September 30, 2020 , JAB beneficially owned approximately 44 % of KDP's outstanding common stock. JAB and its affiliates also hold investments in a number of other companies that have commercial relationships with the Company, including Peet's , Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc. • KDP purchases certain raw materials from Peet's and manufactures coffee and tea portion packs under Peet's brands for sale by KDP and Peet's in the U.S. and Canada. • KDP exclusively manufactures, distributes and sells Peet's RTD beverage products in the U.S. and Canada. • KDP licenses the Caribou Coffee, Panera Bread and Krispy Kreme trademarks for use in the manufacturing of portion packs for the Keurig brewing system. • KDP sells various beverage concentrates and packaged beverages to Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc. for resale to retail customers. KDP holds investments in certain brand ownership companies, and in certain instances, the Company also has rights in specified territories to bottle and/or distribute the brands owned by such companies. KDP purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S. Additionally, any transactions with significant partners in these investments, such as ABI , are considered related party transactions. ABI purchases Clamato from KDP and pays the Company a royalty for use of the brand name. Refer to Note 4 for additional information about KDP 's investments in brand ownership companies. 16 . Segments For all periods presented, the Company 's operating structure consisted of the following four reportable segments: • The Coffee Systems segment reflects sales in the U.S. and Canada of the manufacture and distribution of finished goods relating to the Company 's coffee system, K-Cup pod s and brewers. • The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company 's own brands and third-party brands, through both the DSD system and the WD system. • The Beverage Concentrates segment reflects sales of the Company 's branded concentrates and syrup to third-party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands. • The Latin America Beverages segment reflects sales primarily in Mexico and the Caribbean from the manufacture and distribution of concentrates, syrup and finished beverages. Segment results are based on management reports. Net sales and income from operations are the significant financial measures used to assess the operating performance of the Company 's operating segments. Intersegment sales are recorded at cost and are eliminated in the unaudited Condensed Consolidated Statements of Income. “ Unallocated corporate costs ” are excluded from the Company 's measurement of segment performance and include unrealized commodity derivative gains and losses, and certain general corporate expenses. 26 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) Information about the Company 's operations by reportable segment is as follows: Third Quarter First Nine Months (in millions) 2020 2019 2020 2019 Segment Results – Net sales Coffee Systems $ 1,097 $ 1,065 $ 3,113 $ 3,023 Packaged Beverages 1,447 1,307 4,056 3,734 Beverage Concentrates 352 360 967 1,034 Latin America Beverages 124 138 361 395 Net sales $ 3,020 $ 2,870 $ 8,497 $ 8,186 Third Quarter First Nine Months (in millions) 2020 2019 2020 2019 Segment Results – Income from operations Coffee Systems $ 320 $ 310 $ 882 $ 890 Packaged Beverages 260 196 657 531 Beverage Concentrates 262 245 679 690 Latin America Beverages 25 25 73 62 Unallocated corporate costs ( 114 ) ( 196 ) ( 511 ) ( 508 ) Income from operations $ 753 $ 580 $ 1,780 $ 1,665 17 . Revenue Recognition The Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include CSD , NCB , K-Cup pod s and appliances, occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. Sales taxes and other similar taxes are excluded from revenue. Costs associated with shipping and handling activities, such as merchandising, are included in SG&A expenses as revenue is recognized. 27 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) The following table disaggregates the Company 's revenue by portfolio: (in millions) Coffee Systems Packaged Beverages Beverage Concentrates Latin America Beverages Total For the third quarter of 2020: CSD (1) $ — $ 658 $ 345 $ 89 $ 1,092 NCB (1) — 689 4 35 728 K-Cup pods (2) 812 — — — 812 Appliances 230 — — — 230 Other 55 100 3 — 158 Net sales $ 1,097 $ 1,447 $ 352 $ 124 $ 3,020 For the first nine months of 2020: CSD (1) $ — $ 1,842 $ 951 $ 262 $ 3,055 NCB (1) — 1,913 8 98 2,019 K-Cup pods (2) 2,433 — — — 2,433 Appliances 530 — — — 530 Other 150 301 8 1 460 Net sales $ 3,113 $ 4,056 $ 967 $ 361 $ 8,497 For the third quarter of 2019: CSD (1) $ — $ 577 $ 352 $ 100 $ 1,029 NCB (1) — 626 4 37 667 K-Cup pods (2) 824 — — — 824 Appliances 187 — — — 187 Other 54 104 4 1 163 Net sales $ 1,065 $ 1,307 $ 360 $ 138 $ 2,870 For the first nine months of 2019: CSD (1) $ — $ 1,640 $ 1,012 $ 282 $ 2,934 NCB (1) — 1,789 9 111 1,909 K-Cup pods (2) 2,400 — — — 2,400 Appliances 464 — — — 464 Other 159 305 13 2 479 Net sales $ 3,023 $ 3,734 $ 1,034 $ 395 $ 8,186 (1) Represents net sales of owned and partner brands within our portfolio. (2) Represents net sales from owned brands, partner brands and private label owners. Net sales for partner brands and private label owners are contractual and long term in nature. 28 Table of Contents