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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-27 · 441 added, 429 removed, 292 unchanged (75% of the section changed)

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This section of this Annual Report on Form 10-K generally discusses the years ended December 31, 2020 and 2019 and year-over-year comparisons between the years ended December 31, 2020 and 2019.

Discussions of the periods prior to the year ended December 31, 2018 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018 .

Discussions of the periods prior to the year ended December 31, 2019 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 and the discussion therein for the year ended December 31, 2019 compared to the year ended December 31, 2018 is incorporated by reference into this Annual Report.

This Annual Report on Form 10-K contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands.

All of the product names included in this Annual Report on Form 10-K are either our registered trademarks or those of our licensors.

DR PEPPER SNAPPLE GROUP, INC.

On January 29, 2018, DPS entered into a Merger Agreement by and among DPS , Maple and Merger Sub, whereby Merger Sub would be merged with and into Maple , with Maple surviving the DPS Merger as a wholly-owned subsidiary of DPS .

The DPS Merger was consummated on July 9, 2018, at which time DPS changed its name to "Keurig Dr Pepper Inc.".

Maple owns Keurig , a leader in specialty coffee and innovative single serve brewing systems.

The combined businesses created KDP, a new beverage company of scale with a portfolio of iconic consumer brands and expanded distribution capability to reach virtually every point-of-sale in North America.

See Note 1 and Note 3 of the Notes to our Audited Consolidated Financial Statements for further information related to the DPS Merger .

KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including water (enhanced and flavored), ready-to-drink tea and coffee, juice, juice drinks, mixers and specialty coffee, and is a leading producer of innovative single serve brewing systems.

With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountain and The Original Donut Shop.

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

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

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

according to IRi, available nearly everywhere people shop and consume beverages.

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to restaurants, hotel chains, office product and coffee distributors, and partner brand owners;

and directly to consumers through its websites.

and directly to consumers through its website.

Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.

UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS

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

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

Refer to Item 1A, Risk Factors , of this Annual Report on Form 10-K for information about risks and uncertainties facing us.

We expect net sales growth for the year ending December 31, 2020 to accelerate to 3.0% to 4.0%, versus our merger target of 2.0% to 3.0%.

This momentum is expected to be fueled by investments we are planning across the business, including in the areas of innovation, new partnerships, in-store execution, marketing and research and development.

Adjusted diluted EPS growth for the year ending December 31, 2020 is expected to be in the range of 13% to 15%, or $1.38 to $1.40 per diluted share, reflecting the opportunities we are pursuing and the investments it is planning to make to drive accelerated top-line growth.

Over the three-year period ending December 31, 2021, we continue to expect to deliver Adjusted diluted EPS growth in the range of 15% to 17%, in line with our merger target.

Supporting this guidance are the following expectations:

Merger synergies of $200 million for the year ending December 31, 2020 , consistent with our long-term merger target for $200 million per year over the 2019-2021 period.

Adjusted interest expense is expected to be in the range of $530 million to $545 million, reflecting ongoing deleveraging and some benefit from unwinding interest rate swap contracts.

The Adjusted effective tax rate is expected to be in the range of 24.5% to 25.0%.

Diluted weighted average shares outstanding are estimated to be approximately 1,425 million.

Management leverage ratio is expected to be in the range of 3.5x to 3.8x as of December 31, 2020 .

The beverage market is subject to some seasonal variations.

Our cold beverage sales are generally higher during the warmer months, while hot beverage sales are generally higher during the cooler months.

Overall beverage sales can also be influenced by the timing of holidays and weather fluctuations.

Sales of brewing systems and related accessories are generally higher during the second half of the year due to the holiday shopping season.

As of December 31, 2020, we report our business in four operating 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 single-serve brewing system, K-Cup pod s and other coffee products.

and Canada of the manufacture and distribution of finished goods relating to the Company's single-serve brewers, K-Cup pods and other coffee products.

• The Packaged Beverages segment reflects sales in the U.S.

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Coffee Systems K-Cup Pod and Appliance Sales Volume

In our Coffee Systems segments, we measure our sales volume as the number of appliances and the number of individual K-Cup pod s sold to our customers.

In our Coffee Systems segments, we measure our sales volume as the number of appliances and the number of individual K-Cup pods sold to our customers.

Packaged Beverages and Latin America Beverages Sales Volume

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Beverage Concentrates Sales Volume

In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales.

The unit of measurement for concentrate case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.

Concentrate case sales represent units of measurement for concentrates sold by us to our bottlers and distributors.

A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage.

In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales for concentrates sold by us to our bottlers and distributors.

A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.

It does not include any other component of the finished beverage other than concentrate.

Our net sales in our concentrate businesses are based on our sales of concentrate cases.

COMPARABLE RESULTS OF OPERATIONS

As a result of the DPS Merger , in order for management to discuss our historical results on a comparable basis, we prepared unaudited pro forma condensed combined financial information to illustrate the estimated effects of the DPS Merger , which was consummated on July 9, 2018, based on the historical results of operations of DPS and Maple.

See Supplemental Unaudited Pro Forma Condensed Combined Financial Information section at the end of Management's Discussion and Analysis for further information on the assumptions used in the preparation of the financial information.

Furthermore, management believes that there are certain non-GAAP financial measures that allow management to evaluate our results, trends and ongoing performance on a comparable basis.

In order to derive the adjusted financial information for the year ended December 31, 2019, we adjusted certain financial statement captions and metrics for certain items affecting comparability.

For the year ended December 31, 2018, we adjusted certain financial statement captions and metrics prepared on a pro forma basis for certain items affecting comparability.

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

Presentation of these adjusted financial statement captions and metrics in the tables below compare adjusted financial information for the year ended December 31, 2019 to adjusted pro forma financial information for the year ended December 31, 2018 to provide more meaningful comparisons between years as a result of the DPS Merger .

USE OF NON-GAAP FINANCIAL MEASURES

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

GAAP measures, including adjusted income from operations, adjusted net income and adjusted diluted earnings per share.

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

GAAP measures.

UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS

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

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

Refer to Item 1A, "Risk Factors", combined with the Uncertainties and Trends Affecting Liquidity section below, for more information about the risks and uncertainties we face.

COVID-19 Pandemic Disclosures

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

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

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

We are finding innovative ways to quickly adapt to changes in shopping behaviors, with the vast majority of North America impacted by a mix of occupancy limitations, stay-at-home or shelter-in-place orders, and closures of non-essential businesses.

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

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

The COVID-19 pandemic has had divergent impacts within our business.

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

At the same time, we experienced significant declines in net sales 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 future, the economic effects of the COVID-19 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, in response to increases in reported cases and hospitalizations in certain regions.

These government actions could impact consumers' movements and access to our products.

While we believe that there will continue to be strong long-term demand for our products, the timing and extent of economic recovery, and the uncertainties in short-term demand trends, make it difficult to predict the overall effects of the COVID-19 pandemic on our business.

We expect that there will be heightened volatility in net sales during and subsequent to the duration of the pandemic that may impact interim periods.

Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our critical frontline employees and our supply chain.

As food and agriculture is deemed part of the critical infrastructure by the Department of Homeland Security, our frontline employees have been identified as critical workers in maintaining the U.S.

food and beverage supply.

As a result, we have strived to follow recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our manufacturing and distribution facilities, which also included temporary incentive pay programs and benefits.

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 COVID-19 pandemic have impacted and could continue to impact our operations.

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

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

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

The COVID-19 pandemic has not materially impacted our liquidity position.

We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets enabled by our debt ratings.

Refer to Uncertainties and Trends Affecting Liquidity within the Liquidity and Capital Resources section below for more information.

EXECUTIVE SUMMARY

Impact of COVID-19 on our Financial Statements

The impact of COVID-19 on our 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 us to successfully navigate these mix impacts posed by the COVID-19 pandemic to drive overall performance.

• 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 significant decline in away-from-home consumption due to weaknesses in the office coffee channel, as many companies shifted to a work-from-home model during 2020.

Sales in the e-commerce channel were very strong, as consumers shifted purchases to the online 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, which was partially offset by softness in the convenience and gas channels due to decreased consumer mobility.

• Beverage Concentrates experienced a significant decline in net sales 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 year, reflecting a modest reopening of quick-serve and other fast-casual restaurants.

• Latin America Beverages experienced limited growth in sales volumes, driven by reduced consumer mobility and tourism 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 impacted the effectiveness and return on marketing investments;

• Reduced other discretionary costs, such as travel and entertainment expenses, within our business.

As a result of these items, COVID-19 impacted 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 above for further information.

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

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 non-GAAP financial measures.

In addition, reported amounts under U.S.

GAAP also include additional costs, not included in the COVID-19 item affecting comparability, as presented in tables below.

Items Affecting Comparability (1)

(in millions) Employee Compensation Expense (2)

Employee Protection Costs (3)

Allowances for Expected Credit Losses (4)

Inventory Write-Downs (5)

For the year ended December 31, 2020

Coffee Systems $ 15 $ 10 $ 2 $ 8 $ 35

Packaged Beverages 76 25 8 — 109

Beverage Concentrates — — 4 — 4

Latin America Beverages — 2 — — 2

Total $ 91 $ 37 $ 14 $ 8 $ 150

(1) Employee compensation expense and employee protection costs are both included as the COVID-19 item affecting comparability in the reconciliation of our Adjusted Non-GAAP financial measures.

(2) Primarily reflects temporary incremental frontline incentive pay and the associated taxes in order to maintain essential operations during the COVID-19 pandemic.

Impacts both cost of sales and SG&A expenses.

In mid-September 2020, we discontinued the incremental frontline incentive pay program.

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

Impacts both cost of sales and SG&A expenses.

(4) Allowances reflect the expected impact of the economic uncertainty caused by COVID-19, leveraging estimates of credit worthiness, default and recovery rates for certain of our customers.

Impacts SG&A expenses.

(5) Inventory write-downs represent obsolescence charges, which impact cost of sales.

Financial Overview

The following table details our net income and diluted EPS for the years ended December 31, 2020 and 2019:

For the Year Ended December 31,

(in millions, except per share data)

For the Year Ended December 31, Dollar Percent

(in millions, except per share data) 2020 2019 Change Change

Net income attributable to KDP $ 1,325 $ 1,254 $ 71 5.7 %

Adjusted net income

Adjusted net income attributable to KDP 1,988 1,727 261 15.1 %

0.93 0.88 0.05 5.7 %

Adjusted diluted EPS

Net income attributable to KDP increased $668 million to $1,254 million for the year ended December 31, 2019 , compared to $586 million for the year ended December 31, 2018 , primarily driven by the incremental impact in the current year of the DPS Merger completed in 2018, including the favorable comparison to the $158 million of transaction costs and the $131 million impact of the inventory step-up associated with the DPS Merger recorded in the year ended December 31, 2018 .

Diluted EPS increased 66.0% to $0.88 as compared to $0.53 in the prior year.

Adjusted net income increased $269 million , or 18.4% , to $1,727 million , compared to Adjusted pro forma net income of $1,458 million in the prior year.

This change primarily reflected the growth in Adjusted income from operations, lower adjusted interest expense, driven by deleveraging and the benefit of unwinding several interest rate swap contracts, and a lower effective tax rate due to the TCJA .

Additionally, Adjusted net income was impacted by the year ago comparison of the non-operating benefits of a cash distribution from BodyArmor in connection with our unit-holder interest and a gain on our prior equity interest in Core as a result of the Core Acquisition and an increase in our share of losses from our investments in unconsolidated affiliates driven by Bedford .

Adjusted diluted EPS increased 17.3% to $1.22 , as compared to Adjusted pro form diluted EPS of $1.04 in the prior year.

During the year ended December 31, 2019 , we made net repayments of approximately $1,286 million related to our senior notes, our term loans, and commercial paper notes.

We additionally made repayments of approximately $531 million of structured payables.

1.40 1.22 0.18 14.8 %

Net income attributable to KDP increased $71 million, or 5.7%, to $1,325 million for the year ended December 31, 2020, compared to $1,254 million in the prior year, reflecting strong growth in income from operations, driven primarily by the continued benefit of productivity and merger synergies, volume/mix growth and lower discretionary expenses, primarily marketing, partially offset by $150 million of additional pre-tax expenses associated with COVID-19 and a non-cash impairment on our Bai brand intangible asset.

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 equity investments and a related party note receivable.

Adjusted net income attributable to KDP increased $261 million, or 15.1%, to $1,988 million, compared to $1,727 million in the prior year, reflecting the continued benefit of productivity and merger synergies, volume/mix growth and lower discretionary expenses, primarily marketing, which were partially offset by lower net price realization and higher operating and manufacturing costs associated with increased consumer retail demand for our products.

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

During the year ended December 31, 2020, we made net repayments of $951 million related to our Notes, our 2019 KDP Term Loan, and our commercial paper notes.

Additionally, we repaid $341 million and added $171 million of structured payables.

In February 2021, our Board has approved an increase of 25% in our quarterly dividend, which will begin with the second quarter dividend announcement.

RESULTS OF OPERATIONS

Our results of operations include the following periods, which reflect the results of operations of KDP for:

the year ended December 31, 2019 , and

the year ended December 31, 2018, which also includes 176 days of the results of operations of DPS subsequent to the DPS Merger , which was completed on July 9, 2018.

We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our investments in unconsolidated affiliates.

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

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The following table sets forth our consolidated results of operations for the years ended December 31, 2020 and 2019:

For the Year Ended December 31,

(in millions, except per share amounts)

For the Year Ended December 31, Dollar Percentage

(in millions, except per share amounts) 2020 2019 Change Change

$ 11,618 $ 11,120 $ 498 4.5 %

Cost of sales 5,132 4,778 354 7.4

Gross profit 6,486 6,342 144 2.3

Selling, general and administrative expenses 3,978 3,962 16 0.4

Other operating expense (income), net

Impairment of intangible assets 67 — 67 NM

Other operating (income) expense, net (39) 2 (41) NM

Income from operations 2,480 2,378 102 4.3

Interest expense 604 654 (50) (7.6)

Interest expense - related party

Loss on early extinguishment of debt 4 11 (7) (63.6)

Impairment of investments and note receivable 102 — 102 NM

Other expense (income), net 17 19 (2) (10.5)

Income before provision (benefit) for income taxes

Provision (benefit) for income taxes

Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards

Income before provision for income taxes 1,753 1,694 59 3.5

Provision for income taxes 428 440 (12) (2.7)

1,325 1,254 71 5.7

Net income attributable to non-controlling interest — — — NM

Net income attributable to KDP

$ 1,325 $ 1,254 $ 71 5.7 %

Earnings per common share:

Operating margin

Effective tax rate

Net sales for the year ended December 31, 2019 increased $3,678 million to $11,120 million compared with net sales of $7,442 million for the year ended December 31, 2018 , primarily driven by the incremental impact in the current year of the DPS Merger completed in 2018.

Basic $ 0.94 $ 0.89 $ 0.05 5.6 %

Diluted 0.93 0.88 0.05 5.7 %

Gross margin 55.8 % 57.0 % (120 bps)

Operating margin 21.3 % 21.4 % (10 bps)

Effective tax rate 24.4 % 26.0 % (160 bps)

Sales Volume.

The following table sets forth changes in sales volume for the year ended December 31, 2020 compared to the prior year:

K-Cup pod volume 6.3 %

Brewer volume

CSD sales volume 0.1 %

NCB sales volume 1.4 %

Net sales for the year ended December 31, 2020 increased $498 million to $11,618 million compared with net sales of $11,120 million in the prior year.

This performance reflected higher volume/mix of 5.6%, partially offset by lower net price realization of 0.6% and unfavorable foreign currency translation of 0.5%, primarily in our Latin America Beverages segment.

Gross Profit.

Gross profit for the year ended December 31, 2019 was $6,342 million , or 57.0% of net sales as compared to $3,882 million , or 52.2% of net sales for the year ended December 31, 2018 .

The primary driver of the change in gross profit was the incremental impact in the current year of the DPS Merger completed in 2018 including the favorable comparison to the $131 million impact of the inventory step-up associated with the DPS Merger in the third quarter of 2018.

Gross profit for the year ended December 31, 2020 was $6,486 million, or 55.8% of net sales as compared to $6,342 million, or 57.0% of net sales in the prior year.

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, $52 million in COVID-19 charges and an increase in other manufacturing costs, associated with the strong consumer demand.

Gross margin decreased 120 bps from the prior year to 55.8%.

Selling, General and Administrative Expenses.

SG&A expenses for the year ended December 31, 2019 increased $1,327 million to $3,962 million compared with the year ended December 31, 2018 .

The primary driver of the increase in SG&A expenses was the incremental impact in the current year of the DPS Merger completed in 2018, including acquired operating costs, transaction costs and restructuring expenses associated with the integration of DPS and Maple .

Other Operating Expense (Income), Net.

Other operating expense (income), net had a favorable change of $8 million for the year ended December 31, 2019 compared with the year ended December 31, 2018 .

During 2019, the impairment of real estate and equipment was partially offset by a network optimization program gain of $30 million related to the asset sale-leaseback of three manufacturing facilities as compared to unfavorable fair value adjustments on real estate assets held for sale in 2018.

SG&A expenses for the year ended December 31, 2020 increased $16 million to $3,978 million, compared with $3,962 million in the prior year.

The increase was driven by $98 million in COVID-19 charges, expenses associated with productivity projects, inflation in logistics, and higher operating costs associated with the strong consumer demand, such as logistics and labor.

These increases were partially offset by the benefit of strong productivity and merger synergies and lower discretionary expenses, primarily marketing.

Impairment of Intangible Assets.

Impairment of intangible assets reflects a $67 million non-cash impairment charge recorded for the Bai brand as a result of our annual impairment analysis as of October 1, 2020.

Refer to Note 4 of the Notes to our Consolidated Financial Statements for further information regarding the impairment analysis.

Other Operating (Income) Expense, Net.

Other operating (income) expense, net had a favorable change of $41 million for the year ended December 31, 2020 compared with the prior year, largely driven by the comparison to unfavorable fair value adjustments on real estate assets in the prior year.

Additionally, we had an incremental gain from our network optimization program in the current year, with a gain of $42 million from the sale-leaseback of four facilities in the current year, compared to a gain of $30 million in the prior year from the sale-leaseback of three facilities.

Income from Operations.

Income from operations increased $1,141 million to $2,378 million for the year ended December 31, 2019 , primarily driven by the incremental impact in the current year of the DPS Merger completed in 2018, with the increase in gross profit, partially offset by an increase in SG&A expenses.

Income from operations increased $102 million to $2,480 million for the year ended December 31, 2020, driven by the increase in gross profit and the favorable change in other operating (income) expense, net, partially offset by the non-cash impairment of the Bai brand intangible asset and the increase in SG&A expenses.

Operating margin decreased 10 bps versus the prior year to 21.3%.

Interest Expense.

Interest expense increased $253 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 , primarily due to the full year impact of the increased borrowings and the assumption of existing senior unsecured notes as a result of the DPS Merger , as well as the impact of our interest rate derivative instruments, partially offset by the impact of net repayments to our 2019 Notes, our term loans and our commercial paper notes.

Interest Expense - Related Party.

Interest expense - related party decreased $51 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 as a result of the capitalization of the related party term loans into additional paid-in capital during the DPS Merger completed in 2018.

Interest expense decreased $50 million or 7.6%, to $604 million for the year ended December 31, 2020 compared to $654 million in the prior year.

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

Loss on Early Extinguishment of Debt .

We recognized $11 million of loss on early extinguishment of debt during the year ended December 31, 2019 , related to our prepayments on our term loans, compared to $13 million of loss on early extinguishment of debt for the year ended December 31, 2018 as we paid off the Term Loan A upon the consummation of the DPS Merger in 2018.

Other Expense (Income), net.

Other expense (income), net had an unfavorable change of $38 million for the year ended December 31, 2019 compared with the year ended December 31, 2018 , driven primarily by an increase in our share of losses from our investments in unconsolidated affiliates, driven by Bedford, as well as the unfavorable comparison to the gain on a cash distribution from BodyArmor in the prior year.

Loss on early extinguis hment of debt decreased $7 million to $4 million for the year ended December 31, 2020 compared to $11 million for the prior year.

This change was primarily the result of the Company's focus on repaying commercial paper during the current year, versus our focus on voluntary repayments on our term loan in the prior year.

Impairment on Investments and Note Receivable.

Impairment on investments and note receivable reflected a non-cash impairment charge of $102 million for the year ended December 31, 2020 associated with our Bedford investment and the related note receivable and our LifeFuels investment.

Refer to Note 5 of the Notes to our Consolidated Financial Statements for additional information regarding the impairment charges.

Effective Tax Rate.

The effective tax rates for the years ended December 31, 2020 and 2019 were 24.4% and 26.0%, respectively.

The decrease from prior year primarily related to the tax benefit received in the current year due to a decrease in our uncertain tax positions as a result of examination settlements and the reversal of a valuation allowance related to the carryforward of net operating losses in a wholly-owned subsidiary.

Net Income Attributable to KDP.

Net income attributable to KDP increased $71 million, or 5.7%, to $1,325 million for the year ended December 31, 2020 as compared to $1,254 million in the prior year, driven by improved income from operations, reduced interest expense and reduced losses on early extinguishment of debt, as well as the decrease in the effective tax rate, which were partially offset by the non-cash impairment on investments and note receivable during the year ended December 31, 2020.

Diluted EPS increased 5.7% to $0.93 per diluted share as compared to $0.88 in the prior year.

Adjusted Results of Operations

The following table sets forth certain consolidated adjusted results of operations for the years ended December 31, 2019 and 2018 :

For the Year Ended December 31,

(in millions, except per share amounts)

Adjusted net sales

The following table sets forth selected consolidated adjusted results of operations for the years ended December 31, 2020 and 2019:

For the Year Ended December 31, Dollar Percentage

(in millions, except per share amounts) 2020 2019 Change Change

Adjusted income from operations $ 3,191 $ 2,890 $ 301 10.4 %

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Adjusted provision for income taxes 644 591 53 9.0

Adjusted operating margin

Adjusted effective tax rate

Adjusted Net Sales.

Adjusted net sales increased $96 million , or 0.9% , to $11,120 million for the year ended December 31, 2019 as compared to Adjusted pro forma net sales of $11,024 million in the prior year.

This performance reflected strong underlying net sales growth of 3.2% , driven by higher volume/mix of 2.6% and net price realization of 0.6% , which was partially offset by the expected unfavorable impact related to changes in our allied brands portfolio of 2.1% .

Unfavorable foreign currency translation also impacted the year by 0.2% .

Adjusted net income attributable to KDP 1,988 1,727 261 15.1

Adjusted diluted EPS

1.40 1.22 0.18 14.8

Adjusted operating margin 27.5 % 26.0 % 150 bps

Adjusted effective tax rate 24.5 % 25.5 % (100 bps)

Adjusted Income from Operations.

Adjusted income from operations increased $270 million , or 10.3% , to $2,890 million for the year ended December 31, 2019 compared to Adjusted pro forma income from operations of $2,620 million in the prior year.

This performance primarily reflected the strong productivity and merger synergies, both of which benefitted SG&A and cost of sales, and growth in underlying net sales, partially offset by inflation in input costs, led by packaging, and logistics and the comparison to a $22 million gain from the remeasurement of our equity investment in Big Red.

Unfavorable foreign currency translation also impacted the year by 0.2% .

Adjusted operating margin grew 220 bps to 26.0% in the year ended December 31, 2019 .

Adjusted income from operations increased $301 million, or 10.4%, to $3,191 million for the year ended December 31, 2020 compared to $2,890 million in the prior year.

Driving this performance in the current year was the benefit of productivity and merger synergies, which impacted both SG&A and cost of sales, higher volume/mix, and lower discretionary expenses, primarily marketing.

Partially offsetting these positive drivers were unfavorable net price realization, $22 million of COVID-19 charges and higher operating and manufacturing costs associated with the strong consumer demand.

Adjusted operating margin grew 150 bps to 27.5%.

Adjusted Interest Expense.

Adjusted interest expense decreased $82 million , or 12.9% , to $553 million for the year ended December 31, 2019 compared to Adjusted pro forma interest expense of $635 million in the prior year.

This change primarily reflected the benefits of lower indebtedness due to continued deleveraging, realized gains associated with the termination of certain interest rate swaps and the benefit of lower interest rates as a result of our existing interest rate swaps.

Adjusted interest expense decreased $11 million, or 2.0%, to $542 million for the year ended December 31, 2020 compared to $553 million in the prior year.

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 prior year 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 decreased 90 bps to 25.5% for the year ended December 31, 2019 compared to Adjusted pro forma effective tax rate of 26.4% in the prior year.

This decrease in our Adjusted effective tax rate was primarily due to a reduction in the U.S.

federal tax rate from 24.5% to 21.0%, partially offset by the loss of tax benefits associated with the U.S.

domestic manufacturing deduction in 2019.

The Adjusted effective tax rate decreased 100 bps to 24.5% for the year ended December 31, 2020 compared to 25.5% in the prior year.

Adjusted Net Income Attributable to KDP.

Adjusted net income increased 15.1% to $1,988 million for the year ended December 31, 2020 as compared to $1,727 million in the prior year.

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

Adjusted Diluted EPS.

Adjusted diluted EPS increased 14.8% to $1.40 per diluted share as compared to $1.22 per diluted share in the prior year.

Results of Operations by Segment

The following tables set forth net sales and income from operations for our segments for the years ended December 31, 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)

For the Year Ended December 31,

(in millions) For the Year Ended December 31,

Segment Results — Net sales 2020 2019

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Latin America Beverages 497 528

Net sales $ 11,618 $ 11,120

For the Year Ended December 31,

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COFFEE SYSTEMS

The following table provides certain results of operations for our Coffee Systems segment for the years ended December 31, 2019 and 2018 :

For the Year Ended December 31,

(in millions)

The following table provides selected information for our Coffee Systems segment for the years ended December 31, 2020 and 2019:

For the Year Ended December 31, Dollar Percentage

(in millions) 2020 2019 Change Change

Net sales $ 4,433 $ 4,233 $ 200 4.7 %

Income from operations 1,268 1,219 49 4.0 %

Operating margin

Adjusted net sales

Operating margin 28.6 % 28.8 % (20 bps)

Adjusted income from operations 1,514 1,403 111 7.9 %

Adjusted operating margin

Adjusted operating margin 34.2 % 33.1 % 110 bps

Sales Volume.

The Coffee Systems segment recorded strong volume growth reflecting a 9.0% increase in K-Cup pod volume and an 8.2% increase in brewer volume in the year ended December 31, 2019 compared to the prior year.

Net sales increased $119 million , or 2.9% , to $4,233 million for the year ended December 31, 2019 , compared to $4,114 million in the prior year due to volume/mix growth of 6.1% , which was driven by strong sales volume growth partially offset by unfavorable pod sales mix.

This growth was partially offset by lower net price realization of 2.8% .

Unfavorable foreign currency translation also impacted the year by 0.4% .

Adjusted Net Sales.

Adjusted net sales increased $115 million , or 2.8% , to $4,233 million for the year ended December 31, 2019 , compared to $4,118 million in the prior year due to volume/mix growth of 6.1% , which was driven by strong sales volume growth partially offset by unfavorable pod sales mix.

This growth was partially offset by lower net price realization of 2.9% .

Unfavorable foreign currency translation also impacted the year by 0.4% .

Sales volume growth for the year ended December 31, 2020 compared to the prior year for the Coffee Systems segment included strong K-Cup pod volume growth of 6.3%, reflecting strength in at-home consumption which was significantly offset by softness in the away-from-home business due to the COVID-19 pandemic.

Brewer volume increased 21.2% in the year ended December 31, 2020, as compared to 8.2% growth in the prior year, reflecting successful innovation introduced over the past two years and investments to drive household penetration.

Net sales increased $200 million, or 4.7%, to $4,433 million for the year ended December 31, 2020, compared to $4,233 million in the prior year due to volume/mix growth of 7.2%, driven by strong sales volume growth in both pods and brewers.

This growth was partially offset by lower net price realization of 2.4% and unfavorable foreign currency translation of 0.1%.

Income from Operations.

Income from operations was $1,219 million for the year ended December 31, 2019 , compared to $1,163 million in the prior year, driven by the benefits of pod volume growth and strong productivity and merger synergies which were partially offset by lower net price realization, unfavorable pod mix, inflation in input costs, led by packaging, as well as logistics and people costs, expenses associated with productivity projects, and increased marketing investments.

Operating margin grew 50 bps to 28.8% .

Income from operations increased $49 million, or 4.0%, to $1,268 million for the year ended December 31, 2020, compared to $1,219 million in the prior year, driven by the continued benefit of strong productivity and merger synergies, which impacted both cost of sales and SG&A, strong volume/mix growth and lower discretionary expenses, primarily marketing.

These benefits were partially offset by strategic pricing, $35 million in COVID-19 charges, and expenses associated with productivity projects.

Operating margin declined 20 bps to 28.6%.

Adjusted Income from Operations.

Adjusted income from operations increased $76 million , or 5.7% , to $1,403 million for the year ended December 31, 2019 , compared with Adjusted pro forma income from operations of $1,327 million in the prior year, primarily reflecting strong productivity and merger synergies and strong volume/mix growth, partially offset by lower net price realization, inflation in input costs, led by packaging, as well as logistics and people costs, and increased marketing investments.

Adjusted income from operations increased $111 million, or 7.9%, to $1,514 million for the year ended December 31, 2020, compared to $1,403 million in the prior year, driven by the continued benefit of strong productivity and merger synergies, which impacted both cost of sales and SG&A, strong volume/mix, and lower discretionary expenses, primarily marketing.

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

Adjusted operating margin grew 110 bps to 34.2%.

PACKAGED BEVERAGES

The following table provides certain results of operations for our Packaged Beverages segment for the years ended December 31, 2019 and 2018 :

For the Year Ended December 31,

(in millions)

The following table provides selected information for our Packaged Beverages segment for the years ended December 31, 2020 and 2019:

For the Year Ended December 31, Dollar Percentage

(in millions) 2020 2019 Change Change

Net sales $ 5,363 $ 4,945 $ 418 8.5 %

Income from operations 822 757 65 8.6 %

Operating margin

Adjusted net sales

Operating margin 15.3 % 15.3 % 0 bps

Adjusted income from operations 1,021 783 238 30.4 %

Adjusted operating margin

Adjusted operating margin 19.0 % 15.8 % 320 bps

Sales Volume.

Sales volume for the year ended December 31, 2019 increased significantly primarily driven by the incremental impact in the current year from the DPS Merger in the prior year.

Adjusted Sales Volume.

Adjusted sales volume for the year ended December 31, 2019 declined 2.9% due to the net unfavorable impact of changes in our allied brands portfolio and lower CSD volume, partially offset by the growth of Core Hydration and contract manufacturing.

Net sales increased $2,530 million to $4,945 million for the year ended December 31, 2019 , compared to $2,415 million in the prior year, driven by the incremental impact in the current year from the DPS Merger in the prior year.

Adjusted Net Sales.

Adjusted net sales decreased $124 million , or 2.4% , to $4,945 million for the year ended December 31, 2019 compared to $5,069 million in the prior year, reflecting underlying net sales growth of 2.3% , driven by higher net price realization of 1.8% from pricing actions taken late in 2018 and higher volume/mix of 0.5% .

More than offsetting the underlying net sales growth was the expected unfavorable impact from changes in the allied brands portfolio totaling 4.7% .

Sales volume for the year ended December 31, 2020 increased 7.3% compared to the prior year, reflecting the impact of COVID-19 and our strong in-market execution, which displayed strength in CSDs, juice and juice drinks, premium water and apple sauce.

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 year.

Net sales increased $418 million, or 8.5%, to $5,363 million for the year ended December 31, 2020, compared to $4,945 million in the prior year, driven by higher volume/mix of 8.2% and favorable price realization of 0.3%.

Income from Operations.

Income from operations was $757 million for the year ended December 31, 2019 , compared to $257 million in the prior year, driven by the incremental impact in the current year from the DPS Merger in the prior year, the favorable comparison to the $105 million impact of the inventory step-up associated with the DPS Merger in the prior year, and strong productivity and merger savings.

Income from operations increased $65 million, or 8.6%, to $822 million for the year ended December 31, 2020, compared to $757 million in the prior year, driven primarily by strong volume/mix.

Other favorable drivers included the benefit of continued productivity and merger synergies and lower discretionary expenses, primarily marketing.

These growth drivers were partially offset by $109 million in COVID-19 charges, a non-cash impairment charge of $67 million related to the Bai brand, higher manufacturing and operating costs, such as logistics and labor, associated with the strong consumer demand, inflation in logistics, the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year and increased expenses associated with productivity projects.

Operating margin was flat versus the prior year at 15.3%.

Adjusted Income from Operations.

Adjusted income from operations increased $92 million , or 13.3% , to $783 million for the year ended December 31, 2019 compared to Adjusted pro forma income from operations of $691 million in the prior year.

This performance primarily reflected strong productivity and merger synergies, the incremental margin from Core and Big Red in their first year as owned brands, a network optimization program gain of $30 million related to the asset sale-leaseback of three manufacturing facilities and the growth in underlying net sales.

Partially offsetting these growth drivers were inflation in input costs and logistics and the comparison to a $22 million gain from the remeasurement of our equity investment in Big Red.

Adjusted operating margin grew 220 bps to 15.8% .

Adjusted income from operations increased $238 million, or 30.4%, to $1,021 million for the year ended December 31, 2020 compared to $783 million in the prior year, largely driven by strong volume/mix.

Other favorable drivers included the benefit of continued productivity and merger synergies and lower discretionary expenses, primarily marketing.

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

Adjusted operating margin grew 320 bps versus the prior year to 19.0%.

BEVERAGE CONCENTRATES

The following table provides certain results of operations for our Beverage Concentrates segment for the years ended December 31, 2019 and 2018 :

For the Year Ended December 31,

(in millions)

The following table provides selected information for our Beverage Concentrates segment for the years ended December 31, 2020 and 2019:

For the Year Ended December 31, Dollar Percentage

(in millions) 2020 2019 Change Change

Net sales $ 1,325 $ 1,414 $ (89) (6.3) %

Income from operations 932 955 (23) (2.4) %

Operating margin

Adjusted net sales

Operating margin 70.3 % 67.5 % 280 bps

Adjusted income from operations 938 957 (19) (2.0) %

Adjusted operating margin

Adjusted operating margin 70.8 % 67.7 % 310 bps

Sales Volume.

Sales volume for the year ended December 31, 2019 increased significantly primarily driven by the incremental impact in the current year from the DPS Merger in the prior year.

Adjusted Sales Volume.

Adjusted sales volume for the year ended December 31, 2019 increased 0.2% driven by Dr Pepper, Canada Dry and Big Red, partially offset by Crush, 7UP and Schweppes.

Net sales increased $745 million to $1,414 million for the year ended December 31, 2019 , compared to $669 million in the prior year, driven by the incremental impact in the current year from the DPS Merger in the prior year.

Adjusted Net Sales.

Adjusted net sales increased $83 million , or 6.2% , to $1,414 million for the year ended December 31, 2019 compared to Adjusted pro forma net sales of $1,331 million in the prior year, driven by higher net price realization of 5.3% and higher volume/mix of 1.1% .

Unfavorable foreign currency translation also impacted the period by 0.2% .

Sales volume for the year ended December 31, 2020 declined 5.1% compared to the prior year, 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 $89 million, or 6.3% to $1,325 million for the year ended December 31, 2020, compared to $1,414 million in the prior year, driven by unfavorable volume/mix of 5.8%, lower net price realization of 0.4% and unfavorable foreign currency translation of 0.1%.

Income from Operations.

Income from operations was $955 million for the year ended December 31, 2019 , compared to $430 million in the prior year, driven by the incremental impact in the current year from the DPS Merger in the prior year and the favorable comparison to the $17 million impact of the inventory step-up associated with the DPS Merger in the prior year.

Income from operations decreased $23 million, or 2.4% to $932 million for the year ended December 31, 2020, compared to $955 million in the prior year, driven by the net sales decline and higher compensation costs, partially offset by lower discretionary expenses, primarily marketing.

Operating margin increased 280 bps versus the prior year to 70.3%.

Adjusted Income from Operations.

Adjusted income from operations increased $96 million , or 11.1% , to $957 million for the year ended December 31, 2019 compared with Adjusted pro forma income from operations of $861 million in the prior year.

This performance primarily reflected the growth in Adjusted net sales as well as productivity and merger synergies.

Partially offsetting these growth drivers were inflation in input costs and logistics.

Adjusted operating margin grew 300 bps versus the year ago period to 67.7% .

Adjusted income from operations decreased $19 million, or 2.0%, to $938 million for the year ended December 31, 2020 compared to $957 million in the prior year, driven by the net sales decline, partially offset by lower discretionary expenses, primarily marketing.

Adjusted operating margin grew 310 bps versus the prior year to 70.8%.

LATIN AMERICA BEVERAGES

The following table provides certain results of operations for our Latin America Beverages segment for the years ended December 31, 2019 and 2018 :

For the Year Ended December 31,

(in millions)

The following table provides selected information for our Latin America Beverages segment for the years ended December 31, 2020 and 2019:

For the Year Ended December 31, Dollar Percentage

(in millions) 2020 2019 Change Change

Net sales $ 497 $ 528 $ (31) (5.9) %

Income from operations 105 85 20 23.5 %

Operating margin

Adjusted net sales

Operating margin 21.1 % 16.1 % 500 bps

Adjusted income from operations 108 82 26 31.7 %

Adjusted operating margin

Adjusted operating margin 21.7 % 15.5 % 620 bps

Sales Volume.

Sales volume for the year ended December 31, 2019 increased significantly primarily driven by the incremental impact in the current year from the DPS Merger in the prior year.

Adjusted Sales Volume.

Adjusted sales volume for the year ended December 31, 2019 declined 3.7% , as Aguafiel decreased 4.3% primarily due to the exit of our low margin bulk water business, partially offset by a 0.6% increase in the balance of the portfolio.

Net sales increased $284 million to $528 million for the year ended December 31, 2019 , compared to $244 million in the prior year, driven by the incremental impact in the current year from the DPS Merger in the prior year.

Adjusted Net Sales.

Adjusted net sales increased $22 million , or 4.3% , to $528 million for the year ended December 31, 2019 compared to Adjusted pro forma net sales of $506 million in the prior year, driven by higher net price realization of 4.5% .

Unfavorable foreign currency translation also impacted the period by 0.2% .

Sales volume for the year ended December 31, 2020 increased 0.4% compared to the prior year, driven by Squirt.

Net sales decreased $31 million, or 5.9% to $497 million for the year ended December 31, 2020, compared to $528 million in the prior year, driven primarily by unfavorable FX translation of 9.7%.

Excluding the unfavorable impact of FX translation, net sales increased as a result of higher net price realization of 5.8%, partially offset by unfavorable volume/mix of 2.0%.

Income from Operations.

Income from operations was $85 million for the year ended December 31, 2019 , compared to $29 million in the prior year, driven by the incremental impact in the current year from the DPS Merger in the prior year including the favorable comparison to the $9 million impact of the inventory step-up associated with the DPS Merger in the prior year and productivity savings.

Income from operations increased $20 million, or 23.5%, to $105 million for the year ended December 31, 2020, compared to $85 million in the prior year, driven by higher net price realization, continued productivity and lower discretionary expenses, primarily marketing, partially offset by unfavorable FX effects (FX translation and transaction), unfavorable volume/mix, inflation in logistics and the comparison to a real estate gain in the prior year.

Operating margin increased 500 bps versus the prior year to 21.1%.

Adjusted Income from Operations.

Adjusted income from operations decreased $1 million , or 1.2% , to $82 million for the year ended December 31, 2019 , compared to Adjusted pro forma income from operations of $83 million in the prior year.

This performance reflected net sales growth and productivity savings, partially offset by inflation in input costs, energy and logistics, higher general and administrative expenses and unfavorable foreign currency transaction.

Additionally, the change reflected the unfavorable comparison to a $6 million benefit related to a previous reimbursement by a resin supplier in the prior year.

Adjusted operating margin declined 90 bps from the prior year to 15.5% .

Adjusted income from operations increased $26 million, or 31.7%, to $108 million for the year ended December 31, 2020, compared to $82 million in the prior year.

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

Adjusted operating margin grew 620 bps versus the prior year to 21.7%.

LIQUIDITY AND CAPITAL RESOURCES

Trends and Uncertainties Affecting Liquidity

Customer and consumer demand for our products may be impacted by all risk factors discussed in Item 1A, "Risk Factors" that could have a material effect on production, delivery and consumption of our products in the U.S.

, Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume.

Our financial condition and liquidity remain strong.

Net cash provided by operations was $2,456 million for the year ended December 31, 2020 compared to $2,474 million for the prior year.

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 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.

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations and our $3.9 billion borrowing capacity currently available under our existing KDP Revolver and 2020 364-Day Credit Agreement.

Additionally, we have an uncommitted commercial paper program where we can issue up to $2.4 billion of unsecured commercial paper notes on a private placement basis, which provides us significant flexibility and short-term liquidity.

We believe this level of liquidity enables us to more than meet our commitments, even in a prolonged economic downturn, as we continue to exercise financial discipline to ensure our long-term financial health.

Refer to Note 3 of the Notes to our Consolidated Financial Statements for management's discussion of these financing arrangements.

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

Uncertainties and Trends Affecting Liquidity

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.

Customer and consumer demand for our products may additionally be impacted by all risk factors discussed in Item 1A, "Risk Factors" that could have a material effect on production, delivery and consumption of our products in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume.

Similarly, disruptions in financial and credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors.

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

our ability to access our other financing arrangements, including the KDP Revolver and 364-Day Credit Agreement , which have availability of $3,150 million as of December 31, 2019 ;

our continued optimization of our operations;

a significant downgrade in our credit ratings could impact our accounts payable program and may reduce flexibility of our business to engage in certain transactions, such as the execution and renewal of certain leases;

our continued capital expenditures;

• Our ability to access our other financing arrangements, including the KDP Revolver and the 2020 364-Day Credit Agreement, which have availability of $3,900 million as of December 31, 2020;

• A significant downgrade in our credit ratings could limit a financial institution's willingness to participate in our accounts payable program and reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions;

• Our continued payment of dividends;

• Our continued capital expenditures;

• 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.

Financing Arrangements

Refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for management's discussion of financing arrangements.

LIBOR Considerations

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Financial Conduct Authority announced that LIBOR will no longer be published after 2021.

, the Alternative Reference Rates Committee selected the Secured Overnight Financing Rate as the preferred alternative reference rate to LIBOR .

We have a number of financing arrangements which incorporate LIBOR as a benchmark rate and which extend past 2021, including the 2019 KDP Term Loan Agreement and the KDP Revolver .

In the U.S., the Alternative Reference Rates Committee selected the Secured Overnight Financing Rate as the preferred alternative reference rate to LIBOR.

In December 2020, it was announced that certain LIBOR rates will continue to be published through June 30, 2023.

We have a number of financing arrangements which incorporate LIBOR as a benchmark rate and which extend past 2021, including the 2019 KDP Term Loan and the KDP Revolver.

The agreements related to such financing arrangements contain provisions for alternative reference rates, and we do not expect a significant change to our cost of debt as a result of the transition from LIBOR to an alternative reference rate.

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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 Periods:

The following table summarizes our cash activity:

Year Ended December 31,

Three Months Ended December 31,

Fiscal Year Ended September 30,

(in millions) 2020 2019 2018

Net cash provided by operating activities $ 2,456 $ 2,474 $ 1,613

Net cash (used in) provided by investing activities

Net cash provided by (used in) financing activities

Net cash used in investing activities (316) (150) (19,131)

Net cash (used in) provided by financing activities (1,990) (2,364) 17,577

NET CASH PROVIDED BY OPERATING ACTIVITIES

Net cash provided by operating activities increased $861 million for the year ended December 31, 2019 as compared to year ended December 31, 2018 , primarily due to additional cash flows from operations generated as a result of the DPS Merger .

The increase in net cash provided by operating activities was driven by the increase in net income adjusted for non-cash items and the improvement in working capital primarily driven by extended payment terms with our suppliers, partially offset by the payment and deferral of customer incentives.

As of December 31, 2019 , the Company deferred estimated tax payments of $59 million, which were paid in January 2020, as compared to no deferral of estimated tax payments as of December 31, 2018 .

Net cash provided by operating activities decreased $18 million for the year ended December 31, 2020 as compared to year ended December 31, 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 December 31, 2020, we had no deferred estimated tax payments, as compared to deferred estimated tax payments as of December 31, 2019 of $59 million, which were paid in January 2020.

Beginning in the second quarter of 2020 and continuing through the rest of the year, we 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 December 31, 2020, we have deferred a total of $59 million in such payments.

Cash Conversion Cycle

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The calculation of each component of the cash conversion cycle is provided below:

Calculation (on a trailing twelve month basis)

(Average inventory divided by cost of sales) * Number of days in the period

(Accounts receivable divided by net sales) * Number of days in the period

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

Our cash conversion cycle increased 1 day to approximately (46) days as of December 31, 2019 as compared to (47) days as of December 31, 2018 .

Component Calculation (on a trailing twelve month basis)

DIO (Average inventory divided by cost of sales) * Number of days in the period

DSO (Accounts receivable divided by net sales) * Number of days in the period

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

Our cash conversion cycle declined (17) days to approximately (63) days as of December 31, 2020 as compared to (46) days as of December 31, 2019.

The following table summarizes our cash conversion cycle:

Cash conversion cycle (63) (46)

In future periods, DPO is expected to have a positive impact on our cash conversion cycle as a result of our supplier terms initiative, which has set our customary terms as we integrate our legacy businesses.

For the year ending December 31, 2021, DPO is expected to have a positive impact on our cash conversion cycle as a result of our supplier terms initiative, which has set our customary terms as we integrate our legacy businesses.

Accounts Payable Program

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

As of December 31, 2019 and December 31, 2018 , $2,097 million and $1,438 million , respectively, of our outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

We have been informed by the third party administrator that as of December 31, 2020 and December 31, 2019, $2,578 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 $2,770 million and $1,745 million for the years ended December 31, 2020 and 2019, respectively.

NET CASH USED IN INVESTING ACTIVITIES

Cash used in investing activities for the year ended December 31, 2020 was primarily driven by our purchases of property, plant and equipment of $461 million and purchases of intangible assets of $56 million, which was partially 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 year ended December 31, 2019 was primarily driven by our purchases of property, plant and equipment of $330 million, partially offset by proceeds of $247 million from sales of property, plant and equipment, primarily driven by our asset sale-leaseback transactions.

Other drivers of cash used investing activities included $35 million for purchases of intangible assets, primarily the reacquisition of distribution rights, and advances of $32 million to Bedford under its line of credit with us.

Cash used in investing activities for the year ended December 31, 2018 consisted primarily of our business acquisitions of the DPS Merger , the Big Red Acquisition and the Core Acquisition of $19,114 million , net of cash acquired of $169 million , and purchases of property, plant and equipment of $180 million .

NET CASH USED IN (PROVIDED BY) FINANCING ACTIVITIES

Cash used in financing activities for year ended December 31, 2019 consisted primarily of the voluntary and mandatory repayments on the 2018 KDP Term Loan and 2019 KDP Term Loan of $1,203 million , dividend payments of $844 million , repayments of structured payables of $531 million and the repayment of the 2019 Notes of $250 million .

NET CASH USED IN FINANCING ACTIVITIES

Cash used in financing activities for the year ended December 31, 2020 consisted primarily of the net repayment of $1,246 million for commercial paper notes.

We made 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 at the onset of the COVID-19 pandemic versus borrowings under our KDP Revolver.

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

Additionally, we made voluntary and mandatory repayments on the term loan facility of $955 million, dividend payments of $846 million, the repayment of the 2020 Notes of $250 million and net payments on structured payables of $170 million.

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 year ended December 31, 2019 consisted primarily of the voluntary and mandatory repayments on the 2018 KDP Term Loan and 2019 KDP Term Loan of $1,203 million, dividend payments of $844 million, repayments of structured payables of $531 million and the repayment of the 2019 Notes of $250 million.

These cash outflows from financing activities were partially offset by net issuance of commercial paper notes of $167 million and proceeds from structured payables of $330 million.

Net cash provided by financing activities for year ended December 31, 2018 consisted primarily of proceeds from the issuance of common stock of $9,000 million , issuance of unsecured notes of $8,000 million , proceeds from the 2018 KDP Term Loan of $2,700 million and net issuance of commercial paper notes of $1,080 million .

These cash inflows from financing activities were partially offset by repayments on the 2018 KDP Term Loan of $3,447 million .

These activities were used to accommodate the DPS Merger and reflect subsequent repayments since the DPS Merger .

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

Rating Agency

Long-Term Debt Rating

Commercial Paper Rating

Date of Last Change

Rating Agency Long-Term Debt Rating Commercial Paper Rating Outlook

Moody's Baa2 P-2 Negative

S&P BBB A-2 Stable

These debt and commercial paper ratings impact the interest we pay on our financing arrangements.

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Capital Expenditures

Capital expenditures were $330 million and $180 million for the years ended December 31, 2019 and 2018 , respectively.

Purchases of property, plant and equipment were $461 million and $330 million for the years ended December 31, 2020 and 2019, respectively.

Capital expenditures, which includes purchases of property, plant and equipment and amounts reflected in accounts payable and accrued expenses, for the year ended December 31, 2020 primarily related to our continued investment in state-of-the-art manufacturing facilities and equipment through the build-out of our Spartanburg manufacturing facility, the purchase of real estate in Ireland and the associated build out of the manufacturing facility and the build-out of our Allentown manufacturing facility.

Capital expenditures for the year ended December 31, 2019 primarily related to manufacturing equipment, our continued investment in the construction of our new Spartanburg facility in South Carolina and information technology infrastructure.

Capital expenditures for the year ended December 31, 2018 were primarily related to machinery and equipment, information technology infrastructure, logistics equipment and replacement of existing cold drink equipment.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents decreased $28 million to $111 million as of December 31, 2019 compared to $139 million as of December 31, 2018 .

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $144 million to $255 million as of December 31, 2020 compared to $111 million as of December 31, 2019.

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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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 contractual obligations and contingencies as of December 31, 2019 :

Refer to Note 3 of the Notes to our Consolidated Financial Statements for obligations related to our senior unsecured notes and our KDP Credit Agreements.

Refer to Note 9 of the Notes to our Consolidated Financial Statements for future minimum lease commitments.

The following table summarizes our contractual obligations as of December 31, 2020:

Payments Due in Year

(in millions)

Long-term obligations (1)

(in millions) Total 2021 2022 2023 2024 2025 After 2025

Interest payments $ 5,266 $ 504 $ 457 $ 406 $ 349 $ 326 $ 3,224

Finance leases (2)

Operating leases (3)

Purchase obligations (1)

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

Please refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for additional information.

Amounts represent our contractual payment obligations for our lease arrangements classified as finance leases.

These amounts exclude renewal options, which were not yet executed but were included in the lease term to determine finance lease obligation as the lease imposes a penalty on us in such amount that the renewal appeared reasonably assured at lease inception.

Refer to Note 4 for additional information .

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

Refer to Note 4 for additional information

1,893 1,131 296 178 110 91 87

(1) 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.

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The table above does not reflect any payments related to these amounts as it is not possible to make a reasonable estimate of the amount or timing of the payment.

Refer to Note 7 of the Notes to our Audited Consolidated Financial Statements for further information.

Refer to Note 7 of the Notes to our Consolidated Financial Statements for further information.

The total accrued benefit liability representing the underfunded position for pension recognized as of December 31, 2020 was approximately $25 million.

This amount is impacted by, among other items, funding levels, plan amendments, changes in plan assumptions and the investment return on plan assets.

We did not include estimated payments related to our total accrued benefit liability in the table above.The Pension Protection Act of 2006 was enacted in August 2006 and established, among other things, new standards for funding of U.S.

We did not include estimated payments related to our total accrued benefit liability in the table above.

The Pension Protection Act of 2006 was enacted in August 2006 and established, among other things, new standards for funding of U.S.

defined benefit pension plans.

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However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material to our consolidated financial statements.

See Note 2 of the Notes to our Audited Consolidated Financial Statements for a discussion of these and other accounting policies.

Judgments and Uncertainties

Effect if Actual Results Differ from Assumptions

See Note 2 of the Notes to our Consolidated Financial Statements for a discussion of these and other accounting policies.

Goodwill and Other Indefinite Lived Intangible Assets

For goodwill and other indefinite lived intangible assets, we conduct tests for impairment annually, as of October 1, or more frequently if events or circumstances indicate the carrying amount may not be recoverable.

We conduct tests for impairment of our goodwill and our other indefinite lived intangible assets annually, as of October 1, or more frequently if events or circumstances indicate the carrying amount may not be recoverable.

We use present value and other valuation techniques to make this assessment.

If the carrying amount of goodwill or an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

For purposes of impairment testing we assign goodwill to the reporting unit that benefits from the synergies arising from each business combination and also assign indefinite lived intangible assets to our reporting units.

We define our six reporting units (in italics below) as the following:

Packaged Beverages

Coffee Systems

Beverage Concentrates

Latin America Beverages

For both goodwill and other indefinite lived intangible assets, we have the option to first assess qualitative factors to determine whether the fair value of either the reporting unit or indefinite lived intangible asset is not "more likely than not" less than its carrying value ("Step 0").

For purposes of impairment testing, we assign goodwill to the reporting unit that benefits from the synergies arising from each business combination, and we also assign indefinite lived intangible assets to our reporting units.

We define our six reporting units as the following:

Segments Reporting Units

Packaged Beverages DSD

Coffee Systems Coffee Systems US

Coffee Systems Canada

Beverage Concentrates Beverage Concentrates

Latin America Beverages Latin America Beverages

If a quantitative analysis is required, the following would be required:

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If the carrying value exceeds the estimated fair value, impairment is recorded.

- The impairment tests for goodwill include comparing a fair value of the respective reporting unit with its carrying value, including goodwill and considering any indefinite lived intangible asset impairment charges.

For our detailed impairment analysis, we used an income based approach to determine the fair value of our assets, as well as an overall consideration of market capitalization and our enterprise value.

• The impairment tests for goodwill include comparing fair value of the respective reporting unit with its carrying value, including goodwill and considering any indefinite lived intangible asset impairment charges.

For the year ended December 31, 2020, we performed a quantitative analysis, whereby we used an income approach, or in some cases a combination of income and market based approaches, to determine the fair value of our assets, as well as an overall consideration of market capitalization and enterprise value.

These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies.

These assumptions could be negatively impacted by various risks discussed in "Risk Factors" in this Annual Report on Form 10-K.

Critical assumptions for quantitative analyses include revenue growth and profit performance, including the achievability of synergies, over the next six year period, as well as an appropriate discount rate, long term growth rate and royalty rates, as applicable.

These assumptions could be negatively impacted by various risks discussed in Item 1A, Risk Factors , in this Annual Report on Form 10-K.

Critical assumptions for quantitative analyses include revenue growth and profit performance, including the achievability of productivity and synergies, over the next five year period, as well as an appropriate discount rate, long term growth rate and royalty rates, as applicable.

Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums.

For 2019, such discount rates ranged from 7.25% to 13.00%.

Long term growth rates are based on the long-term inflation forecast, industry growth and the long-term economic growth potential.

For 2019, the long term growth rates ranged from 0.0% to 2.5%.

Royalty rates are based on observable market participant information.

For 2019, such royalty rate used in the impairment analysis of trade names ranged from 7.5% to 10.0%.

The following table provides the range of rates used in the analysis as of October 1, 2020:

Rate Minimum Maximum

Discount rates 6.0 % 10.0 %

Long-term growth rates — % 3.5 %

Royalty rates 1.0 % 10.0 %

The carrying values of goodwill and indefinite lived intangible assets as of December 31, 2020, were $20,184 million and $22,534 million , respectively.

We have not identified any impairments in goodwill or indefinite lived intangible assets during the Periods presented.

During the year ended December 31, 2020, the Company recorded an impairment of $ 67 million for the indefinite lived brand asset of Bai.

No other impairment of goodwill or indefinite lived intangible assets was identified during the year ended December 31, 2020, and no impairment was identified in each of the years ended December 31, 2019 and 2018.

Sensitivity Analysis - Discount Rate

For goodwill, holding all other assumptions in the analysis constant, including the revenue and profit performance assumption, the effect of a 0.50% increase in the discount rate used to determine the fair value of the reporting units as of October 1, 2020, would not change our conclusion.

For the indefinite-lived brands, holding all other assumptions in the analysis constant, including the revenue and profit performance assumption, the effect of a 0.50% increase in the discount rate used to determine the fair value of our brands as of October 1, 2019 would impact the amount of headroom over the carrying value of our brands as follows (in millions):

Carrying Value

Headroom Percentage

For the indefinite-lived intangible assets, holding all other assumptions in the analysis constant, including the revenue and profit performance assumption, the effect of a 0.50% increase in the discount rate used to determine the fair value of our brands and trade names as of October 1, 2020, would impact the amount of headroom over the carrying value of our brands and trade names as follows (in millions):

Selected Discount Rate Discount Rate Increase of 0.50%

Headroom Percentage Carrying Value Fair Value Carrying Value Fair Value

Potential impairment (1)

$ 482 $ 415 $ 1,070 $ 948

0 - 10% 588 625 3,575 3,693

11 - 25% 4,464 5,150 2,986 3,492

26 - 50% 2,261 2,993 10,916 15,867

In excess of 50% 11,946 19,835 1,194 2,130

For the indefinite-lived trade names, holding all other assumptions in the analysis constant, including the revenue and profit performance assumption, the effect of a 0.50% increase in the discount rate used to determine the fair value of our trade names as of October 1, 2019 would impact the amount of headroom over the carrying value of our trade names as follows (in millions):

Carrying Value

Headroom Percentage

$ 19,741 $ 29,018 $ 19,741 $ 26,130

Potential impairment $ — $ — $ — $ —

0 - 10% 1 1 1 1

11 - 25% — — — —

26 - 50% — — — —

In excess of 50% 2,479 6,990 2,479 6,420

Judgments and Uncertainties

Effect if Actual Results Differ from Assumptions

$ 2,480 $ 6,991 $ 2,480 $ 6,421

(1) The amounts listed in the Selected Discount Rate columns represent the carrying value of Bai as of the October 1, 2020 measurement date, prior to the $67 million impairment recorded during the fourth quarter of 2020.

Sensitivity Analysis - Long-Term Growth Rate

For goodwill, holding all other assumptions in the analysis constant, including the discrete period revenue and profit performance assumptions as well as the discount rates, the effect of a 0.50% decrease in the long-term growth rate used to determine the fair value of the reporting units as of October 1, 2020, would not change our conclusion.

For the indefinite-lived intangible assets, holding all other assumptions in the analysis constant, including the discrete period revenue and profit performance assumptions as well as the discount rates, the effect of a 0.50% decrease in the long-term revenue growth rate used to determine the fair value of our brands and trade names as of October 1, 2020, would impact the amount of headroom over the carrying value of our brands and trade names as follows (in millions):

Selected Long-Term Growth Rate Long-Term Growth Rate Decrease of 0.50%

Headroom Percentage Carrying Value Fair Value Carrying Value Fair Value

Potential impairment (1)

$ 482 $ 415 $ 1,070 $ 968

0 - 10% 588 625 3,603 3,805

11 - 25% 4,464 5,150 2,644 3,142

26 - 50% 2,261 2,993 3,060 4,269

In excess of 50% 11,946 19,835 9,364 14,570

$ 19,741 $ 29,018 $ 19,741 $ 26,754

Potential impairment $ — $ — $ — $ —

0 - 10% 1 1 1 1

11 - 25% — — — —

26 - 50% — — — —

In excess of 50% 2,479 6,990 2,479 6,540

$ 2,480 $ 6,991 $ 2,480 $ 6,541

(1) The amounts listed in the Selected Long-Term Growth Rate columns represent the carrying value of Bai as of the October 1, 2020 measurement date, prior to the $67 million impairment recorded during the fourth quarter of 2020.

Revenue Recognition

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Differences between estimated expenses and actual costs are normally insignificant and are recognized to earnings in the period differences are determined.

Further judgment is required to ensure the classification of the spend is correctly recorded as either a reduction from gross sales or advertising and marketing expense, which is a component of our SG&A expenses.

A 10% change in the accrual for our customer incentives, sales returns and marketing programs as of December 31, 2019, would have affected our income from operations by $36 million for the year ended December 31, 2019.

Additionally, judgment is required to ensure the classification of the spend is correctly recorded as either a reduction from gross sales or advertising and marketing expense, which is a component of our SG&A expenses.

A 10% change in the accrual for our customer incentives, sales returns and marketing programs would have affected our income from operations by $38 million for the year ended December 31, 2020.

We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following:

(1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount, or (3) the tax position is “more likely than not” to be sustained , but not in the financial period in which the tax position was originally taken.

We assess the likelihood of realizing our deferred tax assets.

Valuation allowances reduce deferred tax assets to the amount more likely than not to be realized.

• the tax position is not “more likely than not” to be sustained,

• the tax position is “more likely than not” to be sustained, but for a lesser amount, or

• the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken.

Our liability for uncertain tax positions contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various tax positions.

We base our judgment of the recoverability of our deferred tax assets primarily on historical earnings, our estimate of current and expected future earnings and prudent and feasible tax planning strategies.

Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities.

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A favorable tax settlement may be recognized as a reduction in our effective tax rate in the period of resolution.

We also assess the likelihood of realizing our deferred tax assets.

Valuation allowances reduce deferred tax assets to the amount more likely than not to be realized.

If results differ from our assumptions, a valuation allowance against deferred tax assets may be increased or decreased which would impact our effective tax rate.

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Significant assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset, if applicable.

If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements may be exposed to potential impairment of the intangible assets and goodwill, as discussed in the Goodwill and Other Indefinite Lived Intangible Assets critical accounting estimate section.

If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the consolidated financial statements may be exposed to potential impairment of the intangible assets and goodwill, as discussed in the Goodwill and Other Indefinite Lived Intangible Assets critical accounting estimate section above.

OFF-BALANCE SHEET ARRANGEMENTS

We currently participate in three multi-employer pension plans.

In the event that we withdraw from participation in one of these plans, the plan will ultimately assess us a withdrawal liability for exiting the plan, and U.S.

Distribution Rights Associated with Residual Value Guarantee

On December 28, 2020, one of our third-party bottlers sold their manufacturing and distribution rights to Veyron SPE.

Subsequently, we entered into a distribution arrangement with Veyron SPE, which provided us access to distribute certain CSD beverages, such as Canada Dry, 7UP and A&W in a number of counties in New York and New Jersey in exchange for a fixed service fee and a residual value guarantee.

As a result of the residual value guarantee, Veyron SPE was determined to be a VIE;

however, we did not consolidate the VIE as we were not the primary beneficiary.

Since the agreement provided us immediate distribution access without reacquiring ownership of the distribution rights asset and includes a guarantee on the assets of Veyron SPE, we believe this is an off-balance sheet arrangement.

Revenues and expenses related to the arrangement for the year ended December 31, 2020 were not significant.

Refer to Note 16 of the Notes to our Consolidated Financial Statements for additional information.

Multi-Employer Pension Plans

We currently participate, and have in the past participated, in multi-employer pension plans in the U.S.

If, in the future, we choose to withdraw from participation in one of these plans, or we are deemed to have withdrawn from any of the multi-employer pension plans in which we currently participate or have participated in the past, the plan will assess us a withdrawal liability for exiting the plan, and U.S.

GAAP would require us to record the withdrawal charge as an expense in our consolidated statements of income and as a liability on our consolidated balance sheets once the multi-employer pension withdrawal charge is probable and estimable.

Refer to Note 8 of the Notes to our Audited Consolidated Financial Statements for additional information regarding our multi-employer pension plans.

Refer to Note 10 of the Notes to our Consolidated Financial Statements for additional information regarding our multi-employer pension plans.

There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our results of operations, financial condition, liquidity, capital expenditures or capital resources other than letters of credit outstanding.

Refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for additional information regarding outstanding letters of credit.

Refer to Note 3 of the Notes to our Consolidated Financial Statements for additional information regarding outstanding letters of credit.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 of the Notes to our Audited Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S.

SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION AND NON-GAAP FINANCIAL MEASURES

Supplemental Unaudited Pro Forma Combined Financial Information

The following unaudited pro forma combined financial information is presented to illustrate the estimated effects of the DPS Merger , which was consummated on July 9, 2018, for the year ended December 31, 2018 based on the historical results of operations of DPS and Maple .

See Notes 1 and 3 of our Notes to our Audited Consolidated Financial Statements for additional information on the DPS Merger .

The following unaudited pro forma combined statements of income for the year ended December 31, 2018 are based on the historical financial statements of DPS and Maple after giving effect to the DPS Merger , related equity investments, and the assumptions and adjustments described in the accompanying notes to these unaudited pro forma combined statements of income.

The KDP ( Maple ) statement of income information for the year ended December 31, 2018 was derived from the audited consolidated financial statements included elsewhere in this Form 10-K.

The unaudited pro forma combined statements of income set forth below primarily give effect to the following assumptions and adjustments:

Application of the acquisition method of accounting;

The issuance of Maple common stock to JAB in connection with the equity investments;

The conversion of Maple Parent Corporation into KDP shares in accordance with the Merger Agreement;

The pre-closing Maple share conversion;

The exchange of one share of KDP common stock for each share of DPS common stock;

The change in year-end for Maple ;

The alignment of accounting policies.

The unaudited pro forma combined financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition.

We utilized estimated fair values at the Merger Date for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed.

The unaudited pro forma combined financial information has been prepared and presented in a form consistent with SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results.

In addition, the accompanying unaudited pro forma combined statements of income do not reflect any anticipated synergies, operating efficiencies, cost savings or any integration costs that may result from the DPS Merger .

The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma combined statements of income to give effect to unaudited pro forma events that are (1) directly attributable to the DPS Merger , (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of KDP.

As a result, under SEC Regulation S-X Article 11, certain expenses such as transaction costs and costs associated with the impact of the step-up of inventory related to the DPS Merger are eliminated from pro forma results in all periods presented.

In contrast, under the U.S.

GAAP presentation in Note 3, Acquisitions and Investments in Unconsolidated Subsidiaries , these expenses are required to be included in prior year pro forma results.

See Note 3 of the Notes to our Audited Consolidated Financial Statements for additional information.

The unaudited pro forma combined financial information, including the related notes, should be read in conjunction with the historical consolidated financial statements and related notes of DPS , and with our Audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Keurig Dr Pepper Inc.

Pro Forma Condensed Combined Statement of Income

For the Year Ended December 31, 2018

(in millions, except per share data)

Reported KDP (1)

January 1 - July 8, 2018 (2)

Pro Forma Adjustments (3)

Pro Forma Combined

Cost of sales

Selling, general and administrative expenses

Other operating expense (income), net

Refer to Note 2 of the Notes to our Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S.

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The Notes are fully and unconditionally guaranteed by certain of our direct and indirect subsidiaries (the "Guarantors"), as defined in the indentures governing the Notes.

The Guarantors are 100% owned either directly or indirectly by us and jointly and severally guarantee, subject to the release provisions described below, our obligations under the Notes.

None of our subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries held by Maple Parent Holdings Corp.

prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee the Notes.

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

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

the Parent and the Guarantors' amounts due from;

amounts due to, and transactions with Non-Guarantors are disclosed separately.

The consolidating schedules are provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.

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

(in millions) For the Year Ended December 31, 2020

Net sales $ 6,636

Income from operations 1,262

Interest expense

Interest expense - related party

Loss on early extinguishment of debt

Other expense (income), net

Income before provision for income taxes

Provision for income taxes

Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards

Net income attributable to KDP 1,325

Earnings per common share:

Weighted average common shares outstanding:

Refer to the Statements of Income , which includes DPS activity subsequent to the Merger Date.

Refers to DPS activity during the year ended December 31, 2018 prior to the Merger Date.

Refer to Summary of Pro Forma Adjustments .

Keurig Dr Pepper Inc.

Reconciliation of Pro Forma Segment Information

(in millions)

Reported KDP (1)

January 1 - July 8, 2018 (2)

Pro Forma Adjustments (3)

Pro Forma Combined

For the Year Ended December 31, 2018

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Total net sales

Income from Operations

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Unallocated Corporate

Total income from operations

Refer to the Statements of Income , which includes DPS activity subsequent to the Merger Date.

Refers to DPS activity during the year ended December 31, 2018 prior to the Merger Date.

Refer to Summary of Pro Forma Adjustments .

Summary of Pro Forma Adjustments

Pro forma adjustments included in the Pro Forma Combined Statements of Income for the year ended December 31, 2018 are as follows:

A decrease in Net sales to remove the historical deferred revenue associated with DPS ' arrangements with PepsiCo and Coca-Cola , which were eliminated in the fair value adjustments for DPS as part of purchase price accounting.

An increase in Net sales to remove the historical amortization of certain capitalized upfront customer incentive program payments.

These were eliminated in the fair value adjustments for DPS as these upfront payments were revalued within the customer relationship intangible assets recorded in purchase price accounting.

Adjustment to remove the impact of the step-up of inventory recorded in purchase price accounting.

Adjustments to SG&A expenses due to changes in amortization as a result of the fair value adjustments for DPS ' intangible assets with definite lives as part of purchase price accounting.

Adjustments to SG&A expenses due to changes in depreciation as a result of the fair value adjustments for DPS ' property, plant and equipment as part of purchase price accounting.

A decrease to SG&A expenses for both DPS and Maple to remove non-recurring transaction costs as a result of the DPS Merger .

Removal of the Interest expense - related party caption for Maple , as the related party debt was capitalized into Additional paid-in capital immediately prior to the DPS Merger .

Adjustments to Interest expense to remove the historical amortization of deferred debt issuance costs, discounts and premiums and to record incremental amortization as a result of the fair value adjustments for DPS ' senior unsecured notes as part of purchase price accounting.

Adjustments to Interest expense to record incremental interest expense and amortization of deferred debt issuance costs for borrowings related to the DPS Merger .

Removal of the Net income attributable to employee redeemable NCI and mezzanine equity awards caption as the Maple non-controlling interest was eliminated to reflect the capital structure of KDP.

(in millions) December 31, 2020 December 31, 2019

Current assets (1)

$ 1,810 $ 1,404

Non-current assets 43,333 43,501

Current liabilities (2)

$ 5,148 $ 3,942

Non-current liabilities 16,164 17,707

(1) Includes $423 million and $241 million of current intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of December 31, 2020 and December 31, 2019, respectively.

(2) Includes $30 million and $20 million of current intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of December 31, 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 in this report selected unaudited pro forma combined financial information for the year ended December 31, 2018 .

We also present (i) Adjusted pro forma net sales, (ii) Adjusted pro forma income from operations, (iii) Adjusted pro forma net income and (iv) Adjusted pro forma diluted EPS, which are considered non-GAAP financial measures.

This pro forma financial information and non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S.

GAAP, we have presented for the years ended December 31, 2020 and 2019 (i) Adjusted income from operations, (ii) Adjusted interest expense, (iii) Adjusted provision for income taxes, (iv) Adjusted net income attributable to KDP and (v) 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.

The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way.

The adjusted measures are not substitutes for their comparable U.S.

GAAP financial measures, such as net sales, income from operations, net income, diluted EPS, or other measures prescribed by U.S.

GAAP financial measures, such as income from operations, net income, diluted EPS, or other measures prescribed by U.S.

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

For the year ended December 31, 2019 , we define our Adjusted non-GAAP financial measures as certain financial statement captions and metrics adjusted for certain items affecting comparability, while for the year ended December 31, 2018 , we define our Adjusted non-GAAP financial measures as certain pro forma financial statement captions and metrics adjusted for certain items affecting comparability.

For the years ended December 31, 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.

Items affecting comparability:

Defined as certain items that are excluded for comparison to prior year periods, adjusted for the tax impact as applicable.

Defined as certain items that are excluded for comparison to the prior year, adjusted for the tax impact as applicable.

Tax impact is determined based upon an approximate rate for each item.

For each period, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S.

For each year, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S.

GAAP and do not have an offsetting risk reflected within the financial results;

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(iv) the amortization of the fair value adjustment of the senior unsecured notes obtained as a result of the DPS Merger;

(v) stock compensation expense attributable to the matching awards made to employees who made an initial investment in the EOP or the Keurig Dr Pepper Omnibus Incentive Plan of 2009;

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

For the year ended December 31, 2019 , the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition ;

(ii) productivity expenses;

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

(iv) provision for legal settlements;

(v) the impact of the step-up of acquired inventory not associated with the DPS Merger (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, as discussed in our 2018 Annual Report on Form 10-K.

For the year ended December 31, 2018 , the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition ;

(v) stock compensation expense attributable to the matching awards made to employees who made an initial investment in the EOP, the 2009 Incentive Plan or the 2019 Incentive Plan;

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

For the year ended December 31, 2020, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations;

(ii) productivity expenses;

(iii) provisions for legal settlements;

(iii) costs related to significant non-routine legal matters;

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

and (v) tax reform associated with the TCJA .

For the year ended December 31, 2019 , the supplemental financial data set forth below includes reconciliations of Adjusted net sales, 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 year ended December 31, 2018 , the supplemental financial data set forth below includes reconciliations of Adjusted pro forma net sales, Adjusted pro forma income from operations, Adjusted pro forma net income and Adjusted pro forma diluted EPS to the applicable financial measure presented in the unaudited pro forma condensed combined financial statements for the same period.

For a reconciliation of the applicable financial measure presented in the unaudited pro forma condensed combined financial statement for the year ended December 31, 2018 to the applicable historical financial measure presented in accordance with U.S.

GAAP , please see "Supplemental Unaudited Pro Forma Condensed Combined Financial Information" above.

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

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

and (vii) impairment recognized on the Bai brand.

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

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

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

For the year ended December 31, 2019, 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 non-routine legal matters;

(v) the impact of the step-up of acquired inventory not associated with the DPS Merger;

(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 years ended December 31, 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 consolidated financial statement for the same year.

KEURIG DR PEPPER INC.

2 unchanged sentences

(Unaudited, in millions, except per share data)

Cost of sales

Selling, general and administrative expenses

Other operating expense (income), net

Income from operations

Operating margin

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Impairment of intangible assets Income from operations Operating margin

Reported $ 5,132 $ 6,486 55.8 % $ 3,978 $ 67 $ 2,480 21.3 %

Items Affecting Comparability:

3 unchanged sentences

Restructuring and integration costs — — (199) — 199

Transaction costs

Inventory step-up

Provision for legal settlements

Malware Incident

Adjusted GAAP

Interest expense

Loss on early extinguishment of debt

Income before provision for income taxes

Provision for income taxes

Effective tax rate

Weighted Average Diluted shares

Diluted earnings per share

Productivity (29) 29 (99) — 128

Impairment of intangible assets — — — (67) 67

Non-routine legal matters — — (57) — 57

COVID-19 (44) 44 (84) — 128

Adjusted $ 5,092 $ 6,526 56.2 % $ 3,374 $ — $ 3,191 27.5 %

Interest expense Impairment on investments and note receivable Loss on early extinguishment of debt Income before provision for income taxes Provision for income taxes Effective tax rate Net income Weighted Average Diluted shares Diluted earnings per share

Reported $ 604 $ 102 $ 4 $ 1,753 $ 428 24.4 % $ 1,325 1,422.1 $ 0.93

Items Affecting Comparability:

5 unchanged sentences

Restructuring and integration costs — — — 199 49 150 0.11

Transaction costs

Productivity — — — 128 33 95 0.07

Impairment on intangible asset — — 67 15 52 0.04

Loss on early extinguishment of debt — — (4) 4 1 3 —

Inventory step-up

Provision for legal settlements

Malware Incident

Adjusted GAAP

Investment impairment — (102) — 102 25 77 0.05

Non-routine legal matters — — — 57 14 43 0.03

COVID-19 — — — 128 31 97 0.07

Adjusted $ 542 $ — $ — $ 2,632 $ 644 24.5 % $ 1,988 1,422.1 $ 1.40

Diluted EPS may not foot due to rounding.

3 unchanged sentences

(Unaudited, in millions, except per share data)

Cost of sales

Selling, general and administrative expenses

Other operating expense (income), net

Income from operations

Operating margin

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Other operating (income) expense, net Income from operations Operating margin

Reported $ 4,778 $ 6,342 57.0 % $ 3,962 $ 2 $ 2,378 21.4 %

Items Affecting Comparability:

3 unchanged sentences

Restructuring and integration costs (1) 1 (216) (25) 242

Productivity (15) 15 (60) (22) 97

Transaction costs — — (9) — 9

Provision for legal settlements

Non-routine legal matters — — (48) — 48

Inventory step-up (3) 3 — — 3

Adjusted Pro Forma

Interest expense

Loss on early extinguishment of debt

Other expense (income), net

Income before provision for income taxes

Provision for income taxes

Effective tax rate

Weighted Average Diluted shares

Diluted earnings per share

Malware incident (2) 2 (6) — 8

Adjusted $ 4,792 $ 6,328 56.9 % $ 3,483 $ (45) $ 2,890 26.0 %

Interest expense Loss on early extinguishment of debt Income before provision for income taxes Provision for income taxes Effective tax rate Net income Weighted Average Diluted shares Diluted earnings per share

Reported $ 654 $ 11 $ 1,694 $ 440 26.0 % $ 1,254 1,419.1 $ 0.88

Items Affecting Comparability:

5 unchanged sentences

Restructuring and integration costs 1 — 241 55 186 0.13

Productivity — — 97 24 73 0.05

Transaction costs (16) — 25 7 18 0.01

Loss on early extinguishment of debt — (11) 11 2 9 0.01

Provision for legal settlements

Non-routine legal matters — — 48 11 37 0.02

Inventory step-up — — 3 1 2 —

Adjusted Pro Forma

Numbers may not foot due to rounding.

Malware incident — — 8 2 6 —

Adjusted $ 553 $ — $ 2,318 $ 591 25.5 % $ 1,727 1,419.1 $ 1.22

Diluted EPS may not foot due to rounding.

KEURIG DR PEPPER INC.

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

(in millions)

Items Affecting Comparability

Adjusted GAAP

(in millions) Reported Items Affecting Comparability Adjusted

For the Year Ended December 31, 2020

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Total net sales

Income from Operations

5 unchanged sentences

Total income from operations $ 2,480 $ 711 $ 3,191

(in millions)

Items Affecting Comparability

Adjusted Pro Forma

(in millions) Reported Items Affecting Comparability Adjusted

For the Year Ended December 31, 2019

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Total net sales

Income from Operations

6 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis