What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-29 · 305 added, 623 removed, 286 unchanged (76% of the section changed)

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Given these uncertainties, you should not put undue reliance on any forward-looking statements.

All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report and in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as our subsequent filings with the SEC .

All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report, as well as our subsequent filings with the SEC.

Forward-looking statements represent our estimates and assumptions only as of the date that they were made.

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

KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSD s, NCB s, 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.

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, 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.

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, which are available nearly everywhere people shop and consume beverages.

KDP operates as an integrated brand owner, manufacturer and distributor.

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COFFEE SYSTEMS

Our Coffee Systems segment is primarily a producer of innovative single serve brewing systems and specialty coffee in the U.S.

Our brewing systems are aimed at changing the way consumers prepare and enjoy coffee and other beverages, both at home and away from home in places such as offices, restaurants, cafeterias, convenience stores and hotels.

We develop and sell a variety of Keurig brewers, brewer accessories and other coffee-related equipment.

In addition to coffee, we produce and sell a variety of other specialty beverages in K-Cup pod s (including hot and iced teas, hot cocoa and other beverages) for use with Keurig brewing systems.

We also offer traditional whole bean and ground coffee in other package types, including bags, fractional packages and cans.

Our Coffee Systems segment is primarily a producer of innovative single serve brewers and specialty coffee in the U.S.

Our Coffee Systems segment manufactures over 75% of the pods in the single-serve K-Cup pod format in the U.S.

We manufacture and sell 100% of the K-Cup pod s of our own brands, such as Green Mountain Coffee Roasters, The Original Donut Shop, Laughing Man, REVV, and Van Houtte.

We have licensing and manufacturing agreements with our partner brands, including brands such as Starbucks, Dunkin' Donuts, Folgers, Newman’s Own Organics, McCafé, Peet's Coffee, Caribou Coffee, Eight O’Clock, Maxwell House, and Tim Hortons, and private label arrangements.

Our Coffee Systems segment also has agreements for manufacturing, distributing, and selling K-Cup pod s for tea under brands such as Celestial Seasonings, Lipton and Tazo in addition to K-Cup pod s of our own brand, Snapple.

We also produce and sell K-Cup pod s for cocoa, including through a licensing agreement for the Swiss Miss brand, and hot apple cider.

Our Coffee Systems segment manufactures its K-Cup pod s in facilities in North America that include specialty designed proprietary high-speed packaging lines using freshly roasted and ground coffee as well as tea, cocoa and other products.

We manufacture and sell 100% of the K-Cup pods of the following brands to retailers, away from home channel participants and end-use consumers:

Green Mountain Coffee Roasters, The Original Donut Shop, McCafé, Laughing Man, REVV, and Van Houtte.

We manufacture and sell K-Cup pods for the following brands to our partners, who in turn sell them to retailers:

Starbucks, Smuckers, Peet's, Dunkin' Donuts, Folgers, Newman’s Own Organics, Caribou Coffee, Eight O’Clock, Maxwell House, and Tim Hortons, as well as private label arrangements.

Generally, we are able to sell these brands to our away from home channel participants and end-use consumers.

We also have agreements for manufacturing, distributing, and selling K-Cup pods for tea under brands such as Celestial Seasonings, Lipton and Tazo in addition to K-Cup pods of our own brand, Snapple.

We also produce and sell K-Cup pods for cocoa, including through a licensing agreement for the Swiss Miss brand, and hot apple cider, including under our own brand, Mott's.

Our Coffee Systems segment manufactures its K-Cup pods in facilities in North America that include specialty designed proprietary high-speed packaging lines using freshly roasted and ground coffee as well as tea, cocoa and other products.

We offer high-quality coffee, including certified single-origin, organic, flavored, limited edition and proprietary blends.

We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences.

We engineer and design most of our single serve brewing systems, where we then utilize third-party contract manufacturers located in various countries in Asia for brewer appliance manufacturing.

We distribute our Coffee Systems products using third-party distributors, retail partners and through e-commerce, including our website at www.keurig.com.

We engineer and design most of our single serve brewers, where we then utilize third-party contract manufacturers located in various countries in Asia for brewer appliance manufacturing.

We distribute our brewers using third-party distributors, retail partners and through our website at www.keurig.com.

PACKAGED BEVERAGES

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

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

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

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

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

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

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

The majority of our Packaged Beverages net sales come from the manufacturing and distribution of our own brands and the contract manufacturing of certain private label and emerging brand beverages.

We also recognize net sales in this segment from the distribution of our partner brands such as evian, Vita Coco, Peet's RTD Coffee, A Shoc energy drinks, Runa energy drinks and Polar sparkling seltzer waters.

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

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and are sold or distributed to retailers and their warehouses by our own distribution network or by third party distributors.

We sell our Packaged Beverages products through our DSD and our WD systems, both of which include sales to all major retail channels, including supermarkets, fountains, mass merchandisers, club stores, e-commerce, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.

We sell our Packaged Beverages products through our DSD and our WD systems, both of which include sales to all major retail channels.

BEVERAGE CONCENTRATES

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Louis, Missouri.

Beverage concentrates are shipped to third party bottlers, as well as to our own manufacturing systems, who combine them with carbonation, water, sweeteners and other ingredients, package the combined product in aluminum cans, PET containers and glass bottles, and sell them as a finished beverage to retailers.

Beverage concentrates are also manufactured into syrup, which is shipped to fountain customers, such as fast food restaurants, who mix the syrup with water and carbonation to create a finished beverage at the point of sale to consumers.

Dr Pepper represents most of our fountain channel volume.

Our Beverage Concentrates brands are sold by our bottlers through all major retail channels including supermarkets, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.

We are expanding our manufacturing capabilities to include a concentrate manufacturing facility in Ireland in 2021.

Dr Pepper represents most of our FFS volume.

Our Beverage Concentrates brands are sold by our bottlers through all major retail channels.

LATIN AMERICA BEVERAGES

Our Latin America Beverages segment is a brand ownership, manufacturing and distribution business, with operations in Mexico representing approximately 90% of the segment's 2020 net sales.

This segment participates mainly in carbonated mineral water, flavored CSD , bottled water and vegetable juice, with particular strength in carbonated mineral water, vegetable juice categories and grapefruit flavored CSD s.

The largest brands include Peñafiel, Squirt, Clamato, Aguafiel and Crush.

In Mexico, we manufacture and distribute our products through our bottling operations and third party bottlers and distributors.

We sell our finished beverages through all major Mexican retail channels, including small outlets, supermarkets, hypermarkets, convenience stores and on-premise channels.

In the Caribbean, we distribute our products through third party bottlers and distributors.

We have also begun to distribute certain products in other international jurisdictions through various third party bottlers and distributors.

In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, K-Cup pod s or brewers.

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.

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.

This segment participates mainly in the carbonated mineral water, flavored CSD, bottled water and vegetable juice categories.

The largest brands include Peñafiel, Clamato, Squirt, Aguafiel and Crush.

In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, K-Cup pods or brewers.

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 pods sold to our customers.

Packaged Beverages and Latin America Beverages Sales Volume

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Case sales include both our owned brands and certain brands licensed to and/or distributed by us.

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.

Beverage Concentrates Sales Volume

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.

COMPARABLE RESULTS OF OPERATIONS

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Impact of COVID-19 on our Financial Statements

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

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

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

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

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

On March 11, 2021, the world marked the one-year anniversary of the date that the World Health Organization declared COVID-19 a global pandemic.

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

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

Brewer volume advanced significantly reflecting growth in purchases of brewers due to successful innovation and investments to drive household penetration.

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

• Packaged Beverages delivered strong net sales driven by strong in-market execution that resulted in market share growth in the majority of the segment's beverage portfolio, despite lapping the initial pantry stock-up behavior at the onset of the COVID-19 pandemic at the end of the first quarter of 2020.

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

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

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

• Beverage Concentrates returned to growth in the quarter as volume growth in sales to bottlers and distributors was tempered by declines in the fountain foodservice business, which services restaurants and hospitality, which continues to experience softness as a result of COVID-19 but has been steadily improving as businesses begin to reopen.

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

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

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

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

• Reduced marketing expense in relation to the prior year pre-COVID-19 levels of spending, given the current COVID-19 landscape has reduced the effectiveness and return on certain marketing investments;

• Significantly reduced all other discretionary costs, such as travel and entertainment expenses, within the business.

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

Refer to the section Uncertainties and Trends Affecting our Business - COVID-19 Pandemic Disclosures below for further information.

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

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Items Affecting Comparability (1)

(in millions)

Employee Compensation Expense (2)

(in millions) Employee Compensation Expense (2)

Employee Protection Costs (3)

Allowances for Expected Credit Losses (4)

Inventory Write-Downs (5)

For the third quarter of 2020:

For the first quarter of 2021:

Coffee Systems $ 1 $ 9 $ — $ 10

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Latin America Beverages — 1 — 1

For the first nine months of 2020:

Total $ 4 $ 12 $ — $ 16

For the first quarter of 2020:

Coffee Systems $ — $ — $ 2 $ 2

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Latin America Beverages — — — —

Total $ 3 $ 2 $ 10 $ 15

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

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

(2) In 2021, includes pay for temporary employees, including the associated taxes, as well as incremental benefits provided to frontline workers such as extended sick leave, in order to maintain essential operations during the COVID-19 pandemic.

In 2020, primarily reflected temporary incremental frontline incentive pay and benefits, as well as pay for temporary employees, including the associated taxes.

Impacts both cost of sales and SG&A expenses.

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

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

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Impacts SG&A expenses.

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

Impacts cost of sales.

Financial Overview

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

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

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

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

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

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

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

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

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

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

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

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

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

Our stock ticker remains "KDP".

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

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

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

Financial Overview - First Quarter of 2021 as compared to First Quarter of 2020

As Reported, in millions (except EPS)

As Adjusted, in millions (except EPS)

Key Events During the First Quarter of 2021

In February 2021, we announced that our Board of Directors declared a regular quarterly cash dividend of $0.15 per share, payable in U.S.

dollars, on the Company’s common stock.

The regular quarterly dividend was paid on April 15, 2021 to shareholders of record on April 1, 2021.

In March 2021, we filed a prospectus supplement with the SEC to sell up to 4,300,000 shares to or through Goldman in at-the-market offerings, known as an ATM Program.

The ATM Program was completed effective March 15, 2021, and the net proceeds of approximately $140 million were primarily used to cover our obligation to remit cash to local, state and federal tax authorities in connection with the net settlement of vesting restricted stock units during the first quarter of 2021.

Use of the ATM Program to fund these tax withholding obligations is intended to create an orderly market in KDP shares being sold to cover tax obligations on behalf of employees upon the vesting of equity awards in 2021.

In March 2021, we completed the issuance of a total of $1,150 million aggregate principal amount of 2024 Notes, $500 million aggregate principal amount of 2031 Notes and $500 million aggregate principal amount of 2051 Notes.

We used the proceeds from these Notes to repay our 2021-A Notes, our 2021-B Notes, our 2022 Notes, and approximately $1 billion of our 2023 Notes, as well as to voluntarily prepay and terminate our 2019 KDP Term Loan.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS AND SEC REGULATIONS

On November 19, 2020, the SEC issued a final rule intended to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K related to Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information.

Early adoption on an item-by-item basis is permitted after February 10, 2021, the effective date of the rule, and we must apply the rule to our Form 10-K for the year ending December 31, 2021.

We early adopted the amendments to one item resulting in the elimination of Item 301, Selected Financial Data, from Part II, Item 6 of our Annual Report, and we have adopted the remaining amendments which are applicable to Form 10-Q in this Quarterly Report for the quarter ended March 31, 2021.

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

RESULTS OF OPERATIONS

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

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

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

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GAAP measures.

Third Quarter of 2020 Compared to Third Quarter of 2019

First Quarter of 2021 Compared to First Quarter of 2020

Consolidated Operations

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

Third Quarter

($ in millions, except per share amounts)

The following table sets forth our unaudited condensed consolidated results of operations for the first quarter of 2021 and 2020:

First Quarter Dollar Percentage

($ in millions, except per share amounts) 2021 2020 Change Change

Net sales $ 2,902 $ 2,613 $ 289 11.1 %

Cost of sales 1,302 1,161 141 12.1

Selling, general and administrative expenses

Other operating expense (income), net

Income from operations

Interest expense

Loss on early extinguishment of debt

Impairment on investments and note receivable

Other expense, net

Income before provision for income taxes

Provision for income taxes

Earnings per common share:

Operating margin

Effective tax rate

Sales Volume.

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

K-Cup pod volume

Brewer volume

CSD sales volume

NCB sales volume

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

Gross profit 1,600 1,452 148 10.2

Gross profit increased $79 million for the third quarter of 2020 compared with the prior year period.

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

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

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

Selling, general and administrative expenses 961 1,028 (67) (6.5)

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

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

Other Operating Expense (Income), Net.

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

Income from Operations.

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

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

Interest Expense.

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

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

Impairment on Investments and Note Receivable.

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

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

Effective Tax Rate.

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

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

taxation of foreign earnings in the current period.

Adjusted Results of Operations

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

Third Quarter

(in millions, except per share amounts)

Adjusted income from operations

Adjusted interest expense

Adjusted provision for income taxes

Adjusted net income

Adjusted diluted EPS

Adjusted operating margin

Adjusted effective tax rate

Adjusted Income from Operations.

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

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

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

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

Adjusted Interest Expense.

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

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

Adjusted Effective Tax Rate.

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

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

taxation of foreign earnings in the current period.

Adjusted Net Income.

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

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

Adjusted Diluted EPS.

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

Results of Operations by Segment

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

Third Quarter

(in millions)

Segment Results — Net sales

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Third Quarter

(in millions)

Segment Results — Income from Operations

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Unallocated corporate costs

Income from operations

COFFEE SYSTEMS

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

Third Quarter

(in millions)

Income from operations

Operating margin

Adjusted income from operations

Adjusted operating margin

Sales Volume.

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

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

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

Unfavorable FX translation also impacted the period by 0.2% .

Income from Operations.

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

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

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

Adjusted Income from Operations.

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

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

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

PACKAGED BEVERAGES

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

Third Quarter

(in millions)

Income from operations

Operating margin

Adjusted income from operations

Adjusted operating margin

Sales Volume.

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

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

Income from Operations.

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

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

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

Adjusted Income from Operations.

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

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

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

BEVERAGE CONCENTRATES

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

Third Quarter

(in millions)

Income from operations

Operating margin

Adjusted income from operations

Adjusted operating margin

Sales volume.

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

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

Income from Operations.

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

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

Adjusted Income from Operations.

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

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

LATIN AMERICA BEVERAGES

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

Third Quarter

(in millions)

Income from operations

Operating margin

Sales Volume.

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

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

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

Income from Operations .

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

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

First Nine Months of 2020 Compared to First Nine Months of 2019

Consolidated Operations

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

First Nine Months

($ in millions, except per share amounts)

Cost of sales

Selling, general and administrative expenses

Other operating expense (income), net

Other operating income, net (1) (42) 41 NM

Income from operations 640 466 174 37.3

Interest expense 140 153 (13) (8.5)

Loss on early extinguishment of debt

Impairment on investments and note receivable

Other expense, net

Loss on early extinguishment of debt 105 2 103 NM

Impairment of investments and note receivable — 86 (86) NM

Other (income) expense, net (3) 20 (23) NM

Income before provision for income taxes 398 205 193 94.1

Provision for income taxes 73 49 24 49.0

Net income $ 325 $ 156 169 108.3

Earnings per common share:

Operating margin

Effective tax rate

Basic $ 0.23 $ 0.11 $ 0.12 109.1 %

Diluted 0.23 0.11 0.12 109.1

Gross margin 55.1 % 55.6 % (50 bps)

Operating margin 22.1 % 17.8 % 430 bps

Effective tax rate 18.3 % 23.9 % (560 bps)

Sales Volume .

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

K-Cup pod volume

Brewer volume

CSD sales volume

NCB sales volume

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

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

The following table provides the percentage increase in sales volumes compared to the prior year period:

Percentage Change

K-Cup Pods 13.7 %

Net sales increased $289 million, or 11.1%, to $2,902 million for the first quarter of 2021 compared to $2,613 million in the prior year period.

This performance reflected volume/mix of 10.3%, net price realization of 0.5% and favorable FX translation of 0.3%.

Gross Profit.

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

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

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

Gross profit increased $148 million, or 10.2%, to $1,600 million for the first quarter of 2021 compared to $1,452 million in the prior year period.

This performance primarily reflected strong volume/mix and the benefit of productivity and merger synergies, partially offset by inflation in commodity costs.

Gross margin decreased 50 bps versus the year ago period to 55.1%.

Selling, General and Administrative Expenses.

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

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

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

Other Operating (Income) Expense, net.

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

SG&A expenses decreased $67 million, or 6.5%, to $961 million for the first quarter of 2021 compared to $1,028 million in the prior year period.

The decrease was driven by the favorable change in commodity mark-to-market impacts of $72 million, lower marketing expense in relation to the prior year pre-COVID-19 levels of spending and productivity and merger synergies, partially offset by inflation in logistics, higher operating costs associated with the increased shipment volume and higher professional fees.

Other Operating Income, net.

Other operating income, net had an unfavorable change of $41 million for the first quarter of 2021 compared to the prior year period, largely driven by the network optimization program gain of $42 million on the asset sale-leaseback of four facilities in the first quarter of 2020.

Income from Operations.

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

Income from operations increased $174 million, or 37.3%, to $640 million for the first quarter of 2021 compared to $466 million in the prior year period, driven by the increase in gross profit and the decrease in SG&A expenses, partially offset by the unfavorable change in other operating income, net.

Operating margin increased 430 bps versus the year ago period to 22.1%.

Interest Expense.

Interest expense decreased $39 million , or 7.8% , to $458 million for the first nine months of 2020 compared to $497 million for the prior year period.

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

Impairment on Investments and Note Receivable.

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

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

Interest expense decreased $13 million, or 8.5%, to $140 million for the first quarter of 2021 compared to $153 million for the prior year period.

This change was primarily the result of the favorable change in unrealized interest rate swap mark-to-market impacts of $32 million, partially offset by the unfavorable comparison to the realized benefit of unwinding several interest rate swap contracts in the prior year period.

Loss on Early Extinguishment of Debt.

Loss on early extinguishment of debt reflected expense of $105 million during the first quarter of 2021 due to our strategic refinancing initiatives.

Impairment of Investments and Note Receivable.

Impairment on investments and note receivable reflected a favorable comparison to a non-cash impairment charge of $86 million in the prior year period associated with our Bedford investment.

Effective Tax Rate.

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

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

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

The effective tax rate decreased 560 bps to 18.3% for the first quarter of 2021, compared to 23.9% in the prior year period, primarily driven by the tax benefit received from excess tax deductions that were generated from the vesting of RSUs.

Net income increased $169 million, or 108.3%, to $325 million for the first quarter of 2021 as compared to $156 million in the prior year period, driven by improved income from operations and reduced interest expense, as well as the favorable comparison to the impairment on investments and note receivable in the first quarter of 2020, partially offset by the loss on early extinguishment of debt in the first quarter of 2021.

Diluted EPS increased 109.1% to $0.23 per diluted share as compared to $0.11 in the prior year period.

Adjusted Results of Operations

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

First Nine Months

(in millions, except per share amounts)

The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the first quarter of 2021 and 2020:

First Quarter Dollar Percent

(in millions, except per share amounts) 2021 2020 Change Change

Adjusted income from operations $ 741 $ 684 $ 57 8.3 %

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Adjusted diluted EPS 0.33 0.29 0.04 13.8

Adjusted operating margin

Adjusted effective tax rate

Adjusted operating margin 25.5 % 26.2 % (70 bps)

Adjusted effective tax rate 22.1 % 25.0 % (290 bps)

Adjusted Income from Operations.

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

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

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

Adjusted operating margin grew 210 bps versus the year ago period to 27.5% .

Adjusted income from operations increased $57 million, or 8.3%, to $741 million for the first quarter of 2021 compared to Adjusted income from operations of $684 million in the prior year period.

Driving this performance in the current period were strong volume/mix, the benefit of productivity and merger synergies, which impacted both SG&A and cost of sales, and lower marketing expense in relation to the prior year pre-COVID-19 levels of spending.

Partially offsetting these positive drivers were higher manufacturing costs and operating costs, driven by inflation in commodities and logistics, increases in employee costs and professional fees, and an unfavorable comparison to a network optimization program gain of $42 million on the asset-sale leaseback of four facilities in the prior year period.

Adjusted operating margin declined 70 bps versus the year ago period to 25.5%.

Adjusted Interest Expense.

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

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

Adjusted interest expense increased $19 million, or 15.8%, to $139 million for the first quarter of 2021 compared to Adjusted interest expense of $120 million in the prior year period, driven by the unfavorable comparison to the realized benefit of unwinding several interest rate swap contracts in the first quarter of 2020.

Adjusted Effective Tax Rate.

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

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

The Adjusted effective tax rate decreased 290 bps to 22.1% for the first quarter of 2021, compared to 25.0% in the prior year period, primarily driven by the tax benefit received from excess tax deductions that were generated from the vesting of RSUs.

Adjusted Net Income.

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

Adjusted net income increased 15.4% to $471 million for the first quarter of 2021 as compared to Adjusted net income of $408 million in the prior year period.

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

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Results of Operations by Segment

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

(in millions)

First Nine Months

The following tables provide net sales and income from operations for our reportable segments for the first quarter of 2021 and 2020, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S.

(in millions) First Quarter

Segment Results — Net sales 2021 2020

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Latin America Beverages 125 117

First Nine Months

Net sales $ 2,902 $ 2,613

First Quarter

(in millions) 2021 2020

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

First Nine Months

(in millions)

First Quarter Dollar Percent

(in millions) 2021 2020 Change Change

Net sales $ 1,142 $ 973 $ 169 17.4 %

Income from operations 336 272 64 23.5

Operating margin

Operating margin 29.4 % 28.0 % 140 bps

Adjusted income from operations 389 347 42 12.1

Adjusted operating margin

Adjusted operating margin 34.1 % 35.7 % (160 bps)

Sales Volume.

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

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

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

Unfavorable FX translation also impacted the period by 0.1% .

Sales volume growth in the first quarter of 2021 compared to the prior year period for the Coffee Systems segment included strong K-Cup pod volume growth of 13.7%, reflecting strength in at-home consumption which was tempered by continued softness in the away-from-home business due to the COVID-19 pandemic.

Brewer volume increased 61.4% in the first quarter of 2021, as compared to a decline of 2.4% in the year-ago period, driven by our successful brewer innovation program as well as a benefit from shipment timing.

Net sales increased 17.4% to $1,142 million for the first quarter of 2021 compared to $973 million in the prior year period, driven by strong volume/mix of 19.5% and favorable FX translation of 0.5%, partially offset by lower net price realization of 2.6%.

Income from Operations.

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

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

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

Income from operations increased $64 million, or 23.5%, to $336 million for the first quarter of 2021, compared to $272 million in the prior year period, driven by strong volume/mix and the continued benefit of productivity and merger synergies, as well as reduced costs to achieve those productivity and merger synergies.

These benefits were partially offset by declines due to strategic pricing initiatives, the unfavorable comparison to a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility in the prior year period, inflation in packaging and raw materials and $10 million of increased charges due to COVID-19.

Operating margin grew 140 bps versus the year ago period to 29.4%.

Adjusted Income from Operations.

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

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

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

Adjusted income from operations increased $42 million, or 12.1%, to $389 million for the first quarter of 2021, compared to $347 million in the prior year period, driven by strong volume/mix and the continued benefit of productivity and merger synergies.

Adjusted operating margin declined 160 bps versus the year ago period to 34.1%, primarily reflecting unfavorable mix due to the strong brewer growth and the unfavorable comparison to the gain on an asset sale-leaseback in the prior year.

PACKAGED BEVERAGES

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

First Nine Months

(in millions)

First Quarter Dollar Percent

(in millions) 2021 2020 Change Change

Net sales $ 1,307 $ 1,217 $ 90 7.4 %

Income from operations 175 189 (14) (7.4)

Operating margin

Operating margin 13.4 % 15.5 % (210 bps)

Adjusted income from operations 197 203 (6) (3.0)

Adjusted operating margin

Adjusted operating margin 15.1 % 16.7 % (160 bps)

Sales Volume.

Sales volume for the first nine months of 2020 increased 8.0% compared to the prior year period, reflecting the impact of COVID-19 which displayed strength in CSDs, juice and juice drinks, premium water and apple sauce, driven by heightened consumer demand the first nine months of 2020 .

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

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

Sales volume for the first quarter of 2021 increased 3.8% compared to the prior year period, driven by strength in CSDs which was partially offset by the unfavorable comparison to the stock-up behavior in the first quarter of 2020 related to COVID-19.

Net sales increased 7.4% to $1,307 million in the first quarter of 2021, compared to $1,217 million in the prior year period, driven by volume/mix of 6.8%, net price realization of 0.4% and favorable FX translation of 0.2%.

Income from Operations.

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

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

These growth drivers were partially offset by $103 million in COVID-19 charges, higher manufacturing and operating costs, such as logistics and labor, associated with the strong consumer demand and the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year period.

Operating margin grew 200 bps versus the year ago period to 16.2% .

Income from operations decreased $14 million, or 7.4%, to $175 million for the first quarter of 2021 compared to $189 million for the prior year period, driven primarily by the unfavorable comparison to a network optimization gain of $26 million in the prior year period related to the asset sale-leaseback of three facilities, inflation, led by commodity costs and logistics, increased operating costs due to higher volumes and expenses associated with productivity projects.

These decreases were partially offset by strong volume/mix growth and the benefit of productivity and merger synergies.

Operating margin declined 210 bps versus the year ago period to 13.4%.

Adjusted Income from Operations.

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

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

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

Adjusted operating margin grew 430 bps versus the year ago period to 19.1% .

Adjusted income from operations decreased $6 million, or 3.0%, to $197 million for the first quarter of 2021 compared to $203 million for the prior year period, driven primarily by the unfavorable comparison to a network optimization gain of $26 million in the prior year period related to the asset sale-leaseback of three facilities, inflation, led by commodity costs and logistics, and increased operating costs due to higher volumes.

These decreases were partially offset by strong volume/mix growth and productivity and merger synergies.

Adjusted operating margin declined 160 bps versus the year ago period to 15.1%, primarily reflecting the aforementioned asset sale-leaseback gain in the year-ago period.

BEVERAGE CONCENTRATES

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

First Nine Months

(in millions)

First Quarter Dollar Percent

(in millions) 2021 2020 Change Change

Net sales $ 328 $ 306 $ 22 7.2 %

Income from operations 238 197 41 20.8

Operating margin

Operating margin 72.6 % 64.4 % 820 bps

Adjusted income from operations 239 197 42 21.3

Adjusted operating margin

Adjusted operating margin 72.9 % 64.4 % 850 bps

Sales Volume.

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

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

Sales volume for the first quarter of 2021 increased 1.0% compared to the prior year period.

Sales to our bottlers and distributors increased compared to the prior year period.

This increase was partially offset by declines in sales volume for our fountain foodservice business, which services restaurants and hospitality, which continue to experience softness as a result of COVID-19 with sequential improvements over recent periods as businesses begin to reopen.

Net sales increased 7.2% to $328 million in the first quarter of 2021, compared to $306 million in the prior year period, reflecting net price realization of 7.2% and favorable FX translation of 0.7%, partially offset by lower volume/mix of 0.7%.

Income from Operations.

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

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

Income from operations increased $41 million, or 20.8%, to $238 million for the first quarter of 2021 compared to $197 million in the prior year period.

This performance reflected higher net price realization and lower marketing expenses in relation to the prior year pre-COVID-19 levels of spending .

Operating margin increased 820 bps versus the year ago period to 72.6%.

Adjusted Income from Operations.

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

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

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

Adjusted income from operations increased $42 million, or 21.3%, to $239 million for the first quarter of 2021 compared to $197 million in the prior year period.

This performance reflected higher net price realization and lower marketing expenses in relation to the prior year pre-COVID-19 levels of spending.

Adjusted operating margin increased 850 bps versus the year ago period to 72.9%, primarily reflecting the favorable net price realization.

LATIN AMERICA BEVERAGES

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

First Nine Months

(in millions)

First Quarter Dollar Percent

(in millions) 2021 2020 Change Change

Net sales $ 125 $ 117 $ 8 6.8 %

Income from operations 22 27 (5) (18.5)

Operating margin

Operating margin 17.6 % 23.1 % (550 bps)

Adjusted income from operations 23 27 (4) (14.8)

Adjusted operating margin

Adjusted operating margin 18.4 % 23.1 % (470 bps)

Sales Volume.

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

Net sales decreased $34 million , or 8.6% , to $361 million for the first nine months of 2020 compared to $395 million in the prior year period, driven primarily by unfavorable FX translation of 10.9% .

Excluding the unfavorable impact of FX translation, net sales increased as a result of higher net price realization of 5.7% , partially offset by unfavorable volume/mix of 3.4% .

Sales volume for the first quarter of 2021 as compared to the prior year period decreased 0.4%, as increases in Peñafiel were more than offset by declines in Aguafiel and Crush.

Net sales grew 6.8% to $125 million for the first quarter of 2021, compared to $117 million in the prior year period, reflecting net price realization of 10.3%.

This growth was partially offset by unfavorable volume/mix of 2.6% and unfavorable FX translation of 0.9%.

Income from Operations .

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

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

Income from operations decreased $5 million, or 18.5%, to $22 million for the first quarter of 2021 compared to $27 million in the prior year period, driven by unfavorable FX effects (FX translation and transaction) and unfavorable volume/mix, partially offset by higher net price realization.

Operating margin decreased 550 bps versus the year ago period to 17.6%.

Adjusted Income from Operations.

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

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

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

Adjusted income from operations decreased $4 million, or 14.8%, to $23 million for the first quarter of 2021 compared to $27 million in the prior year period, driven by unfavorable FX effects (FX translation and transaction) and unfavorable volume/mix, partially offset by higher net price realization.

Adjusted operating margin declined 470 bps versus the year ago period to 18.4%, primarily reflecting the unfavorable impact of FX transaction.

UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS

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

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

COVID-19 Pandemic Disclosures

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

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

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

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

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

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

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

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

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

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

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

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

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 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 includes additional 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 pandemic have impacted and could continue to impact our operations.

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

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

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

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

The pandemic has not materially impacted our liquidity position.

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 and Capital Resources for more information.

We do not believe our operating and intangible assets are impaired as a result of COVID-19.

For additional information on risk factors that could impact our results, please refer to Risk Factors in Part II, Item 1A of this Form 10-Q.

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

CRITICAL ACCOUNTING ESTIMATES

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LIQUIDITY AND CAPITAL RESOURCES

Overview and Our Financing Arrangements

Our financial condition and liquidity remain strong.

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

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

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

Net cash provided by operations was $546 million for the first quarter of 2021 compared to $414 million for the prior year period.

Although there is continued uncertainty related to the 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 over the course of the pandemic to strengthen our balance sheet leave us well positioned to manage our business.

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 through our integration and productivity initiatives, and developing new opportunities for growth such as innovation and agreements with partners to distribute brands that are accretive to our portfolio.

The following summarizes our cash activity for the first quarter of 2021 and 2020:

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $94 million from December 31, 2020 to March 31, 2021 as cash generated from our operations outpaced the impact of dividends and deleveraging.

Cash generated by our foreign operations is generally repatriated to the U.S.

periodically as working capital funding requirements in those jurisdictions allow.

Foreign cash balances were $177 million and $165 million as of March 31, 2021 and December 31, 2020, respectively.

Principal Sources of Capital Resources

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from our operations and borrowing capacity currently available under our KDP Revolver and 2021 364-Day Credit Agreement.

Additionally, we have an uncommitted commercial paper program where we can issue unsecured commercial paper notes on a private placement basis.

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

During March 2020, as a result of market stress and a dislocation in the commercial paper market driven by the COVID-19 pandemic, we chose to repay $1,000 million of commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver .

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

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

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

As a result of these two actions, we have increased our liquidity to a level that we believe 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 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of these new financing arrangements.

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

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

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

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

First Nine Months

(in millions)

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

NET CASH PROVIDED BY OPERATING ACTIVITIES

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

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

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

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

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

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

Sources of Liquidity - Operations

Net cash provided by operating activities increased $132 million for the first quarter of 2021, as compared to first quarter of 2020, driven by the increase in net income adjusted for non-cash items, partially offset by a decline in working capital.

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

The change was primarily driven by an increase of 19 days in our DPO as the DPS operations had significantly shorter terms than the legacy KGM business, which have been steadily increasing as we continue to focus on our accounts payable program.

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

September 30,

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 improved 19 days to approximately 66 days as of March 31, 2021 as compared to 47 days in the prior year period.

The following table summarizes our cash conversion cycle:

Cash conversion cycle (66) (47)

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

We have been informed by the third party administrator that as of September 30, 2020 and December 31, 2019 , $2,442 million and $2,097 million , respectively, of our outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

The amounts settled through the program and paid to the financial institutions were $2,022 million and $1,208 million for the first nine months of 2020 and 2019 , respectively.

NET CASH USED IN INVESTING ACTIVITIES

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

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

NET CASH USED IN FINANCING ACTIVITIES

Cash used in financing activities for the first nine months of 2020 consisted primarily of the net repayment of $911 million for commercial paper notes, which was primarily a result of the decision to repay commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver .

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

Additionally, we made voluntary and mandatory repayments on the term loan facility of $880 million , repayment of the 2020 Notes of $250 million , dividend payments of $635 million and net payments on structured payables of $162 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 first nine months of 2019 consisted primarily of the voluntary and mandatory repayments on the term loan facility of $873 million , repayment of the 2019 Notes of $250 million , repayments of structured payables of $432 million and dividend payments of $633 million .

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

We have been informed by the third party administrator that as of March 31, 2021 and December 31, 2020, $2,777 million and $2,578 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 $698 million and $557 million for the first quarter of 2021 and 2020, respectively.

Impact of the Cares Act

Beginning in the second quarter of 2020, 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 January 3, 2022, with the remainder due by January 3, 2023.

As of March 31, 2021, we have deferred a total of $59 million in such payments.

Sources of Liquidity - Financing

During the first quarter of 2021, we undertook a strategic refinancing and issued $2,150 million aggregate face value of Notes, consisting of $1,150 million aggregate principal amount of 0.750% 2024 Notes, $500 million aggregate principal amount of 2.250% 2031 Notes, and $500 million aggregate principal amount of 3.350% 2051 Notes.

The proceeds from the issuance were used to voluntarily prepay several tranches of our existing Notes and our 2019 KDP Term Loan in order to take advantage of current market conditions to refinance our debt maturities at more attractive interest rates, while also extending the duration of our debt.

In March 2021, we also terminated our 2020 364-Day Credit Agreement, which would have expired in April 2021, and replaced it with our 2021 364-Day Credit Agreement, which has a term-out option allowing us to extend the maturity date by converting the facility into a term loan agreement for an additional one-year term.

Additionally, in March 2021, we filed a prospectus supplement with the SEC in order to sell up to 4,300,000 shares to or through Goldman in at-the-market offerings, known as an ATM Program.

The ATM Program was completed effective March 15, 2021, and the net proceeds of approximately $ 140 million were primarily used to cover our obligation to remit cash to local, state and federal tax authorities in connection with the net settlement of vesting restricted stock units during the first quarter of 2021.

Commissions and fees paid under the ATM program were less than $1 million for the first quarter of 2021.

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

We also have an active shelf registration statement, filed with the SEC on August 27, 2019, which allows us to issue an indeterminate number or amount of common stock, preferred stock, debt securities and warrants from time to time in one or more offerings at the direction of our Board of Directors.

As of March 31, 2021, our credit ratings were as follows:

Rating Agency Long-Term Debt Rating Commercial Paper Rating Outlook Date of Last Change

Moody's Baa2 P-2 Stable February 26, 2021

S&P BBB A-2 Stable May 14, 2018

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

A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.

As of March 31, 2021, we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.

Principal Uses of Capital Resources

Our principal uses of our capital resources following the DPS Merger are deleveraging, providing shareholder return to our investors through dividends, and investing in KDP to capture market share and drive growth through innovation and routes to market.

Deleveraging and Other Debt Repayments

In 2018, management set deleveraging targets for a 2-3 year time period following the DPS Merger in order to optimize our balance sheet, and we continue to be focused on achieving those targets within that time frame.

Since the DPS Merger, we have made net repayments of $3,295 million of our Notes, our commercial paper and our other credit agreements, including $120 million for the first quarter of 2021.

In May 2021, our $ 1,750 million 2021 Merger Notes will be repaid at maturity, using cash generated from operations and, as needed, issuance of variable-rate debt available to us through the various KDP Credit Agreements, including commercial paper.

In February 2021, we announced that our Board of Directors approved a 25% increase in our annualized dividend rate to $0.75 per share, from the current annualized rate of $0.60 per share, effective with the Company’s regular quarterly dividend to be announced in the second quarter of 2021, subject to official declaration by the Board of Directors.

We additionally announced that our Board of Directors declared a regular quarterly cash dividend of $0.15 per share, payable in U.S.

dollars, on our common stock.

The regular quarterly dividend was paid on April 15, 2021 to shareholders of record on April 1, 2021.

Capital Expenditures

We have significantly invested in state-of-the-art manufacturing and warehousing facilities, including expansive investments in new facilities in Spartanburg, South Carolina;

Newbridge, Ireland;

and Allentown, Pennsylvania, in order to optimize our supply chain network through integration and productivity projects.

Purchases of property, plant and equipment were $95 million and $151 million for the first quarter of 2021 and 2020, respectively.

Capital expenditures, which includes both purchases of property, plant and equipment and amounts included in accounts payable and accrued expenses, for the first quarter of 2021 primarily related to our continued investment in the build-out of our Allentown manufacturing facility, the build out of the Ireland facility and build-out of our Spartanburg manufacturing facility.

Capital expenditures included in accounts payable and accrued expenses were $259 million for the first quarter of 2021, which primarily related to these investments.

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

Capital expenditures included in accounts payable and accrued expenses was $177 million for the first quarter of 2020, which primarily related to these investments.

As we begin to move past the three-year period after the DPS Merger, we expect that total capital expenditures will be approximately 3% of net sales on an annualized basis.

Purchases of Intangible Assets

We have invested in the expansion of our DSD network through transactions with strategic independent bottlers to ensure competitive distribution scale for our brands.

These transactions are generally accounted for as an asset acquisition, as the majority of the transaction price represents the reacquisition of our distribution rights.

Purchases of intangible assets were $12 million and $15 million for the first quarter of 2021 and 2020, respectively.

Uncertainties and Trends Affecting Liquidity

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

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

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

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

Our ability to access our committed financing arrangements, including our KDP Revolver and our 2020 364-Day Credit Agreement , which have availability of $3,900 million as of October 29, 2020;

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

• Our intention to drive significant cash flow generation to enable rapid deleveraging within three years from the DPS Merger;

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, which could impact our accounts payable program;

Our continued integration of DPS;

Our continued capital expenditures;

• Our ability to access our committed financing arrangements, including our KDP Revolver and our 2021 364-Day Credit Agreement ;

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

• A significant downgrade in our credit ratings could limit i) 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, which could impact our accounts payable program;

or ii) our ability to issue debt at terms that are favorable to us;

• Our continued payment of dividends;

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

• Our continued capital expenditures;

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

• Future equity investments;

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• Fluctuations in our tax obligations.

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

Rating Agency

Long-Term Debt Rating

Commercial Paper Rating

Date of Last Change

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

A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.

Capital Expenditures

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

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

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

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

Capital expenditures included in accounts payable and accrued expenses was $236 million for the first nine months of 2019 , which primarily related to our continued investment in the build-out of our Spartanburg facility.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $107 million from December 31, 2019 to September 30, 2020 as cash generated from our operations outpaced our voluntary repayments on our term loan facility and other financing transactions.

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

Cash generated by our foreign operations is generally repatriated to the U.S.

periodically as working capital funding requirements in those jurisdictions allow.

Foreign cash balances were $89 million and $70 million as of September 30, 2020 and December 31, 2019 , respectively.

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

Contractual Commitments and Obligations

We enter into various contractual obligations that impact, or could impact, our liquidity.

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

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

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

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

Payments Due in Year

(in millions)

Interest payments

Purchase obligations (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.

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

OFF-BALANCE SHEET ARRANGEMENTS

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

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

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

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

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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 prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee 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 following schedules present the summarized financial information for Keurig Dr Pepper Inc.

(the “Parent”) and the Guarantors on a combined basis after intercompany eliminations;

the Parent and the Guarantors' amounts due from and amounts due to 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 First Nine Months of 2020

(in millions) For the First Quarter of 2021

Net sales $ 1,617

Income from operations 317

Equity in earnings of subsidiaries, net of tax

(in millions)

September 30, 2020

December 31, 2019

Net income attributable to KDP 325

(in millions) March 31, 2021 December 31, 2020

Current assets (1)

$ 2,047 $ 1,810

Non-current assets 43,636 43,333

Current liabilities (2)

$ 4,621 $ 5,148

Non-current liabilities 16,991 16,164

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

Includes $28 million and $20 million of current intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of September 30, 2020 and December 31, 2019 , respectively.

(1) Includes $408 million and $423 million of current intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of March 31, 2021 and December 31, 2020, respectively.

(2) Includes $32 million and $30 million of current intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of March 31, 2021 and December 31, 2020, respectively.

NON-GAAP FINANCIAL MEASURES

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

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

GAAP, we have presented for the first quarter of 2021 and 2020 (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.

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

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

The Company uses these non-GAAP financial measures, in addition to U.S.

GAAP financial measures, to evaluate its operating and financial performance and to compare such performance to that of prior periods and to the performance of its competitors.

Additionally, the Company uses these non-GAAP financial measures in making operational and financial decisions and in the Company’s budgeting and planning process.

The Company believes that providing these non-GAAP financial measures to investors helps investors evaluate the Company’s operating performance, profitability and business trends in a way that is consistent with how management evaluates such performance and consistent with guidance previously provided by the Company.

For the first quarter of 2021 and 2020, we define our Adjusted non-GAAP financial measures as certain financial statement captions and metrics adjusted for certain items affecting comparability.

The items affecting comparability are defined below.

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(ii) the amortization associated with definite-lived intangible assets;

(iii) the amortization of the deferred financing costs associated with the DPS Merger and the Keurig Acquisition ;

(iii) the amortization of the deferred financing costs associated with the DPS Merger;

(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 , the 2009 Incentive Plan or the 2019 Incentive Plan ;

(v) stock compensation expense and the associated windfall tax benefit attributable to the matching awards made to employees who made an initial investment in KDP;

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

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

For the first quarter of 2021, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations;

(ii) productivity expenses;

(iii) costs related to significant nonroutine legal matters;

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

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

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

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

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

and (vi) gains from insurance recoveries related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment.

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

(ii) productivity expenses;

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

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

(v) the loss on early extinguishment of debt related to the redemption of debt, (vi) incremental costs to our operations related to risks associated with the COVID-19 pandemic and (vii) impairment recognized on equity method investment with Bedford.

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

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

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

(ii) productivity expenses;

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

(iv) costs related to significant nonroutine 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 third quarter and first nine months of 2020 and 2019 , the supplemental financial data set forth below includes reconciliations of Adjusted income from operations, Adjusted net income and Adjusted diluted EPS to the applicable financial measure presented in the unaudited condensed consolidated financial statement for the same period.

KEURIG DR PEPPER INC.

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

For the Third Quarter of 2020

(Unaudited, in millions, except per share data)

Cost of sales

Selling, general and administrative expenses

Income from operations

Operating margin

Items Affecting Comparability:

Mark to market

Amortization of intangibles

Stock compensation

Restructuring and integration costs

Nonroutine legal matters

Adjusted GAAP

Interest expense

Impairment on investments and note receivable

Income before provision for income taxes

Provision for income taxes

Effective tax rate

Weighted Average Diluted shares

Diluted earnings per share

Items Affecting Comparability:

Mark to market

Amortization of intangibles

Amortization of deferred financing costs

Amortization of fair value debt adjustment

Stock compensation

Restructuring and integration costs

Investment Impairment

Nonroutine legal matters

Adjusted GAAP

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

KEURIG DR PEPPER INC.

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

For the Third Quarter of 2019

(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

Items Affecting Comparability:

Mark to market

Amortization of intangibles

Stock compensation

Restructuring and integration costs

Transaction costs

Nonroutine legal matters

Adjusted GAAP

Interest expense

Income before provision for income taxes

Provision for income taxes

Effective tax rate

Weighted Average Diluted shares

Diluted earnings per share

Items Affecting Comparability:

Mark to market

Amortization of intangibles

Amortization of deferred financing costs

Amortization of fair value debt adjustment

Stock compensation

Restructuring and integration costs

Transaction costs

Nonroutine legal matters

Adjusted GAAP

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

For the first quarter of 2021 and 2020, the supplemental financial data set forth below includes reconciliations of Adjusted income from operations, Adjusted interest expense, Adjusted provision for income taxes, Adjusted net income attributable to KDP and Adjusted diluted EPS to the applicable financial measure presented in the unaudited condensed consolidated financial statement for the same period.

KEURIG DR PEPPER INC.

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

For the First Nine Months of 2020

For the First Quarter of 2021

(Unaudited, in millions, except per share data)

Cost of sales

Selling, general and administrative expenses

Income from operations

Operating margin

Cost of sales Gross profit Gross margin

Selling, general and administrative expenses Income from operations Operating margin

Reported $ 1,302 $ 1,600 55.1 % $ 961 $ 640 22.1 %

Items Affecting Comparability:

3 unchanged sentences

Restructuring and integration costs — — (43) 43

Productivity (8) 8 (25) 33

Nonroutine legal matters — — (10) 10

Adjusted GAAP

Interest expense

Loss on early extinguishment of debt

Impairment on investments and note receivable

Income before provision for income taxes

Provision for income taxes

Effective tax rate

Weighted Average Diluted shares

Diluted earnings per share

COVID-19 (12) 12 (4) 16

Malware incident — — 2 (2)

Adjusted $ 1,291 $ 1,611 55.5 % $ 871 $ 741 25.5 %

Interest expense Loss on early extinguishment of debt Income before provision for income taxes Provision for income taxes Effective tax rate

Net income attributable to KDP Diluted earnings per share

Reported $ 140 $ 105 $ 398 $ 73 18.3 % $ 325 $ 0.23

Items Affecting Comparability:

5 unchanged sentences

Restructuring and integration costs — — 43 11 32 0.02

Productivity — — 33 8 25 0.02

Loss on early extinguishment of debt — (105) 105 25 80 0.06

Investment impairment

Nonroutine legal matters — — 10 2 8 0.01

Adjusted GAAP

COVID-19 — — 16 4 12 0.01

Malware incident — — (2) — (2) —

Adjusted $ 139 $ — $ 605 $ 134 22.1 % $ 471 $ 0.33

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

1 unchanged sentence

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

For the First Nine Months of 2019

For the First Quarter of 2020

(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 Income from operations Operating margin

Reported $ 1,161 $ 1,452 55.6 % $ 1,028 $ 466 17.8 %

Items Affecting Comparability:

3 unchanged sentences

Restructuring and integration costs — — (52) 52

Transaction costs

Productivity (16) 16 (38) 54

Nonroutine legal matters — — (9) 9

Inventory step-up

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

COVID-19 (1) 1 (4) 5

Adjusted $ 1,129 $ 1,484 56.8 % $ 842 $ 684 26.2 %

Interest expense Loss on early extinguishment of debt Impairment of investment and note receivable Income before provision for income taxes Provision for income taxes Effective tax rate Net income attributable to KDP Diluted earnings per share

Reported $ 153 $ 2 $ 86 $ 205 $ 49 23.9 % $ 156 $ 0.11

Items Affecting Comparability:

5 unchanged sentences

Restructuring and integration costs — — 52 14 38 0.03

Transaction costs

Productivity — — — 54 15 39 0.03

Loss on early extinguishment of debt — (2) — 2 — 2 —

Impairment of investment and note receivable — — (86) 86 21 65 0.05

Nonroutine legal matters — — — 9 2 7 —

Inventory step-up

Malware incident

Adjusted GAAP

COVID-19 — — — 5 1 4 —

Adjusted $ 120 $ — $ — $ 544 $ 136 25.0 % $ 408 $ 0.29

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

1 unchanged sentence

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

(in millions)

Items Affecting Comparability

Adjusted GAAP

For the third quarter of 2020:

Income from Operations

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Unallocated corporate costs

Total income from operations

For the third quarter of 2019:

Income from Operations

Coffee Systems

Packaged Beverages

Beverage Concentrates

Latin America Beverages

Unallocated corporate costs

Total income from operations

KEURIG DR PEPPER INC.

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

(in millions)

Items Affecting Comparability

Adjusted GAAP

For the first nine months of 2020:

(in millions) Reported Items Affecting Comparability Adjusted GAAP

For the first quarter of 2021:

Income from Operations

5 unchanged sentences

Total income from operations $ 640 $ 101 $ 741

For the first nine months of 2019:

For the first quarter of 2020:

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-Q

Item 2. Management’s Discussion and Analysis