Keurig Dr Pepper Inc. 10-Q

ITEM 1. Financial Statements (Unaudited) KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) First Quarter (in millions, except per share data) 2021 2020 Net sales $ 2,902 $ 2,613 Cost of sales 1,302 1,161 Gross profit 1,600 1,452 Selling, general and administrative expenses 961 1,028 Other operating income, net ( 1 ) ( 42 ) Income from operations 640 466 Interest expense 140 153 Loss on early extinguishment of debt 105 2 Impairment of investments and note receivable — 86 Other (income) expense, net ( 3 ) 20 Income before provision for income taxes 398 205 Provision for income taxes 73 49 Net income 325 156 Less: Net income attributable to non-controlling interest — — Net income attributable to KDP $ 325 $ 156 Earnings per common share: Basic $ 0.23 $ 0.11 Diluted 0.23 0.11 Weighted average common shares outstanding: Basic 1,409.2 1,407.0 Diluted 1,425.6 1,420.1 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) First Quarter (in millions) 2021 2020 Net income $ 325 $ 156 Other comprehensive income Foreign currency translation adjustments 16 ( 583 ) Net change in pension and post-retirement liability, net of tax of $ — and $ — , respectively — ( 1 ) Net change in cash flow hedges, net of tax of $ 22 and $ — , respectively 71 — Total other comprehensive income (loss) 87 ( 584 ) Comprehensive income (loss) 412 ( 428 ) Less: Comprehensive income attributable to non-controlling interest — — Comprehensive income (loss) attributable to KDP $ 412 $ ( 428 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, December 31, (in millions, except share and per share data) 2021 2020 Assets Current assets: Cash and cash equivalents $ 335 $ 240 Restricted cash and restricted cash equivalents 14 15 Trade accounts receivable, net 1,065 1,048 Inventories 841 762 Prepaid expenses and other current assets 410 323 Total current assets 2,665 2,388 Property, plant and equipment, net 2,261 2,212 Investments in unconsolidated affiliates 88 88 Goodwill 20,209 20,184 Other intangible assets, net 23,949 23,968 Other non-current assets 1,187 894 Deferred tax assets 44 45 Total assets $ 50,403 $ 49,779 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,871 $ 3,740 Accrued expenses 989 1,040 Structured payables 148 153 Short-term borrowings and current portion of long-term obligations 1,750 2,345 Other current liabilities 467 416 Total current liabilities 7,225 7,694 Long-term obligations 11,715 11,143 Deferred tax liabilities 6,025 5,993 Other non-current liabilities 1,367 1,119 Total liabilities 26,332 25,949 Commitments and contingencies Stockholders' equity: Preferred stock, $ 0.01 par value, 15,000,000 shares authorized, no shares issued — — Common stock, $ 0.01 par value, 2,000,000,000 shares authorized, 1,417,325,379 and 1,407,260,676 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively 14 14 Additional paid-in capital 21,718 21,677 Retained earnings 2,174 2,061 Accumulated other comprehensive income 164 77 Total stockholders' equity 24,070 23,829 Non-controlling interest 1 1 Total equity 24,071 23,830 Total liabilities and equity $ 50,403 $ 49,779 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) First Quarter (in millions) 2021 2020 Operating activities: Net income $ 325 $ 156 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 102 98 Amortization of intangibles 33 33 Other amortization expense 40 32 Provision for sales returns 19 7 Deferred income taxes 11 ( 5 ) Employee stock-based compensation expense 25 19 Loss on early extinguishment of debt 105 2 Gain on disposal of property, plant and equipment ( 1 ) ( 43 ) Unrealized (gain) loss on foreign currency ( 10 ) 22 Unrealized (gain) loss on derivatives ( 41 ) 43 Equity in loss of unconsolidated affiliates — 15 Impairment on investments and note receivable of unconsolidated affiliate — 86 Other, net 15 22 Changes in assets and liabilities: Trade accounts receivable ( 37 ) 42 Inventories ( 77 ) ( 38 ) Income taxes receivable and payables, net 25 ( 29 ) Other current and non-current assets ( 295 ) ( 179 ) Accounts payable and accrued expenses 121 150 Other current and non-current liabilities 186 ( 19 ) Net change in operating assets and liabilities ( 77 ) ( 73 ) Net cash provided by operating activities 546 414 Investing activities: Purchases of property, plant and equipment ( 95 ) ( 151 ) Proceeds from sales of property, plant and equipment 7 201 Purchases of intangibles ( 12 ) ( 15 ) Issuance of related party note receivable — ( 6 ) Other, net 1 5 Net cash (used in) provided by investing activities $ ( 99 ) $ 34 4 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, Continued) First Quarter (in millions) 2021 2020 Financing activities: Proceeds from issuance of common stock $ 140 $ — Proceeds from unsecured credit facility — 1,000 Proceeds from senior unsecured notes 2,150 — Net payment of commercial paper — ( 387 ) Proceeds from structured payables 35 44 Payments on structured payables ( 41 ) ( 107 ) Payments on Notes ( 1,845 ) ( 250 ) Payments on term loan ( 425 ) ( 405 ) Payments on finance leases ( 15 ) ( 13 ) Cash dividends paid ( 192 ) ( 212 ) Tax witholdings related to net share settlements ( 125 ) — Other, net ( 37 ) 2 Net cash used in financing activities ( 355 ) ( 328 ) Cash, cash equivalents, restricted cash, and restricted cash equivalents: Net change from operating, investing and financing activities 92 120 Effect of exchange rate changes 2 ( 8 ) Beginning balance 255 111 Ending balance $ 349 $ 223 Supplemental cash flow disclosures of non-cash investing activities: Capital expenditures included in accounts payable and accrued expenses $ 259 $ 177 Supplemental cash flow disclosures of non-cash financing activities: Dividends declared but not yet paid 232 212 Finance lease additions 88 10 Supplemental cash flow disclosures: Cash paid for interest 29 — Cash paid for income taxes 31 81 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents KEURIG DR PEPPER INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) Common Stock Issued Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Non-controlling Interest Total Equity (in millions, except per share data) Shares Amount Balance as of January 1, 2021 1,407.3 $ 14 $ 21,677 $ 2,061 $ 77 $ 23,829 $ 1 $ 23,830 Net income — — — 325 — 325 — 325 Other comprehensive income — — — — 87 87 — 87 Dividends declared, $ 0.15 per share — — — ( 212 ) — ( 212 ) — ( 212 ) Issuance of common stock 4.3 — 140 — — 140 — 140 Shares issued under employee stock-based compensation plans and other 5.7 — — — — — — — Stock-based compensation and stock options exercised — — ( 99 ) — — ( 99 ) — ( 99 ) Balance as of March 31, 2021 1,417.3 $ 14 $ 21,718 $ 2,174 $ 164 $ 24,070 $ 1 $ 24,071 Common Stock Issued Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Non-controlling Interest Total Equity (in millions, except per share data) Shares Amount Balance as of January 1, 2020 1,406.8 $ 14 $ 21,557 $ 1,582 $ 104 $ 23,257 $ — $ 23,257 Net income — — — 156 — 156 — 156 Other comprehensive loss — — — — ( 584 ) ( 584 ) — ( 584 ) Dividends declared, $ 0.15 per share — — — ( 211 ) — ( 211 ) — ( 211 ) Shares issued under stock-based compensation plans and other 0.3 — — — — — — — Stock-based compensation and stock options exercised — — 22 — — 22 — 22 Balance as of March 31, 2020 1,407.1 $ 14 $ 21,579 $ 1,527 $ ( 480 ) $ 22,640 $ — $ 22,640 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General ORGANIZATION References in this Quarterly Report on Form 10-Q to "KDP" or "the Company" refer to Keurig Dr Pepper Inc. and all entities included in the unaudited condensed consolidated financial statements. Definitions of terms used in this Quarterly Report on Form 10-Q are included within the Master Glossary. This Quarterly Report on Form 10-Q refers to some of KDP's owned or licensed trademarks, trade names and service marks, which are referred to as the Company's brands. All of the product names included herein are either KDP registered trademarks or those of the Company's licensors. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with KDP's consolidated financial statements and accompanying notes, included in the Company's Annual Report. Except as otherwise specified, references to the "first quarter" indicate the Company's quarterly periods ended March 31, 2021 and 2020. PRINCIPLES OF CONSOLIDATION KDP consolidates all wholly owned subsidiaries. The Company consolidates investments in companies in which it holds the majority interest. In these cases, the third party equity interest is referred to as non-controlling interest. Non-controlling interests are presented as a separate component within equity in the unaudited Condensed Consolidated Balance Sheets, and net income attributable to the non-controlling interests are presented separately in the unaudited Condensed Consolidated Statements of Income. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes KDP's proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors or similar governing body, participation in policy-making decisions and material intercompany transactions. KDP eliminates from its financial results all intercompany transactions between entities included in the unaudited condensed consolidated financial statements. USE OF ESTIMATES The process of preparing KDP's unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. These estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates . RECENTLY ADOPTED PROVISIONS OF U.S. GAAP As of January 1, 2021, the Company adopted ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The objective of the new standard is to clarify the interaction of the accounting for equity securities, investments accounted for under the equity method of accounting and the accounting for certain forward contracts and purchased options accounted for under different topics in U.S. GAAP. The adoption of the standard did not impact KDP's consolidated financial statements. 7 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 2. Long-term Obligations and Borrowing Arrangements The following table summarizes the Company 's long-term obligations: (in millions) March 31, 2021 December 31, 2020 Notes $ 13,465 $ 13,065 Term loan — 423 Subtotal 13,465 13,488 Less - current portion ( 1,750 ) ( 2,345 ) Long-term obligations $ 11,715 $ 11,143 The following table summarizes the Company's short-term borrowings and current portion of long-term obligations: (in millions) March 31, 2021 December 31, 2020 Commercial paper notes $ — $ — Revolving credit facilities — — Current portion of long-term obligations: Notes 1,750 2,246 Term loan — 99 Short-term borrowings and current portion of long-term obligations $ 1,750 $ 2,345 8 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) SENIOR UNSECURED NOTES The Company's Notes consisted of the following: (in millions, except %) Issuance Maturity Date Rate March 31, 2021 December 31, 2020 2021 Merger Notes May 25, 2021 3.551 % $ 1,750 $ 1,750 2021-A Notes November 15, 2021 3.200 % — 250 2021-B Notes November 15, 2021 2.530 % — 250 2022 Notes November 15, 2022 2.700 % — 250 2023 Merger Notes May 25, 2023 4.057 % 1,000 2,000 2023 Notes December 15, 2023 3.130 % 500 500 2024 Notes (1) March 15, 2024 0.750 % 1,150 — 2025 Merger Notes May 25, 2025 4.417 % 1,000 1,000 2025 Notes November 15, 2025 3.400 % 500 500 2026 Notes September 15, 2026 2.550 % 400 400 2027 Notes June 15, 2027 3.430 % 500 500 2028 Merger Notes May 25, 2028 4.597 % 2,000 2,000 2030 Notes May 1, 2030 3.200 % 750 750 2031 Notes March 15, 2031 2.250 % 500 — 2038 Notes May 1, 2038 7.450 % 125 125 2038 Merger Notes May 25, 2038 4.985 % 500 500 2045 Notes November 15, 2045 4.500 % 550 550 2046 Notes December 15, 2046 4.420 % 400 400 2048 Merger Notes May 25, 2048 5.085 % 750 750 2050 Notes May 1, 2050 3.800 % 750 750 2051 Notes March 15, 2051 3.350 % 500 — Principal amount $ 13,625 $ 13,225 Adjustment from principal amount to carrying amount (2) ( 160 ) ( 160 ) Carrying amount $ 13,465 $ 13,065 (1) The 2024 Notes may be called anytime on or after March 15, 2022, in whole or in part, at the Company’s option, at a redemption price equal to 100% of the principal amount being redeemed, plus accrued and unpaid interest. (2) The carrying amount includes unamortized discounts, debt issuance costs and fair value adjustments related to the DPS Merger. On March 15, 2021, the Company completed the issuance of the 2024 Notes, the 2031 Notes, and the 2051 Notes. The discount associated with these notes was approximately $ 3 million and the Company incurred $ 13 million in debt issuance costs. The net proceeds from the issuance were used to repay the Company’s 2021-A Notes, 2021-B Notes, 2022 Notes, and approximately $ 1 billion of the 2023 Merger Notes, as well as to repay and terminate the 2019 KDP Term Loan as described below. As a result of the repayments of senior unsecured notes, the Company recorded losses on early extinguishment of debt of $ 104 million during the first quarter of 2021, comprised of a make-whole premium, fair market value adjustments and deferred financing fees written off. 9 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) VARIABLE-RATE BORROWING ARRANGEMENTS The KDP Credit Agreements consist of the following: (in millions) March 31, 2021 December 31, 2020 Issuance Maturity Date Available Balances Carrying Value Carrying Value 2019 KDP Term Loan $ — $ — $ 425 KDP Revolver (1) February 2023 2,400 — — 2020 364-Day Credit Agreement — — — 2021 364-Day Credit Agreement March 2022 1,500 — — Principal amount $ — $ 425 Unamortized discounts and debt issuance costs — ( 2 ) Carrying amount $ — $ 423 (1) The KDP Revolver has $ 200 million letters of credit availability and none utilized as of March 31, 2021. As of March 31, 2021, the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements . 2019 KDP Term Loan During the first quarter of 2021, the Company voluntarily prepaid and terminated the 2019 KDP Term Loan using proceeds from the aforementioned issuance of senior subordinated notes. As a result of this voluntary prepayment, the Company recorded $ 1 million of losses on early extinguishment of debt related to the 2019 KDP Term Loan during the first quarter of 2021. 364-Day Credit Agreements During the first quarter of 2021, the Company terminated its 2020 364-Day Credit Agreement, which was originally available through April 2021. No amounts were drawn under the 2020 364-Day Credit Agreement prior to termination. The Company then entered into the 2021 364-Day Credit Agreement on March 24, 2021 among KDP, the banks party thereto and Bank of America, N.A. as administrative agent, pursuant to which the Company obtained a $ 1,500 million commitment. The interest rate applicable to borrowings under the 2021 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 1.000 % to 1.625 % or a base rate plus a margin of 0.000 % to 0.625 %, depending on the rating of certain index debt of the Company. The 2021 364-Day Credit Agreement matures on March 23, 2022, and includes a term-out option which allows KDP to extend any outstanding amounts borrowed under the agreement for one year for a fee of 0.750 % on the amounts borrowed. Commercial Paper Program T he following table provides information about the Company 's borrowings under its commercial paper program: First Quarter (in millions, except %) 2021 2020 Weighted average commercial paper borrowings $ 22 $ 1,670 Weighted average borrowing rates 0.18 % 1.85 % Letter of Credit Facility In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility. Under this facility, $ 100 million is available for the issuance of letters of credit, $ 44 million of which was utilized as of March 31, 2021 and $ 56 million of which remains available for use. FAIR VALUE DISCLOSURES The fair values of the Company's commercial paper approximate the carrying value and are considered Level 2 within the fair value hierarchy. The fair values of the Company's Notes are based on current market rates available to the Company and are considered Level 2 within the fair value hierarchy. The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all the Notes and related unamortized costs to be incurred at such date. The fair value of the Company's Notes was $ 14,828 million and $ 15,274 million as of March 31, 2021 and December 31, 2020, respectively. 10 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 3. Goodwill and Other Intangible Assets GOODWILL Changes in the carrying amount of goodwill by reportable segment are as follows: (in millions) Coffee Systems Packaged Beverages Beverage Concentrates Latin America Beverages Total Balance as of January 1, 2021 $ 9,795 $ 5,314 $ 4,536 $ 539 $ 20,184 Foreign currency translation 27 9 6 ( 17 ) 25 Balance as of March 31, 2021 $ 9,822 $ 5,323 $ 4,542 $ 522 $ 20,209 INTANGIBLE ASSETS OTHER THAN GOODWILL The net carrying amounts of intangible assets other than goodwill with indefinite lives are as follows: (in millions) March 31, 2021 December 31, 2020 Brands (1) $ 19,876 $ 19,874 Trade names 2,480 2,480 Contractual arrangements 123 123 Distribution rights 66 57 Total $ 22,545 $ 22,534 (1) The increase of $ 2 million in brands with indefinite lives was due to foreign currency translation during the first quarter of 2021. The net carrying amounts of intangible assets other than goodwill with definite lives are as follows: March 31, 2021 December 31, 2020 (in millions) Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount Acquired technology $ 1,146 $ ( 346 ) $ 800 $ 1,146 $ ( 328 ) $ 818 Customer relationships 638 ( 143 ) 495 638 ( 135 ) 503 Trade names 128 ( 74 ) 54 127 ( 69 ) 58 Contractual arrangements 24 ( 6 ) 18 24 ( 5 ) 19 Brands 21 ( 6 ) 15 21 ( 5 ) 16 Distribution rights 29 ( 7 ) 22 26 ( 6 ) 20 Total $ 1,986 $ ( 582 ) $ 1,404 $ 1,982 $ ( 548 ) $ 1,434 Amortization expense for intangible assets with definite lives was as follows: First Quarter (in millions) 2021 2020 Amortization expense $ 33 $ 33 Amortization expense of these intangible assets over the remainder of 2021 and the next five years is expected to be as follows: Remainder of 2021 For the Years Ending December 31, (in millions) 2022 2023 2024 2025 2026 Expected amortization expense $ 101 $ 134 $ 132 $ 124 $ 110 $ 105 11 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) IMPAIRMENT TESTING KDP conducts impairment tests on goodwill and all indefinite lived intangible assets annually, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. As a result of the changes to the Company’s operating segments effective January 1, 2021, as described in Note 7, which resulted in a change to the Company’s reporting units, management performed a step zero analysis as of the effective date of the goodwill for the impacted reporting units. The Company also performed an analysis as of March 31, 2021 to ensure that there were no additional triggering events which occurred during the quarter. As a result of these analyses, management did not identify any indications that the carrying amount of any goodwill or any intangible asset may not be recoverable. 4. Restructuring and Integration Costs The Company implements restructuring programs from time to time and incurs costs that are designed to improve operating effectiveness and lower costs. When the Company implements these programs, the Company incurs expenses, such as employee separations, lease terminations and other direct exit costs, that qualify as exit and disposal costs under U.S. GAAP. The Company also incurs expenses that are an integral component of, and directly attributable to, its restructuring activities, which do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments, implementation costs and other incremental costs. These costs are recorded within SG&A expenses on the income statement and are held primarily within unallocated corporate costs. DPS INTEGRATION PROGRAM As part of the DPS Merger, the Company developed a program to deliver $ 600 million in synergies over a three-year period through supply chain optimization, reduction of indirect spend through new economies of scale, elimination of duplicative support functions and advertising and promotion optimization. The Company expects to incur total cash expenditures of $ 750 million, comprised of both capital expenditures and expense, and expects to complete the program in 2021. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $ 630 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through March 31, 2021. Restructuring and integration charges on the DPS Integration Program were $ 43 million and $ 53 million for the first quarter of 2021 and 2020, respectively. Restructuring liabilities that qualify as exit and disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements. Restructuring liabilities for the DPS Integration Program, all of which were workforce reduction costs, were as follows for the period presented: (in millions) Restructuring Liabilities Balance as of January 1, 2021 $ 14 Charges to expense 13 Cash payments ( 9 ) Balance as of March 31, 2021 $ 18 5. Derivatives KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and FX rates. KDP manages these risks through a variety of strategies, including the use of interest rate contracts, FX forward contracts, commodity forward, future, swap and option contracts and supplier pricing agreements. KDP does not hold or issue derivative financial instruments for trading or speculative purposes. KDP formally designates and accounts for certain foreign exchange forward contracts that meet established accounting criteria under U.S. GAAP as cash flow hedges. For such contracts, the effective portion of the gain or loss on the derivative instruments is recorded, net of applicable taxes, in AOCI. When net income is affected by the variability of the underlying transaction, the applicable offsetting amount of the gain or loss from the derivative instrument deferred in AOCI is reclassified to net income. Cash flows from derivative instruments designated in a qualifying hedging relationship are classified in the same category as the cash flows from the hedged items. If a cash flow hedge were to cease to qualify for hedge accounting, or were terminated, the derivatives would continue to be carried on the balance sheet at fair value until settled and hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCI would be reclassified to earnings at that time. For derivatives that are not designated or for which the designated hedging relationship is discontinued, the gain or loss on the instrument is recognized in earnings in the period of change. 12 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) The Company has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically, the Company has not experienced material credit losses as a result of counterparty nonperformance. The Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines and monitors the market position of the programs upon execution of a hedging transaction and at least on a quarterly basis. INTEREST RATES Economic Hedges KDP is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate swaps to provide predictability in the Company 's overall cost structure, including both receive-fixed, pay-variable and receive-variable, pay-fixed swaps. A natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in interest expense in the unaudited Condensed Consolidated Statements of Income. As of March 31, 2021, all economic interest rate swap contracts will mature in March 2025. Cash Flow Hedges In order to hedge the variability in cash flows from interest rate changes associated with the Company’s planned future issuances of long-term debt, during the first quarter of 2021, the Company entered into forward starting swaps and designated them as cash flow hedges. The forward starting swaps are planned to be unwound at the issuance of long-term debt. As of March 31, 2021, the forward starting swaps have mandatory termination dates ranging from June 2022 to May 2025. FOREIGN EXCHANGE KDP is exposed to foreign exchange risk in its international subsidiaries, which may transact in currencies that are different from the functional currencies of those subsidiaries. The balance sheets of each of these businesses are also subject to exposure from movements in exchange rates. Economic Hedges During the first quarter of 2021 and 2020, KDP held FX forward contracts to economically manage the balance sheet exposures resulting from changes in the FX exchange rates described above. The intent of these FX contracts is to minimize the impact of FX risk associated with balance sheet positions not in local currency. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same caption of the unaudited Condensed Consolidated Statements of Income as the associated risk. These FX contracts have maturities ranging from April 2021 to September 2024 as of March 31, 2021. Cash Flow Hedges During 2020, KDP began to designate certain FX forward contracts related to inventory purchases of the Canadian and Mexican businesses as cash flow hedges in order to manage the exposures resulting from changes in the FX rates described above. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. These FX contracts, carried at fair value, have maturities ranging from April 2021 to November 2022 as of March 31, 2021. COMMODITIES Economic Hedges KDP centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. The intent of these contracts is to provide a certain level of predictability in the Company's overall cost structure. During the first quarter of 2021 and 2020, the Company held forward, future, swap and option contracts that economically hedged certain of its risks. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations. These commodity contracts have maturities ranging from April 2021 to January 2024 as of March 31, 2021. 13 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS The following table presents the notional amounts of KDP's outstanding derivative instruments by type: (in millions) March 31, 2021 December 31, 2020 Interest rate contracts Forward starting swaps, designated as cash flow hedges $ 2,500 $ — Receive-variable, pay-fixed interest rate swaps, not designated as hedging instruments 450 450 FX contracts Forward contracts, not designated as hedging instruments 505 476 Forward contracts, designated as cash flow hedges 369 333 Commodity contracts 450 450 FAIR VALUE OF DERIVATIVE INSTRUMENTS The fair values of commodity contracts, interest rate contracts and FX forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the reporting date. Interest rate contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the Company's contracts and credit risk of the counterparties. The fair value of FX forward contracts are valued using quoted forward FX prices at the reporting date. Therefore, the Company has categorized these contracts as Level 2. Not Designated as Hedging Instruments The following table summarizes the location of the fair value of the Company's derivative instruments which are not designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets. All such instruments are designated level 2 within the fair value hierarchy. (in millions) Balance Sheet Location March 31, 2021 December 31, 2020 Assets: Commodity contracts Prepaid expenses and other current assets $ 65 $ 45 Interest rate contracts Other non-current assets 2 — Commodity contracts Other non-current assets 25 12 Liabilities: Interest rate contracts Other current liabilities $ 2 $ 2 FX contracts Other current liabilities 7 6 Commodity contracts Other current liabilities 1 5 Interest rate contracts Other non-current liabilities — 7 FX contracts Other non-current liabilities 14 9 Commodity contracts Other non-current liabilities 2 2 Designated as Hedging Instruments The following table summarizes the location of the fair value of the Company's derivative instruments which are designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets. All such instruments are designated level 2 within the fair value hierarchy. (in millions) Balance Sheet Location March 31, 2021 December 31, 2020 Assets: Interest rate contracts Other non-current assets $ 92 $ — Liabilities: FX contracts Other current liabilities $ 13 $ 12 14 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) IMPACT OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS The following table presents the amount of (gains) losses recognized in the unaudited Condensed Consolidated Statements of Income related to derivative instruments not designated as hedging instruments under U.S. GAAP during the periods presented. Amounts include both realized and unrealized gains and losses. First Quarter (in millions) Income Statement Location 2021 2020 Interest rate contracts Interest expense $ ( 8 ) $ 4 FX contracts Cost of sales 4 ( 23 ) FX contracts Other (income) expense, net 5 ( 17 ) Commodity contracts Cost of sales ( 17 ) 17 Commodity contracts SG&A expenses ( 29 ) 45 Total $ ( 45 ) $ 26 IMPACT OF CASH FLOW HEDGES The following table presents the amount of loss reclassified from AOCI into the unaudited Condensed Consolidated Statements of Income related to derivative instruments designated as cash flow hedging instruments during the periods presented: First Quarter (in millions) Income Statement Location 2021 2020 Interest rate contracts Interest expense $ — $ — FX contracts Cost of sales 5 — KDP expects to reclassify approximately $ 15 million of pre-tax net losses from AOCI into net income during the next twelve months related to its FX contracts. KDP does not expect to reclassify any amounts from AOCI into net income during the next twelve months related to its interest rate contracts. 6. Leases The Company leases certain facilities and machinery and equipment, including fleet. These leases expire at various dates through 2044. Some lease agreements contain standard renewal provisions that allow the Company to renew the lease at rates equivalent to fair market value at the end of the lease term. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants, except for leases of certain manufacturing properties that contain residual value guarantees at the end of the term. KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. The following table presents the components of lease cost: First Quarter (in millions) 2021 2020 Operating lease cost $ 30 $ 28 Finance lease cost Amortization of right-of-use assets 13 11 Interest on lease liabilities 3 4 Variable lease cost (1) 8 6 Short-term lease cost — — Sublease income — ( 1 ) Total lease cost $ 54 $ 48 (1) Variable lease cost primarily consists of common area maintenance costs, property taxes, and adjustments for inflation. 15 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) The following table presents supplemental cash flow information about the Company's leases: First Quarter (in millions) 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 28 $ 26 Operating cash flows from finance leases 3 4 Financing cash flows from finance leases 15 13 The following table presents information about the Company's weighted average discount rate and remaining lease term: March 31, 2021 December 31, 2020 Weighted average discount rate Operating leases 3.8 % 4.3 % Finance leases 4.5 % 4.4 % Weighted average remaining lease term Operating leases 13 years 12 years Finance leases 11 years 11 years Future minimum lease payments for non-cancellable leases that have commenced and are reflected on the unaudited Condensed Consolidated Balance Sheets as of March 31, 2021 were as follows: (in millions) Operating Leases Finance Leases Remainder of 2021 $ 72 $ 52 2022 99 65 2023 92 59 2024 90 56 2025 84 52 2025 73 65 Thereafter 536 153 Total future minimum lease payments 1,046 502 Less: imputed interest ( 206 ) ( 86 ) Present value of minimum lease payments $ 840 $ 416 SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED As of March 31, 2021, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $ 343 million. These leases are expected to commence between the second quarter and fourth quarter of 2021, with initial lease terms ranging from 5 years to 10 years. 16 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 7. Segments Effective January 1, 2021, the Company modified its internal reporting and operating segments to reflect changes in the executive leadership team to further enhance speed-to-market and decision effectiveness. These modifications did not change the Company’s reportable segments. The Company's reportable segments consist of the following: • The Coffee Systems segment reflects sales in the U.S. and Canada of the manufacture and distribution of finished goods relating to the Company's coffee system, K-Cup pods and brewers. • The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third-party brands, through both the DSD and WD systems. DSD and WD have both been identified as operating segments that the Company aggregated into Packaged Beverages due to similar economic characteristics and similarities in the nature of finished goods sales and route-to-markets. • The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third-party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands. Our FFS operating segment is aggregated with our Branded Concentrates operating segment into our Beverage Concentrates reportable segment due to similar economic characteristics and similarities in the nature of the product sold. • The Latin America Beverages segment reflects sales primarily in Mexico and the Caribbean from the manufacture and distribution of concentrates, syrup and finished beverages. Segment results are based on management reports. Net sales and income from operations are the significant financial measures used to assess the operating performance of the Company's operating segments. Intersegment sales are recorded at cost and are eliminated in the unaudited Condensed Consolidated Statements of Income. “Unallocated corporate costs” are excluded from the Company's measurement of segment performance and include unrealized commodity derivative gains and losses, and certain general corporate expenses. Information about the Company's operations by reportable segment is as follows: First Quarter (in millions) 2021 2020 Segment Results – Net sales Coffee Systems $ 1,142 $ 973 Packaged Beverages 1,307 1,217 Beverage Concentrates 328 306 Latin America Beverages 125 117 Net sales $ 2,902 $ 2,613 First Quarter (in millions) 2021 2020 Segment Results – Income from operations Coffee Systems $ 336 $ 272 Packaged Beverages 175 189 Beverage Concentrates 238 197 Latin America Beverages 22 27 Unallocated corporate costs ( 131 ) ( 219 ) Income from operations $ 640 $ 466 17 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 8. Earnings Per Share The following table presents the Company's basic and diluted EPS and shares outstanding: First Quarter (in millions, except per share data) 2021 2020 Basic EPS: Net income attributable to KDP $ 325 $ 156 Weighted average common shares outstanding 1,409.2 1,407.0 Earnings per common share — basic $ 0.23 $ 0.11 Diluted EPS: Net income attributable to KDP $ 325 $ 156 Weighted average common shares outstanding 1,409.2 1,407.0 Effect of dilutive securities: RSUs 16.0 12.7 Stock options 0.3 0.4 PSUs 0.1 — Weighted average common shares outstanding and common stock equivalents 1,425.6 1,420.1 Earnings per common share — diluted $ 0.23 $ 0.11 Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation — 0.3 18 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 9. Revenue Recognition The Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include CSDs, NCB, K-Cup pods and appliances, occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. Sales taxes and other similar taxes are excluded from revenue. Costs associated with shipping and handling activities, such as merchandising, are included in SG&A expenses as revenue is recognized. The following table disaggregates the Company's revenue by portfolio: (in millions) Coffee Systems Packaged Beverages Beverage Concentrates Latin America Beverages Total For the first quarter of 2021: CSD (1) $ — $ 624 $ 323 $ 87 $ 1,034 NCB (1) — 581 3 38 622 K-Cup pods (2) 903 — — — 903 Appliances 174 — — — 174 Other 65 102 2 — 169 Net sales $ 1,142 $ 1,307 $ 328 $ 125 $ 2,902 For the first quarter of 2020: CSD (1) $ — $ 563 $ 302 $ 82 $ 947 NCB (1) — 562 2 35 599 K-Cup pods (2) 791 — — — 791 Appliances 127 — — — 127 Other 55 92 2 — 149 Net sales $ 973 $ 1,217 $ 306 $ 117 $ 2,613 (1) Represents net sales of owned and partner brands within our portfolio. (2) Represents net sales from owned brands, partner brands and private label owners. Net sales for partner brands and private label owners are contractual and long-term in nature. 19 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 10. Stock-Based Compensation Stock-based compensation expense is primarily recorded in SG&A expenses in the unaudited Condensed Consolidated Statements of Income. The components of stock-based compensation expense are presented below: First Quarter (in millions) 2021 2020 Total stock-based compensation expense $ 25 $ 19 Income tax benefit recognized in the Statements of Income ( 4 ) ( 4 ) Stock-based compensation expense, net of tax $ 21 $ 15 RESTRICTED SHARE UNITS The table below summarizes RSU activity : RSUs Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in millions) Outstanding as of December 31, 2020 26,688,304 $ 19.66 2.0 $ 854 Granted 3,712,188 27.96 Vested and released ( 9,401,295 ) 10.38 316 Forfeited ( 416,825 ) 24.05 Outstanding as of March 31, 2021 20,582,372 $ 25.30 2.8 $ 707 As of March 31, 2021, there was $ 373 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.8 years. Total payments for the employees' tax obligations to the relevant taxing authorities were $ 125 million for the first quarter of 2021, which were funded through the issuance of shares in at-the-market offerings, known as an ATM program. There were no such payments made during the first quarter of 2020. This payment is reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows. 11. Income Taxes The Company’s effective tax rates were as follows: First Quarter (in millions) 2021 2020 Effective tax rate 18.3 % 23.9 % For the first quarter of 2021, the provision for income taxes was lower than the first quarter of 2020, which was primarily driven by the tax benefit received from excess tax deductions that were generated from the vesting of RSUs. 12. Investments in Unconsolidated Affiliates The following table summarizes investments in unconsolidated affiliates as of March 31, 2021 and December 31, 2020: March 31, December 31, (in millions) Ownership Interest 2021 2020 BodyArmor 12.5 % $ 53 $ 51 Dyla LLC 12.4 % 12 12 Force Holdings LLC 33.3 % 5 5 Beverage startup companies (various) 13 15 Other (various) 5 5 Investments in unconsolidated affiliates $ 88 $ 88 20 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) 13. Other Financial Information CASH AND CASH EQUIVALENTS The carrying value of cash, cash equivalents, restricted cash and restricted cash equivalents is valued as of the balance sheet date equating fair value and classified as Level 1. The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the unaudited Condensed Consolidated Balance Sheets to the total of the same amounts shown in the unaudited Condensed Consolidated Statements of Cash Flows: (in millions) March 31, 2021 December 31, 2020 Cash and cash equivalents $ 335 $ 240 Restricted cash and restricted cash equivalents (1) 14 15 Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows $ 349 $ 255 (1) Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the acquisitions of Bai Brands LLC, Core Nutrition LLC and Big Red Group Holdings, LLC, which have a corresponding holdback liability recorded in other current liabilities, as shown below. ALLOWANCE FOR EXPECTED CREDIT LOSSES Activity in the allowance for expected credit losses account during the periods presented was as follows: (in millions) Allowance for Expected Credit Losses Balance as of December 31, 2020 $ 21 Charges to bad debt expense 1 Write-offs and adjustments — Balance as of March 31, 2021 $ 22 ACCOUNTS PAYABLE KDP has an agreement with a third party administrator which allows participating suppliers to track payments from KDP, and if voluntarily elected by the supplier, to sell payment obligations from KDP to financial institutions. Suppliers can sell one or more of KDP's payment obligations at their sole discretion and the rights and obligations of KDP to its suppliers are not impacted. KDP has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. KDP's obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted. KDP has been informed by the third party administrator that as of March 31, 2021 and December 31, 2020, $ 2,777 million and $ 2,578 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions. 21 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) SELECTED BALANCE SHEET INFORMATION The tables below provide selected financial information from the unaudited Condensed Consolidated Balance Sheets: March 31, December 31, (in millions) 2021 2020 Inventories: Raw materials $ 259 $ 260 Work-in-progress 7 6 Finished goods 600 520 Total 866 786 Allowance for excess and obsolete inventories ( 25 ) ( 24 ) Total Inventories $ 841 $ 762 Prepaid expenses and other current assets: Other receivables $ 74 $ 85 Customer incentive programs 91 34 Derivative instruments 65 45 Prepaid marketing 15 15 Spare parts 60 55 Assets held for sale 2 2 Income tax receivable 10 11 Other 93 76 Total prepaid expenses and other current assets $ 410 $ 323 Other non-current assets: Customer incentive programs $ 67 $ 70 Marketable securities - trading (1) 42 41 Operating lease right-of-use assets 830 645 Derivative instruments 119 12 Equity securities without readily determinable fair values 1 1 Other 128 125 Total other non-current assets $ 1,187 $ 894 (1) Fair values of marketable securities are determined using quoted market prices from daily exchange traded markets, based on the closing price as of the balance sheet date, and are classified as Level 1. The fair value of marketable securities was $ 42 million and $ 41 million as of March 31, 2021 and December 31, 2020, respectively. 22 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) March 31, December 31, (in millions) 2021 2020 Accrued expenses: Customer rebates & incentives $ 326 $ 382 Accrued compensation 149 215 Insurance reserve 40 35 Accrued interest 163 57 Accrued professional fees 24 21 Other accrued expenses 287 330 Total accrued expenses $ 989 $ 1,040 Other current liabilities: Dividends payable $ 232 $ 212 Income taxes payable 63 39 Operating lease liability 80 72 Finance lease liability 49 44 Derivative instruments 23 25 Holdback liabilities 12 15 Other 8 9 Total other current liabilities $ 467 $ 416 Other non-current liabilities: Pension and post-retirement liability $ 38 $ 38 Insurance reserves 74 72 Operating lease liability 760 580 Finance lease liability 367 298 Derivative instruments 16 18 Deferred compensation liability 42 41 Other 70 72 Total other non-current liabilities $ 1,367 $ 1,119 14. Accumulated Other Comprehensive Income (Loss) The following table provides a summary of changes in AOCI, net of taxes: (in millions) Foreign Currency Translation Adjustments Pension and Post-Retirement Benefit Liabilities Cash Flow Hedges Accumulated Other Comprehensive Income (Loss) Balance as of January 1, 2021 $ 95 $ ( 4 ) $ ( 14 ) $ 77 Other comprehensive income 16 — 68 84 Amounts reclassified from accumulated other comprehensive income — — 3 3 Net current period other comprehensive income 16 — 71 87 Balance as of March 31, 2021 $ 111 $ ( 4 ) $ 57 $ 164 Balance as of January 1, 2020 $ 104 $ — $ — $ 104 Other comprehensive loss ( 583 ) ( 1 ) — ( 584 ) Balance as of March 31, 2020 $ ( 479 ) $ ( 1 ) $ — $ ( 480 ) 23 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) The following table presents the amount of (gains)/losses reclassified from AOCI into the unaudited Condensed Consolidated Statements of Income: First Quarter (in millions) Income Statement Caption 2021 2020 Cash Flow Hedges: Interest rate contracts Interest expense $ — $ — FX contracts Cost of sales 5 — Total 5 — Income tax benefit ( 2 ) — Total, net of tax $ 3 $ — 15. Commitments and Contingencies LEGAL MATTERS The Company is involved from time to time in various claims, proceedings, and litigation. KDP establishes reserves for specific legal proceedings when the Company determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. KDP has also identified certain other legal matters where the Company believes an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. Antitrust Litigation In February 2014, TreeHouse Foods, Inc. and certain affiliated entities filed suit against KDP’s wholly-owned subsidiary, KGM, in the U.S. District Court for the Southern District of New York (“SDNY”) (TreeHouse Foods, Inc. et al. v. Green Mountain Coffee Roasters, Inc. et al). The TreeHouse complaint asserted claims under the federal antitrust laws and various state laws, contending that Keurig had monopolized alleged markets for single serve coffee brewers and single serve coffee pods. The TreeHouse complaint sought monetary damages, declaratory relief, injunctive relief and attorneys’ fees. In March 2014, JBR, Inc. filed suit against KGM in the U.S. District Court for the Eastern District of California (JBR, Inc. v. Keurig Green Mountain, Inc.). The claims asserted and relief sought in the JBR, Inc. complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint. Beginning in March 2014, twenty-seven putative class actions asserting similar claims and seeking similar relief were filed on behalf of purported direct and indirect purchasers of KGM’s products in various federal district courts. In June 2014, the Judicial Panel on Multidistrict Litigation granted a motion to transfer these various actions, including the TreeHouse and JBR actions, to a single judicial district for coordinated or consolidated pre-trial proceedings (the “Multidistrict Antitrust Litigation”). Consolidated putative class action complaints by direct purchaser and indirect purchaser plaintiffs were filed in July 2014. An additional class action on behalf of indirect purchasers, originally filed in the Circuit Court of Faulkner County, Arkansas (Julie Rainwater et al. v. Keurig Green Mountain, Inc.), was transferred into the Multidistrict Antitrust Litigation in November 2015. In January 2019, McLane Company, Inc. filed suit against KGM (McLane Company, Inc. v. Keurig Green Mountain, Inc.) in the SDNY asserting similar claims and also was transferred into the Multidistrict Antitrust Litigation. These actions are now pending in the SDNY (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation). Discovery in the Multidistrict Antitrust Litigation commenced in December 2017. Separately, a statement of claim was filed in September 2014 against KGM and Keurig Canada Inc. in Ontario, Canada by Club Coffee L.P., a Canadian manufacturer of single serve beverage pods, asserting a breach of competition law and false and misleading statements by Keurig. In July 2020, KGM reached an agreement with the putative indirect purchaser class plaintiffs in the Multidistrict Antitrust Litigation to settle the claims asserted in their complaint for $ 31 million. The settlement class consists of individuals and entities in the United States that purchased, from persons other than KGM and not for purposes of resale, KGM manufactured or licensed single serve beverage portion packs during the applicable class period (beginning in September 2010 for most states). The court granted preliminary approval of the settlement in December 2020, and the Company paid the settlement amount in January 2021. Putative class members have the opportunity to object or opt out of the settlement, and a final approval hearing is scheduled in June 2021. KDP intends to vigorously defend the remaining lawsuits brought by Treehouse, JBR, McLane, the putative direct purchaser class and Club Coffee. At this time, the Company is unable to predict the outcome of these lawsuits, the potential loss or range of loss, if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations. 24 Table of Contents KEURIG DR PEPPER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, Continued) Proposition 65 Litigation In May 2011, CERT filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, (Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182), alleging that KGM, and certain other defendants who manufacture, package, distribute or sell coffee, failed to warn persons in California that KGM's coffee products expose persons to the chemical acrylamide in violation of Proposition 65. KGM, as part of a joint defense group organized to defend against the lawsuit, disputed CERT's claims and asserted multiple affirmative defenses. The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees, but such trial did not occur in light of California’s Office of Environmental Health Hazard Assessment proposal of a new Proposition 65 regulation clarifying that cancer warnings are not required for chemicals, such as acrylamide, that are present in coffee as a result of roasting coffee beans. After the regulation took effect in October 2019, the litigation continued based on, among other items, CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims. In August 2020, the court granted the defendants' motion for summary judgment, effectively ending CERT's Proposition 65 litigation at the trial court level. CERT has filed its appeal brief, and the Company intends to continue vigorously defending itself in this action. However, the Company believes that the likelihood that it will incur a material loss in connection with the CERT litigation is remote and accordingly, no loss contingency has been recorded. 16. Related Parties IDENTIFICATION OF RELATED PARTIES JAB holds a significant but non-controlling interest in KDP. As of March 31, 2021, JAB beneficially owned approximately 33 % of KDP's outstanding common stock. JAB and its affiliates also hold investments in a number of other companies that have commercial relationships with the Company, including Peet's, Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc. • KDP purchases certain raw materials from Peet's and manufactures coffee and tea portion packs under Peet's brands for sale by KDP and Peet's in the U.S. and Canada. • KDP exclusively manufactures, distributes and sells Peet's RTD beverage products in the U.S. and Canada. • KDP licenses the Caribou Coffee, Panera Bread and Krispy Kreme trademarks for use in the manufacturing of portion packs for the Keurig brewing system. • KDP sells various beverage concentrates and packaged beverages to Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc. for resale to retail customers. KDP holds investments in certain brand ownership companies, and in certain instances, the Company also has rights in specified territories to bottle and/or distribute the brands owned by such companies. KDP purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S. Additionally, any transactions with significant partners in these investments, such as ABI, are considered related party transactions. ABI purchases Clamato from KDP and pays the Company a royalty for use of the brand name. Refer to Note 12 for additional information about KDP's investments in brand ownership companies. 25 Table of Contents