What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 394 added, 145 removed, 446 unchanged (55% of the section changed)

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EXECUTIVE SUMMARY

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

As Reported, in millions (except EPS)

As Adjusted, in millions (except EPS)

Key Events During the Second Quarter of 2021

On May 25, 2021, we repaid our 2021 Merger Notes at maturity using commercial paper.

During the second quarter of 2021, we made net repayments of our Notes, our commercial paper and our other credit agreements of $427 million.

Additionally, on May 25, 2021, our Board of Directors declared a regular quarterly dividend of $0.1875 per share, an increase of 25% compared to the previous quarterly dividend, which was paid on July 15, 2021 to shareholders of record as of July 1, 2021.

Impact of COVID-19 on our Financial Statements

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.

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 first quarter.

• 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 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 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.

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

Employee compensation expense and employee protection costs, which impact our SG&A expenses and cost of sales, are included as the COVID-19 item affecting comparability and is excluded in our Adjusted financial measures.

Employee compensation expense and employee protection costs, which impact our SG&A expenses and cost of sales, are included as the COVID-19 item affecting comparability and are excluded in our Adjusted financial measures.

In addition, reported amounts under U.S.

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Allowances for Expected Credit Losses (4)

For the first quarter of 2021:

Inventory Write-Downs (5)

For the second quarter of 2021:

Coffee Systems $ 1 $ 4 $ (2) $ — $ 3

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Total $ 4 $ 7 $ (13) $ — $ (2)

For the first quarter of 2020:

For the second quarter of 2020:

Coffee Systems $ 7 $ 2 $ — $ 8 $ 17

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Total $ 45 $ 18 $ 4 $ 8 $ 75

For the first six months of 2021:

Coffee Systems $ 2 $ 13 $ (2) $ — $ 13

Packaged Beverages 6 5 (8) — 3

Beverage Concentrates — — (3) — (3)

Latin America Beverages — 1 — — 1

Total $ 8 $ 19 $ (13) $ — $ 14

For the first six months of 2020:

Coffee Systems $ 7 $ 2 $ 2 $ 8 $ 19

Packaged Beverages 41 18 8 — 67

Beverage Concentrates — — 4 — 4

Latin America Beverages — — — — —

Total $ 48 $ 20 $ 14 $ 8 $ 90

(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.

(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.

(2) In 2021, amounts include 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, amounts 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.

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Impacts both cost of sales and SG&A expenses.

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

(4) In 2020, allowances reflected the expected impact of the economic uncertainty caused by COVID-19, leveraging estimates of credit worthiness, default and recovery rates for certain of our customers.

In 2021, reversals of those previously recorded allowances reflect improving economic conditions.

Impacts SG&A expenses.

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.

(5) Impacts cost of sales.

RESULTS OF OPERATIONS

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GAAP measures.

First Quarter of 2021 Compared to First Quarter of 2020

Second Quarter of 2021 Compared to Second Quarter of 2020

Consolidated Operations

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

First Quarter Dollar Percentage

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

Second Quarter Dollar Percentage

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

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

Other (income) expense, net (4) (4) — NM

Income before provision for income taxes 613 406 207 51.0

Provision for income taxes 165 108 57 52.8

Net income $ 448 $ 298 150 50.3

Earnings per common share:

Basic $ 0.32 $ 0.21 $ 0.11 52.4 %

Diluted 0.31 0.21 0.10 47.6

Gross margin 56.4 % 54.5 % 190 bps

Operating margin 23.4 % 19.6 % 380 bps

Effective tax rate 26.9 % 26.6 % 30 bps

Sales Volume.

The following table sets forth changes in sales volume for the second quarter of 2021 compared to the prior year period:

Percentage Change

K-Cup pod volume 0.2 %

Brewer volume

CSD sales volume 7.2

NCB sales volume (5.5)

Net sales increased $276 million, or 9.6%, to $3,140 million for the second quarter of 2021 compared with $2,864 million in the prior year period.

This performance reflected volume/mix growth of 6.1%, higher net price realization of 2.0% and favorable FX translation of 1.5%.

Gross Profit.

Gross profit increased $208 million for the second quarter of 2021 compared with the prior year period.

This performance primarily reflected the impact of growth in volume/mix, higher net price realization, a favorable change in unrealized commodity mark-to-market impacts, the benefit of productivity and merger synergies and favorable FX impacts, including both transaction and translation.

These benefits were partially offset by higher manufacturing costs, due to both the growth in volume/mix and inflation in input costs.

Gross margin increased 190 bps versus the year ago period to 56.4%, driven by our Beverage Concentrates segment.

Selling, General and Administrative Expenses.

SG&A expenses increased $38 million, or 3.8%, to $1,039 million for the second quarter of 2021 compared with $1,001 million in the prior year period.

The increase was driven by higher marketing expense and increases in logistics, driven by both inflation and higher volume/mix.

These increases were partially offset by reduced expenses related to the COVID-19 pandemic, a favorable comparison to an increase in our litigation reserve in the prior year period, and the benefit of productivity and merger synergies.

Income from Operations.

Income from operations increased $173 million to $734 million for the second quarter of 2021 compared to $561 million in the prior year period due to the increase in gross profit, partially offset by increased SG&A expenses.

Operating margin increased 380 bps versus the year ago period to 23.4%.

Interest Expense.

Interest expense decreased $32 million, or 20.4%, to $125 million for the second quarter of 2021 compared with $157 million in the prior year period.

This change was primarily the result of the benefit of our strategic refinancing initiatives and continued deleveraging, realized gains on certain interest rate contracts in the second quarter of 2021, and a favorable change in unrealized mark-to-market impacts on interest rate contracts.

Effective Tax Rate.

The effective tax rate increased 30 bps to 26.9% for the second quarter of 2021, compared to 26.6% in the prior year period, primarily driven by the increase on the revaluation of deferred tax liabilities due to state legislative changes in 2021.

This increase was mostly offset by the decrease of U.S.

taxation of foreign earnings.

Adjusted Results of Operations

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

Second Quarter Dollar Percent

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

Adjusted income from operations $ 839 $ 775 $ 64 8.3 %

Adjusted interest expense 119 145 (26) (17.9)

Adjusted provision for income taxes 186 165 21 12.7

Adjusted net income 538 469 69 14.7

Adjusted diluted EPS 0.38 0.33 0.05 15.2

Adjusted operating margin 26.7 % 27.1 % (40) bps

Adjusted effective tax rate 25.7 % 26.0 % (30) bps

Adjusted Income from Operations.

Adjusted income from operations increased $64 million, or 8.3%, to $839 million for the second quarter of 2021 as compared to Adjusted income from operations of $775 million in the prior year period.

Driving this performance in the quarter were volume/mix growth, higher net price realization, the benefit of productivity and merger synergies, and favorable FX impacts, including both transaction and translation.

These benefits were partially offset by higher marketing expense and higher manufacturing costs, due to both the growth in volume/mix and inflation in input costs.

Adjusted operating margin declined 40 bps versus the year ago period to 26.7%.

Adjusted Interest Expense.

Adjusted interest expense decreased $26 million, or 17.9%, to $119 million for the second quarter of 2021 compared to Adjusted interest expense of $145 million in the prior year period.

This benefit was primarily the result of our strategic refinancing initiatives and realized gains on certain interest rate contracts.

Adjusted Effective Tax Rate.

The Adjusted effective tax rate decreased 30 bps to 25.7% for the second quarter of 2021, compared to the Adjusted effective tax rate of 26.0% in the prior year period.

This decrease was primarily driven by the release of reserves related to settlement of a state audit in the second quarter of 2021 and reduced US taxation of foreign earnings.

Adjusted Net Income.

Adjusted net income increased 14.7% to $538 million for the second quarter of 2021 as compared to Adjusted net income of $469 million in the prior year period.

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

Adjusted Diluted EPS.

Adjusted diluted EPS increased 15.2% to $0.38 per diluted share for the second quarter of 2021 as compared to Adjusted diluted EPS of $0.33 per diluted share in the prior year period.

Results of Operations by Segment

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

Second Quarter

(in millions) 2021 2020

Segment Results — Net sales

Coffee Systems $ 1,101 $ 1,043

Packaged Beverages 1,498 1,392

Beverage Concentrates 375 309

Latin America Beverages 166 120

Net sales $ 3,140 $ 2,864

Second Quarter

(in millions) 2021 2020

Segment Results — Income from Operations

Coffee Systems $ 322 $ 290

Packaged Beverages 258 208

Beverage Concentrates 254 220

Latin America Beverages 36 21

Unallocated corporate costs (136) (178)

Income from operations $ 734 $ 561

COFFEE SYSTEMS

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

Second Quarter Dollar Percent

(in millions) 2021 2020 Change Change

Net sales $ 1,101 $ 1,043 $ 58 5.6 %

Income from operations 322 290 32 11.0

Operating margin 29.2 % 27.8 % 140 bps

Adjusted income from operations $ 371 $ 363 $ 8 2.2 %

Adjusted operating margin 33.7 % 34.8 % (110) bps

Sales Volume.

Volume growth for the Coffee Systems segment included K-Cup pod volume growth of 0.2%, reflecting improvement in our away-from-home businesses which was largely offset by the unfavorable comparison to consumer stock-up purchasing related to the COVID-19 pandemic in the year-ago period.

Brewer volume increased 29.0% in the quarter, as compared to 11.6% in the year ago period, driven by our successful brewer innovation program.

Net sales increased 5.6% to $1,101 million for the second quarter of 2021 compared to net sales of $1,043 million in the prior year period, reflecting volume/mix growth of 3.5%, favorable FX translation of 1.7% and higher net price realization of 0.4%.

Income from Operations.

Income from operations increased $32 million, or 11.0%, to $322 million for the second quarter of 2021, compared to $290 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, a favorable comparison to an increase in our litigation reserve in the prior year period, a favorable change in unrealized commodity mark-to-market impacts, favorable FX effects, including both transaction and translation, phasing of marketing expense and higher net price realization.

These impacts were partially offset by unfavorable product mix related to the strong brewer growth and inflation in input costs, logistics and manufacturing.

Operating margin increased 140 bps versus the year ago period to 29.2%.

Adjusted Income from Operations.

Adjusted income from operations increased $8 million, or 2.2%, to $371 million for the second quarter of 2021, compared with Adjusted income from operations of $363 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, favorable FX effects, including both transaction and translation, phasing of marketing expense and higher net price realization.

These impacts were partially offset by unfavorable product mix related to the strong brewer growth and inflation in input costs, logistics and manufacturing.

Adjusted operating margin decreased 110 bps versus the year ago period to 33.7%.

PACKAGED BEVERAGES

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

Second Quarter Dollar Percent

(in millions) 2021 2020 Change Change

Net sales $ 1,498 $ 1,392 $ 106 7.6 %

Income from operations 258 208 50 24.0

Operating margin 17.2 % 14.9 % 230 bps

Adjusted income from operations $ 286 $ 269 $ 17 6.3 %

Adjusted operating margin 19.1 % 19.3 % (20) bps

Sales Volume.

Sales volume for the second quarter of 2021 increased 0.7% due primarily to strength in our CSDs, driven by our broad flavor portfolio, water, and the addition of Polar to our portfolio of partner brands.

This was partially offset by declines in Hawaiian Punch and reductions in contract manufacturing.

Net sales increased 7.6% to $1,498 million for the second quarter of 2021, compared with net sales of $1,392 million in the prior year period, driven by volume/mix growth of 6.2%, higher net price realization of 1.1% and favorable FX translation of 0.3%.

Income from Operations.

Income from operations increased $50 million, or 24.0%, to $258 million for the second quarter of 2021, compared with $208 million for the prior year period, driven by volume/mix growth, the favorable comparison to COVID-19-related expenses in the prior year period, the benefits of productivity and merger synergies and higher net price realization.

These growth drivers were partially offset by inflation in input costs, logistics and manufacturing, higher marketing expense, increased operating costs due to higher volumes and expenses associated with productivity projects.

Operating margin grew 230 bps versus the year ago period to 17.2%.

Adjusted Income from Operations.

Adjusted income from operations increased $17 million, or 6.3%, to $286 million for the second quarter of 2021, compared with Adjusted income from operations of $269 million for the prior year period, driven by volume/mix growth, the benefits of productivity and merger synergies and higher net price realization.

These growth drivers were partially offset by inflation in input costs, logistics and manufacturing,higher marketing expense and increased operating costs due to higher volumes.

Adjusted operating margin declined 20 bps versus the year ago period to 19.1%.

BEVERAGE CONCENTRATES

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

Second Quarter Dollar Percent

(in millions) 2021 2020 Change Change

Net sales $ 375 $ 309 $ 66 21.4 %

Income from operations 254 220 34 15.5

Operating margin 67.7 % 71.2 % (350) bps

Adjusted income from operations $ 256 $ 222 $ 34 15.3 %

Adjusted operating margin 68.3 % 71.8 % (350) bps

Sales volume.

Sales volume for the second quarter of 2021 increased 7.0%, primarily reflecting improving trends in our fountain foodservice component of the business, which services restaurants and hospitality, driven by higher levels of consumer mobility as compared to the year-ago period.

Net sales increased 21.4% to $375 million for the second quarter of 2021 compared to $309 million for the prior year period, reflecting higher net price realization of 10.4%, driven by the impact of our annual price increases and the favorable comparison of annual true-ups of our prior year estimated customer incentive liability, favorable volume/mix of 10.3% and favorable FX translation of 0.7%.

Income from Operations.

Income from operations increased $34 million, or 15.5%, to $254 million for the second quarter of 2021 compared to $220 million for the prior year period, driven by the impact of higher net sales, partially offset by higher marketing expense.

Operating margin declined 350 bps from versus the year ago period to 67.7%.

Adjusted Income from Operations.

Adjusted income from operations increased $34 million, or 15.3%, to $256 million for the second quarter of 2021 compared with Adjusted income from operations of $222 million for the prior year period, driven by the impact of higher net sales, partially offset by higher marketing expense.

Adjusted operating margin declined 350 bps versus the year ago period to 68.3%.

LATIN AMERICA BEVERAGES

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

Second Quarter Dollar Percent

(in millions) 2021 2020 Change Change

Net sales $ 166 $ 120 $ 46 38.3 %

Income from operations 36 21 15 71.4 %

Operating margin 21.7 % 17.5 % 420 bps

Adjusted income from operations $ 37 $ 23 $ 14 60.9 %

Adjusted operating margin 22.3 % 19.2 % 310 bps

Sales Volume.

Sales volume for the second quarter of 2021 increased 2.6% compared to the prior year period, driven primarily by Clamato, Aguafiel and Penafiel, partially offset by declines in Squirt.

Net sales increased 38.3% to $166 million for the second quarter of 2021 compared to $120 million for the prior year period, driven by favorable FX translation of 17.5%, favorable volume/mix of 16.6% and higher net price realization of 4.2%.

Income from Operations .

Income from operations increased 71.4% to $36 million for the second quarter of 2021 compared to $21 million in the prior year period, driven by favorable FX effects, including both transaction and translation, favorable volume/mix and higher net pricing, partially offset by inflation in logistics and input costs, higher marketing investments and increased operating costs due to higher volumes.

Operating margin increased 420 bps versus the year ago period to 21.7%.

Adjusted Income from Operations .

Adjusted income from operations increased 60.9% to $37 million for the second quarter of 2021 compared to $23 million in the prior year period, driven by favorable FX effects, including both transaction and translation, favorable volume/mix and higher net pricing, partially offset by inflation in logistics and input costs, higher marketing investments and increased operating costs due to higher volumes.

Adjusted operating margin grew 310 bps versus the prior year period to 22.3%.

First Six Months of 2021 Compared to First Six Months of 2020

Consolidated Operations

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

First Six Months Dollar Percentage

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

Net sales $ 6,042 $ 5,477 $ 565 10.3 %

Cost of sales 2,672 2,463 209 8.5

Gross profit 3,370 3,014 356 11.8

Selling, general and administrative expenses 2,000 2,029 (29) (1.4)

Other operating income, net (4) (42) 38 NM

Income from operations 1,374 1,027 347 33.8

Interest expense 265 310 (45) (14.5)

Loss on early extinguishment of debt 105 4 101 NM

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

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K-Cup Pods 6.8 %

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.

Net sales increased $565 million, or 10.3%, to $6,042 million for the first six months of 2021 compared to $5,477 million in the prior year period.

This performance reflected volume/mix of 8.1%, net price realization of 1.3% and favorable FX translation of 0.9%.

Gross Profit.

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%.

Gross profit increased $356 million, or 11.8%, to $3,370 million for the first six months of 2021 compared to $3,014 million in the prior year period.

This performance primarily reflected strong volume/mix, the benefit of productivity and merger synergies, higher net price realization and a favorable change in unrealized commodity mark-to-market impacts.

These benefits were partially offset by higher manufacturing costs, driven by both volume/mix growth and inflation in input costs.

Gross margin increased 80 bps versus the year ago period to 55.8%.

Selling, General and Administrative Expenses.

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.

SG&A expenses decreased $29 million, or 1.4%, to $2,000 million for the first six months of 2021 compared to $2,029 million in the prior year period.

The decrease was driven by the favorable change in commodity mark-to-market impacts of $77 million, a favorable change in expenses related to the COVID-19 pandemic of $54 million, and a favorable comparison to an increase in our litigation reserve in the prior year.

These benefits were partially offset by higher operating costs associated with the increased shipment volume, inflation in logistics, and higher marketing expense.

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.

Other operating income, net had an unfavorable change of $38 million for the first six months 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 prior year period.

Income from Operations.

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.

Income from operations increased $347 million, or 33.8%, to $1,374 million for the first six months of 2021 compared to $1,027 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 390 bps versus the year ago period to 22.7%.

Interest Expense.

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.

Interest expense decreased $45 million, or 14.5%, to $265 million for the first six months of 2021 compared to $310 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 $34 million and the benefit of our strategic refinancing initiatives and continued deleveraging, 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.

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

Impairment of Investments and Note Receivable.

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Effective Tax Rate.

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.

The effective tax rate decreased 220 bps to 23.5% for the first six months of 2021, compared to 25.7% in the prior year period, primarily driven by the tax benefit received from excess tax deductions that were generated from the vesting of RSUs in the first six months of 2021.

Net income increased $319 million, or 70.3%, to $773 million for the first six months of 2021 as compared to $454 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 six months of 2021.

Diluted EPS increased 68.8% to $0.54 per diluted share as compared to $0.32 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 quarter of 2021 and 2020:

First Quarter Dollar Percent

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

First Six Months Dollar Percent

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

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Adjusted Income from Operations.

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 income from operations increased $121 million, or 8.3%, to $1,580 million for the first six months of 2021 compared to Adjusted income from operations of $1,459 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, higher net price realization, and favorable FX effects, including both transaction and translation.

Partially offsetting these positive drivers were inflation, led by input costs and logistics, higher marketing expense, 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, and increased operating costs due to higher volumes.

Adjusted operating margin declined 40 bps versus the year ago period to 26.2%.

Adjusted Interest Expense.

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 interest expense decreased $7 million, or 2.6%, to $258 million for the first six months of 2021 compared to Adjusted interest expense of $265 million in the prior year period, driven by the benefit of lower indebtedness due to continued deleveraging, partially offset by the unfavorable comparison to the realized benefit of unwinding several interest rate swap contracts in the prior year period.

Adjusted Effective Tax Rate.

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.

The Adjusted effective tax rate decreased 150 bps to 24.1% for the first six months of 2021, compared to 25.6% in the prior year period, primarily driven by the tax benefit received from excess tax deductions that were generated from the vesting of RSUs in the first six months of 2021.

Adjusted Net Income.

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.

Adjusted net income increased 15.1% to $1,009 million for the first six months of 2021 as compared to Adjusted net income of $877 million in the prior year period.

This performance was driven primarily by strong growth in Adjusted income from operations and the decrease in the Adjusted effective tax rate.

Adjusted Diluted EPS.

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Results of Operations by Segment

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

The following tables provide net sales and income from operations for our reportable segments for the first six months 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 Six Months

Segment Results — Net sales 2021 2020

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Net sales $ 6,042 $ 5,477

First Quarter

First Six Months

(in millions) 2021 2020

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

First Quarter Dollar Percent

First Six Months Dollar Percent

(in millions) 2021 2020 Change Change

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Sales Volume.

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%.

Sales volume growth in the first six months of 2021 compared to the prior year period for the Coffee Systems segment included K-Cup pod volume growth of 6.8%, reflecting strength in at-home consumption and modest improvement in the away-from-home businesses.

Brewer volume increased 41.3% in the first six months of 2021, as compared to growth of 5.8% in the year-ago period, driven by our successful brewer innovation program.

Net sales increased 11.3% to $2,243 million for the first six months of 2021 compared to $2,016 million in the prior year period, driven by strong volume/mix of 11.2% and favorable FX translation of 1.1%, partially offset by lower net price realization of 1.0%.

Income from Operations.

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.

Income from operations increased $96 million, or 17.1%, to $658 million for the first six months of 2021, compared to $562 million in the prior year period, driven by strong volume/mix, the continued benefit of productivity and merger synergies, as well as reduced costs to achieve the productivity and merger synergies, a favorable comparison to an increase in our litigation reserve in the prior year, a favorable change in unrealized mark-to-market impacts on commodity contracts, and favorable FX effects, including both transaction and translation.

These benefits were partially offset by declines due to inflation in input costs, logistics and manufacturing, strategic pricing initiatives, and 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.

Operating margin grew 140 bps versus the year ago period to 29.3%.

Adjusted Income from Operations.

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 income from operations increased $50 million, or 7.0%, to $760 million for the first six months of 2021, compared to $710 million in the prior year period, driven by strong volume/mix, the continued benefit of productivity and merger synergies, and favorable FX effects, including both transaction and translation.

Adjusted operating margin declined 130 bps versus the year ago period to 33.9%, 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.

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

First Quarter Dollar Percent

First Six Months Dollar Percent

(in millions) 2021 2020 Change Change

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Sales Volume.

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%.

Sales volume for the first six months of 2021 increased 2.1% compared to the prior year period, due primarily to strength in CSDs, driven by our broad flavor portfolio, water, and the addition of Polar to our portfolio of partner brands.

This was partially offset by declines in Hawaiian Punch and reductions in contract manufacturing.

Net sales increased 7.5% to $2,805 million in the first six months of 2021, compared to $2,609 million in the prior year period, driven by volume/mix of 6.4%, net price realization of 0.8% and favorable FX translation of 0.3%.

Income from Operations.

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%.

Income from operations increased $36 million, or 9.1%, to $433 million for the first six months of 2021 compared to $397 million for the prior year period, driven primarily by strong volume/mix growth, the favorable comparison to COVID-19-related expenses in the prior year period, and the benefit of productivity and merger synergies.

These increases were partially offset by inflation in input costs, logistics and manufacturing, 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, expenses associated with productivity projects and increased operating costs due to higher volumes.

Operating margin grew 20 bps from the year ago period to 15.4%.

Adjusted Income from Operations.

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 income from operations increased $11 million, or 2.3%, to $483 million for the first six months of 2021 compared to $472 million for the prior year period, driven primarily by strong volume/mix growth and the benefit of productivity and merger synergies.

These increases were partially offset by inflation in input costs, logistics and manufacturing, 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, and increased operating costs due to higher volumes.

Adjusted operating margin declined 90 bps versus the year ago period to 17.2%, primarily reflecting the aforementioned asset sale-leaseback gain in the year-ago period.

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

First Quarter Dollar Percent

First Six Months Dollar Percent

(in millions) 2021 2020 Change Change

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Sales Volume.

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%.

Sales volume for the first six months of 2021 increased 4.1% compared to the prior year period, reflecting improving trends in our fountain foodservice component of the business, which services restaurants and hospitality, driven by increasing levels of consumer mobility during the first six months of 2021 compared to the year-ago period.

Net sales increased 14.3% to $703 million in the first six months of 2021, compared to $615 million in the prior year period, reflecting higher net price realization of 8.8%, volume/mix growth of 5.0% and favorable FX translation of 0.5%.

Income from Operations.

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 .

Income from operations increased $75 million, or 18.0%, to $492 million for the first six months of 2021 compared to $417 million in the prior year period.

This performance reflected the impact of net sales growth, partially offset by higher marketing expense.

Operating margin increased 220 bps versus the year ago period to 70.0%.

Adjusted Income from Operations.

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.

Adjusted income from operations increased $76 million, or 18.1%, to $495 million for the first six months of 2021 compared to $419 million in the prior year period.

This performance reflected the impact of net sales growth, partially offset by higher marketing expense.

Adjusted operating margin increased 230 bps versus the year ago period to 70.4%.

LATIN AMERICA BEVERAGES

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

First Quarter Dollar Percent

First Six Months Dollar Percent

(in millions) 2021 2020 Change Change

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Sales Volume.

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%.

Sales volume for the first six months of 2021 as compared to the prior year period increased 1.3%, driven by Clamato and Penafiel, partially offset by declines in Squirt.

Net sales grew 22.8% to $291 million for the first six months of 2021, compared to $237 million in the prior year period, reflecting favorable FX translation of 8.5%, net price realization of 7.2%, and volume/mix growth of 7.1%.

Income from Operations .

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.

Income from operations increased $10 million, or 20.8%, to $58 million for the first six months of 2021 compared to $48 million in the prior year period, driven by favorable volume/mix and higher net price realization, partially offset by inflation in input costs and logistics, increases in logistics driven by volume/mix growth, and higher marketing expense.

Operating margin decreased 40 bps versus the year ago period to 19.9%.

Adjusted Income from Operations.

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.

Adjusted income from operations increased $10 million, or 20.0%, to $60 million for the first six months of 2021 compared to $50 million in the prior year period, driven by favorable volume/mix and higher net price realization, partially offset by inflation in input costs and logistics, as well as increased operating costs due to higher volumes, and higher marketing expense.

Adjusted operating margin declined 50 bps versus the year ago period to 20.6%.

UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS

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Our financial condition and liquidity remain strong.

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

Net cash provided by operations was $1,139 million for the first six months of 2021 compared to $1,062 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.

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

Cash, cash equivalents, restricted cash and restricted cash equivalents decreased $85 million from December 31, 2020 to June 30, 2021 primarily as a result of deleveraging, dividend payments and investments in property, plant and equipment, which outpaced cash generated from our operations.

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.

Foreign cash balances were $83 million and $165 million as of June 30, 2021 and December 31, 2020, respectively.

Principal Sources of Capital Resources

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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.

Net cash provided by operating activities increased $77 million for the first six months of 2021, as compared to first six months 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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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.

Our cash conversion cycle improved 15 days to approximately 67 days as of June 30, 2021 as compared to 52 days in the prior year period.

The following table summarizes our cash conversion cycle:

Cash conversion cycle (67) (52)

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

Accounts Payable Program

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

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.

We have been informed by the third party administrator that as of June 30, 2021 and December 31, 2020, $2,901 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 $1,572 million and $1,245 million for the first six months of 2021 and 2020, respectively.

Impact of the Cares Act

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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.

As of June 30, 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.

In March 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.

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.

Commissions and fees paid under the ATM program were less than $1 million for the first six months 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:

As of June 30, 2021, our credit ratings were as follows:

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

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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.

As of June 30, 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

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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.

Since the DPS Merger, we have made net repayments of $3,722 million of our Notes, our commercial paper and our other credit agreements, including $547 million for the first six months of 2021.

In May 2021, our 2021 Merger Notes were repaid at maturity, using cash generated from operations and the issuance of commercial paper.

On May 25, 2021, our Board of Directors declared a regular quarterly dividend of $0.1875 per share, which was paid on July 15, 2021 to shareholders of record as of July 1, 2021.

Capital Expenditures

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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.

Purchases of property, plant and equipment were $204 million and $276 million for the first six months 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 six months 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 $213 million for the first six months of 2021, which primarily related to these investments.

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

Capital expenditures included in accounts payable and accrued expenses were $180 million for the first six months of 2020, which primarily related to these investments.

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.

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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.

Purchases of intangible assets were $12 million and $15 million for the first six months 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, 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, which could result in a reduction in our sales volume.

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

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

• Our intention to drive significant cash flow generation to enable continued deleveraging;

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

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

(in millions) For the First Quarter of 2021

(in millions) For the First Six Months of 2021

Net sales $ 3,473

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Net income attributable to KDP 773

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

(in millions) June 30, 2021 December 31, 2020

Current assets $ 1,887 $ 1,810

$ 2,047 $ 1,810

Non-current assets 43,692 43,333

Current liabilities (2)

Total assets (1)

$ 45,579 $ 45,143

Current liabilities 4,303 5,148

Non-current liabilities 17,034 16,164

(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.

Total liabilities (2)

$ 21,337 $ 21,312

(1) Includes $243 million and $423 million of intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of June 30, 2021 and December 31, 2020, respectively.

(2) Includes $35 million and $30 million of intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of June 30, 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 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.

GAAP, we have presented for the second quarter and first six months 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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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.

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

(vi) non-cash changes in deferred tax liabilities related to goodwill and other intangible assets as a result of tax rate or apportionment changes;

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

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

(ii) productivity expenses;

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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;

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

(ii) productivity expenses;

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(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 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.

For the second quarter and first six months 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 Quarter of 2021

For the Second Quarter of 2021

(Unaudited, in millions, except per share data)

10 unchanged sentences

COVID-19 (7) 7 (4) 11

Adjusted $ 1,366 $ 1,774 56.5 % $ 938 $ 839 26.7 %

Interest expense Income before provision for income taxes Provision for income taxes Effective tax rate

Net income attributable to KDP Diluted earnings per share

Reported $ 125 $ 613 $ 165 26.9 % $ 448 $ 0.31

Items Affecting Comparability:

Mark to market (1) (37) (9) (28) (0.02)

Amortization of intangibles — 34 9 25 0.02

Amortization of deferred financing costs (1) 1 — 1 —

Amortization of fair value debt adjustment (4) 4 — 4 —

Stock compensation — 5 2 3 —

Restructuring and integration costs — 49 11 38 0.03

Productivity — 38 10 28 0.02

Nonroutine legal matters — 6 1 5 —

COVID-19 — 11 3 8 0.01

Change in deferred tax liabilities related to goodwill and other intangible assets — — (6) 6 —

Adjusted $ 119 $ 724 $ 186 25.7 % $ 538 $ 0.38

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 Second Quarter of 2020

(Unaudited, in millions, except per share data)

Cost of sales Gross profit Gross margin

Selling, general and administrative expenses Income from operations Operating margin

Reported $ 1,302 $ 1,562 54.5 % $ 1,001 $ 561 19.6 %

Items Affecting Comparability:

Mark to market (29) 29 16 13

Amortization of intangibles — — (33) 33

Stock compensation — — (8) 8

Restructuring and integration costs — — (52) 52

Productivity (2) 2 (17) 19

Nonroutine legal matters — — (26) 26

COVID-19 (18) 18 (45) 63

Adjusted $ 1,253 $ 1,611 56.3 % $ 836 $ 775 27.1 %

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 $ 157 $ 2 $ 406 $ 108 26.6 % $ 298 $ 0.21

Items Affecting Comparability:

Mark to market (3) — 16 5 11 0.01

Amortization of intangibles — — 33 9 24 0.02

Amortization of deferred financing costs (3) — 3 — 3 —

Amortization of fair value debt adjustment (6) — 6 1 5 —

Stock compensation — — 8 2 6 —

Restructuring and integration costs — — 52 12 40 0.03

Productivity — — 19 4 15 0.01

Loss on early extinguishment of debt — (2) 2 1 1 —

Nonroutine legal matters — — 26 7 19 0.01

COVID-19 — — 63 16 47 0.03

Adjusted $ 145 $ — $ 634 $ 165 26.0 % $ 469 $ 0.33

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

KEURIG DR PEPPER INC.

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

For the First Six Months of 2021

(Unaudited, in millions, except per share data)

Cost of sales Gross profit Gross margin

Selling, general and administrative expenses Income from operations Operating margin

Reported $ 2,672 $ 3,370 55.8 % $ 2,000 $ 1,374 22.7 %

Items Affecting Comparability:

Mark to market 26 (26) 50 (76)

Amortization of intangibles — — (67) 67

Stock compensation — — (11) 11

Restructuring and integration costs — — (92) 92

Productivity (22) 22 (49) 71

Nonroutine legal matters — — (16) 16

COVID-19 (19) 19 (8) 27

Malware incident — — 2 (2)

15 unchanged sentences

Malware incident — — (2) — (2) —

Change in deferred tax liabilities related to goodwill and other intangible assets — — — (6) 6 —

Adjusted $ 258 $ — $ 1,329 $ 320 24.1 % $ 1,009 $ 0.71

2 unchanged sentences

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

For the First Quarter of 2020

For the First Six Months of 2020

(Unaudited, in millions, except per share data)

29 unchanged sentences

(in millions) Reported Items Affecting Comparability Adjusted GAAP

For the first quarter of 2021:

For the second quarter of 2021:

Income from Operations

5 unchanged sentences

Total income from operations $ 734 $ 105 $ 839

For the first quarter of 2020:

For the second quarter of 2020:

Income from Operations

5 unchanged sentences

Total income from operations $ 561 $ 214 $ 775

KEURIG DR PEPPER INC.

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

(in millions) Reported Items Affecting Comparability Adjusted GAAP

For the first six months of 2021:

Income from Operations

Coffee Systems $ 658 $ 102 $ 760

Packaged Beverages 433 50 483

Beverage Concentrates 492 3 495

Latin America Beverages 58 2 60

Unallocated corporate costs (267) 49 (218)

Total income from operations $ 1,374 $ 206 $ 1,580

For the first six months of 2020:

Income from Operations

Coffee Systems $ 562 $ 148 $ 710

Packaged Beverages 397 75 472

Beverage Concentrates 417 2 419

Latin America Beverages 48 2 50

Unallocated corporate costs (397) 205 (192)

Total income from operations $ 1,027 $ 432 $ 1,459

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