Keurig Dr Pepper Inc. 10-Q

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto in our Annual Report, as filed on February 25, 2021. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, in particular, statements about anticipated benefits and expenses of the DPS Merger and other transactions, including estimated synergies, deleveraging and associated cash management, and cost savings, the impact of COVID-19, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as “outlook,” “guidance,” “anticipate,” “expect,” “believe,” “could,” “estimate,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar words, phrases or expressions and variations or negatives of these words in this Quarterly Report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report, as well as our subsequent filings with the SEC. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them, after the date of this Quarterly Report on Form 10-Q, except to the extent required by applicable securities laws. This Quarterly Report on Form 10-Q contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands. All of the product names included in this Quarterly Report on Form 10-Q are either our registered trademarks or those of our licensors. OVERVIEW KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including water (enhanced and flavored), ready-to-drink tea and coffee, juice, juice drinks, mixers and specialty coffee, and is a leading producer of innovative single serve brewing systems. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountain and The Original Donut Shop. KDP has some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. KDP offers more than 125 owned, licensed, and partner brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S., according to IRi, which are available nearly everywhere people shop and consume beverages. KDP operates as an integrated brand owner, manufacturer and distributor. We believe our integrated business model strengthens our route-to-market and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our DSD system and our WD delivery system. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, pure-play e-commerce retailers, and office superstores; to restaurants, hotel chains, office product and coffee distributors, and partner brand owners; and directly to consumers through its websites. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage. The beverage market is subject to some seasonal variations. Our cold beverage sales are generally higher during the warmer months, while hot beverage sales are generally higher during the cooler months. Overall beverage sales can be influenced by the timing of holidays and weather fluctuations. Sales of brewing systems and related accessories are generally higher during the second half of the year due to the holiday shopping season. 27 TABLE OF CONTENTS COFFEE SYSTEMS Our Coffee Systems segment is primarily a producer of innovative single serve brewers and specialty coffee in the U.S. and Canada. Our Coffee Systems segment manufactures over 75% of the pods in the single-serve K-Cup pod format in the U.S. We manufacture and sell 100% of the K-Cup pods of the following brands to retailers, away from home channel participants and end-use consumers: Green Mountain Coffee Roasters, The Original Donut Shop, McCafé, Laughing Man, REVV, and Van Houtte. We manufacture and sell K-Cup pods for the following brands to our partners, who in turn sell them to retailers: Starbucks, Smuckers, Peet's, Dunkin' Donuts, Folgers, Newman’s Own Organics, Caribou Coffee, Eight O’Clock, Maxwell House, and Tim Hortons, as well as private label arrangements. Generally, we are able to sell these brands to our away from home channel participants and end-use consumers. We also have agreements for manufacturing, distributing, and selling K-Cup pods for tea under brands such as Celestial Seasonings, Lipton and Tazo in addition to K-Cup pods of our own brand, Snapple. We also produce and sell K-Cup pods for cocoa, including through a licensing agreement for the Swiss Miss brand, and hot apple cider, including under our own brand, Mott's. Our Coffee Systems segment manufactures its K-Cup pods in facilities in North America that include specialty designed proprietary high-speed packaging lines using freshly roasted and ground coffee as well as tea, cocoa and other products. We offer high-quality coffee, including certified single-origin, organic, flavored, limited edition and proprietary blends. We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences. We engineer and design most of our single serve brewers, where we then utilize third-party contract manufacturers located in various countries in Asia for brewer appliance manufacturing. We distribute our brewers using third-party distributors, retail partners and through our website at www.keurig.com. PACKAGED BEVERAGES Our Packaged Beverages segment is principally a brand ownership, manufacturing and distribution business. In this segment, we primarily manufacture and distribute packaged beverages of our brands. Additionally, in order to maximize the size and scale of our manufacturing and distribution operations, we also distribute packaged beverages for our partner brands and manufacture packaged beverages for other third parties in the U.S. and Canada. The larger NCB brands in this segment include Snapple, Mott's, Bai, Clamato, Hawaiian Punch, Core, Yoo-Hoo, ReaLemon, evian, Vita Coco and Mr and Mrs T mixers. The larger CSD brands in this segment include Dr Pepper, Canada Dry, A&W, 7UP, Sunkist, Squirt, Big Red, RC Cola, and Vernors. The majority of our Packaged Beverages net sales come from the manufacturing and distribution of our own brands and the contract manufacturing of certain private label and emerging brand beverages. We also recognize net sales in this segment from the distribution of our partner brands such as evian, Vita Coco, Peet's RTD Coffee, A Shoc energy drinks, Runa energy drinks and Polar sparkling seltzer waters. We provide a route-to-market for third party brand owners seeking effective distribution for their new and emerging brands. These brands give us exposure in certain markets to fast growing segments of the beverage industry with minimal capital investment. Our Packaged Beverages products are manufactured in multiple facilities across the U.S. and are sold or distributed to retailers and their warehouses by our own distribution network or by third party distributors. We sell our Packaged Beverages products through our DSD and our WD systems, both of which include sales to all major retail channels. BEVERAGE CONCENTRATES Our Beverage Concentrates segment is principally a brand ownership business where we manufacture and sell beverage concentrates in the U.S. and Canada. Most of the brands in this segment are CSD brands. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, Sun Drop, Sunkist soda, A&W, 7UP, Squirt, Big Red, RC Cola and Hawaiian Punch. Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri. We are expanding our manufacturing capabilities to include a concentrate manufacturing facility in Ireland in 2021. Beverage concentrates are shipped to third party bottlers, as well as to our own manufacturing systems, who combine them with carbonation, water, sweeteners and other ingredients, package the combined product in aluminum cans, PET containers and glass bottles, and sell them as a finished beverage to retailers through our Branded Concentrates operating segment. Beverage concentrates are also manufactured into syrup, which is shipped to fountain customers, such as fast food restaurants, who mix the syrup with water and carbonation to create a finished beverage at the point of sale to consumers through our FFS operating segment. Dr Pepper represents most of our FFS volume. Our Beverage Concentrates brands are sold by our bottlers through all major retail channels. 28 TABLE OF CONTENTS LATIN AMERICA BEVERAGES Our Latin America Beverages segment is a brand ownership, manufacturing and distribution business, with operations in Mexico representing approximately 90% of the segment's 2020 net sales. This segment participates mainly in the carbonated mineral water, flavored CSD, bottled water and vegetable juice categories. The largest brands include Peñafiel, Clamato, Squirt, Aguafiel and Crush. VOLUME In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, K-Cup pods or brewers. Coffee Systems K-Cup Pod and Appliance Sales Volume In our Coffee Systems segments, we measure our sales volume as the number of appliances and the number of individual K-Cup pods sold to our customers. Packaged Beverages and Latin America Beverages Sales Volume In our Packaged Beverages and Latin America Beverages segments, we measure volume as case sales to customers. A case sale represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case sales include both our owned brands and certain brands licensed to and/or distributed by us. Beverage Concentrates Sales Volume In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings. It does not include any other component of the finished beverage other than concentrate. COMPARABLE RESULTS OF OPERATIONS Management believes that there are certain non-GAAP financial measures that allow management to evaluate our results, trends and ongoing performance on a comparable basis. In order to derive the adjusted financial information, we adjust certain financial statement captions and metrics prepared under U.S. GAAP for certain items affecting comparability. See Non-GAAP Financial Measures for further information on the certain items affecting comparability used in the preparation of the financial information. These items are referred to within this Management's Discussion and Analysis discussion as Adjusted income from operations, Adjusted interest expense, Adjusted provision for income taxes, Adjusted net income and Adjusted diluted EPS. 29 TABLE OF CONTENTS 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. 30 TABLE OF CONTENTS Impact of COVID-19 on our Financial Statements 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 are excluded in our Adjusted financial measures. In addition, reported amounts under U.S. GAAP also include additional costs, not included as the COVID-19 item affecting comparability, as presented in tables below. Items Affecting Comparability (1) (in millions) Employee Compensation Expense (2) Employee Protection Costs (3) Allowances for Expected Credit Losses (4) Inventory Write-Downs (5) Total For the second quarter of 2021: Coffee Systems $ 1 $ 4 $ (2) $ — $ 3 Packaged Beverages 3 3 (8) — (2) Beverage Concentrates — — (3) — (3) Latin America Beverages — — — — — Total $ 4 $ 7 $ (13) $ — $ (2) For the second quarter of 2020: Coffee Systems $ 7 $ 2 $ — $ 8 $ 17 Packaged Beverages 38 16 — — 54 Beverage Concentrates — — 4 — 4 Latin America Beverages — — — — — 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, 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. (3) Includes costs associated with personal protective equipment, temperature scans, cleaning and other sanitization services. Impacts both cost of sales and SG&A expenses. (4) 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. (5) Impacts cost of sales. 31 TABLE OF CONTENTS RESULTS OF OPERATIONS We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees. References in the financial tables to percentage changes that are not meaningful are denoted by "NM". Non-GAAP financial measures are provided in addition to U.S. GAAP measures. Such non-GAAP financial measures are excluded from the Results of Operations by Segment when there is no difference between the non-GAAP and the corresponding U.S. GAAP measure. See Non-GAAP Financial Measures for more information, including reconciliations to the corresponding U.S. GAAP measures. 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 second quarter of 2021 and 2020: Second Quarter Dollar Percentage ($ in millions, except per share amounts) 2021 2020 Change Change Net sales $ 3,140 $ 2,864 $ 276 9.6 % Cost of sales 1,370 1,302 68 5.2 Gross profit 1,770 1,562 208 13.3 Selling, general and administrative expenses 1,039 1,001 38 3.8 Other operating income, net (3) — (3) NM Income from operations 734 561 173 30.8 Interest expense 125 157 (32) (20.4) 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 32 TABLE OF CONTENTS 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 29.0 CSD sales volume 7.2 NCB sales volume (5.5) Net Sales. 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%. 33 TABLE OF CONTENTS 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. GAAP: 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 34 TABLE OF CONTENTS 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. 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. 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%. 35 TABLE OF CONTENTS 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. 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. 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 $23 million in the prior year period, driven by favorable FX effects, including both transaction and translation, favorable volume/mix and higher net pricing, partially offset by inflation in logistics and input costs, higher marketing investments and increased operating costs due to higher volumes. Adjusted operating margin grew 310 bps versus the prior year period to 22.3%. 36 TABLE OF CONTENTS First Six Months of 2021 Compared to First Six Months of 2020 Consolidated Operations The following table sets forth our unaudited condensed consolidated results of operations for the first six months of 2021 and 2020: First Six Months Dollar Percentage ($ 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 Other (income) expense, net (7) 16 (23) NM Income before provision for income taxes 1,011 611 400 65.5 Provision for income taxes 238 157 81 51.6 Net income $ 773 $ 454 319 70.3 Earnings per common share: Basic $ 0.55 $ 0.32 $ 0.23 71.9 % Diluted 0.54 0.32 0.22 68.8 Gross margin 55.8 % 55.0 % 80 bps Operating margin 22.7 % 18.8 % 390 bps Effective tax rate 23.5 % 25.7 % (220) bps Sales Volume . The following table provides the percentage increase in sales volumes compared to the prior year period: Percentage Change K-Cup Pods 6.8 % Brewers 41.3 CSDs 7.0 NCBs (7.7) Net Sales. 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 $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 $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 $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 $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%. 37 TABLE OF CONTENTS Interest Expense. 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 six months of 2021 due to our strategic refinancing initiatives. Impairment of Investments and Note Receivable. Impairment on investments and note receivable reflected a favorable comparison to a non-cash impairment charge of $86 million in the prior year period associated with our Bedford investment. Effective Tax Rate. The effective tax rate decreased 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. 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. 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 six months of 2021 and 2020: First Six Months Dollar Percent (in millions, except per share amounts) 2021 2020 Change Change Adjusted income from operations $ 1,580 $ 1,459 $ 121 8.3 % Adjusted interest expense 258 265 (7) (2.6) Adjusted provision for income taxes 320 301 19 6.3 Adjusted net income 1,009 877 132 15.1 Adjusted diluted EPS 0.71 0.62 0.09 14.5 Adjusted operating margin 26.2 % 26.6 % (40) bps Adjusted effective tax rate 24.1 % 25.6 % (150) bps Adjusted Income from Operations. 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 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 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 15.1% 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. Adjusted diluted EPS increased 14.5% to $0.71 per diluted share as compared to Adjusted diluted EPS of $0.62 per diluted share in the prior year period. 38 TABLE OF CONTENTS Results of Operations by Segment 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. GAAP: (in millions) First Six Months Segment Results — Net sales 2021 2020 Coffee Systems $ 2,243 $ 2,016 Packaged Beverages 2,805 2,609 Beverage Concentrates 703 615 Latin America Beverages 291 237 Net sales $ 6,042 $ 5,477 First Six Months (in millions) 2021 2020 Segment Results — Income from Operations Coffee Systems $ 658 $ 562 Packaged Beverages 433 397 Beverage Concentrates 492 417 Latin America Beverages 58 48 Unallocated corporate costs (267) (397) Income from operations $ 1,374 $ 1,027 COFFEE SYSTEMS The following table provides selected information about our Coffee Systems segment's results: First Six Months Dollar Percent (in millions) 2021 2020 Change Change Net sales $ 2,243 $ 2,016 $ 227 11.3 % Income from operations 658 562 96 17.1 Operating margin 29.3 % 27.9 % 140 bps Adjusted income from operations 760 710 50 7.0 Adjusted operating margin 33.9 % 35.2 % (130) bps Sales Volume. 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. 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 $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 $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. 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. 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. 39 TABLE OF CONTENTS PACKAGED BEVERAGES The following table provides selected information about our Packaged Beverages segment's results: First Six Months Dollar Percent (in millions) 2021 2020 Change Change Net sales $ 2,805 $ 2,609 $ 196 7.5 % Income from operations 433 397 36 9.1 Operating margin 15.4 % 15.2 % 20 bps Adjusted income from operations 483 472 11 2.3 Adjusted operating margin 17.2 % 18.1 % (90) bps Sales Volume. 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. 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 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 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. BEVERAGE CONCENTRATES The following table provides selected information about our Beverage Concentrates segment's results: First Six Months Dollar Percent (in millions) 2021 2020 Change Change Net sales $ 703 $ 615 $ 88 14.3 % Income from operations 492 417 75 18.0 Operating margin 70.0 % 67.8 % 220 bps Adjusted income from operations 495 419 76 18.1 Adjusted operating margin 70.4 % 68.1 % 230 bps Sales Volume. 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 . 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 $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 $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%. 40 TABLE OF CONTENTS LATIN AMERICA BEVERAGES The following table provides selected information about our Latin America Beverages segment's results: First Six Months Dollar Percent (in millions) 2021 2020 Change Change Net sales $ 291 $ 237 $ 54 22.8 % Income from operations 58 48 10 20.8 Operating margin 19.9 % 20.3 % (40) bps Adjusted income from operations 60 50 10 20.0 Adjusted operating margin 20.6 % 21.1 % (50) bps Sales Volume. 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. 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 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 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 We believe the North American beverage market is influenced by certain key trends and uncertainties. Some of these items, such as the ongoing outbreak of COVID-19, increased health consciousness and changes in consumer preferences and economic factors, have previously created and may continue in the future to create category headwinds for a number of our products. Refer to Item 1A, "Risk Factors", of our Annual Report, combined with the Uncertainties and Trends Affecting Liquidity section below, for more information about risks and uncertainties facing us. CRITICAL ACCOUNTING ESTIMATES The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. These critical accounting estimates are discussed in greater detail in our Annual Report . 41 TABLE OF CONTENTS LIQUIDITY AND CAPITAL RESOURCES Overview Our financial condition and liquidity remain strong. 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 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 $83 million and $165 million as of June 30, 2021 and December 31, 2020, respectively. Principal Sources of Capital Resources Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from our operations and borrowing capacity currently available under our KDP Revolver and 2021 364-Day Credit Agreement. Additionally, we have an uncommitted commercial paper program where we can issue unsecured commercial paper notes on a private placement basis. Based on our current and anticipated level of operations, we believe that our operating cash flows will be sufficient to meet our anticipated obligations for the next twelve months. To the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may utilize cash on hand or amounts available under our financing arrangements, if necessary. Sources of Liquidity - Operations 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. 42 TABLE OF CONTENTS Cash Conversion Cycle Our cash conversion cycle is defined as DIO and DSO less DPO. The calculation of each component of the cash conversion cycle is provided below: Component Calculation (on a trailing twelve month basis) DIO (Average inventory divided by cost of sales) * Number of days in the period DSO (Accounts receivable divided by net sales) * Number of days in the period DPO (Accounts payable * Number of days in the period) divided by cost of sales and SG&A expenses Our cash conversion cycle improved 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: June 30, 2021 2020 DIO 57 52 DSO 32 33 DPO 156 137 Cash conversion cycle (67) (52) Accounts Payable Program As part of our ongoing efforts to improve our cash flow and related liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. Excluding our suppliers who require cash at date of purchase or sale, our current payment terms with our suppliers generally range from 10 to 360 days. We also entered into an agreement with a third party administrator to allow participating suppliers to track payment obligations from us, and if voluntarily elected by the supplier, sell payment obligations from us to financial institutions. Suppliers can sell one or more of our payment obligations at their sole discretion and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. 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 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 Beginning in the second quarter of 2020, we deferred payments of employer-related payroll taxes as allowed under the U.S. Coronavirus Aid, Relief and Economic Security Act, commonly known as the CARES Act. Payment of at least 50% of the deferred amount is due on January 3, 2022, with the remainder due by January 3, 2023. As of June 30, 2021, we have deferred a total of $59 million in such payments. Sources of Liquidity - Financing 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. 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. 43 TABLE OF CONTENTS 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 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. Debt Ratings 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 Moody's Baa2 P-2 Stable February 26, 2021 S&P BBB A-2 Stable May 14, 2018 These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations. As of 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 Our principal uses of our capital resources following the DPS Merger are deleveraging, providing shareholder return to our investors through dividends, and investing in KDP to capture market share and drive growth through innovation and routes to market. Deleveraging and Other Debt Repayments In 2018, management set deleveraging targets for a 2-3 year time period following the DPS Merger in order to optimize our balance sheet, and we continue to be focused on achieving those targets within that time frame. Since the DPS Merger, we have made net repayments of $3,722 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. Dividends 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 for the second quarter of 2021. 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. 44 TABLE OF CONTENTS Capital Expenditures We have significantly invested in state-of-the-art manufacturing and warehousing facilities, including expansive investments in new facilities in Spartanburg, South Carolina; Newbridge, Ireland; and Allentown, Pennsylvania, in order to optimize our supply chain network through integration and productivity projects. Purchases of property, plant and equipment were $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. Purchases of Intangible Assets We have invested in the expansion of our DSD network through transactions with strategic independent bottlers to ensure competitive distribution scale for our brands. These transactions are generally accounted for as an asset acquisition, as the majority of the transaction price represents the reacquisition of our distribution rights. Purchases of intangible assets were $12 million and $15 million for the first six months of 2021 and 2020, respectively. Uncertainties and Trends Affecting Liquidity Disruptions in financial and credit markets, including those caused by the ongoing COVID-19 pandemic, may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials. Customer and consumer demand for our products may 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 continued deleveraging; • Our ability to access our committed financing arrangements, including our KDP Revolver and our 2021 364-Day Credit Agreement ; • Our ability to issue unsecured uncommitted commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $2,400 million; • A significant downgrade in our credit ratings could limit i) a financial institution's willingness to participate in our accounts payable program and reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions, which could impact our accounts payable program; or ii) our ability to issue debt at terms that are favorable to us; • Our continued payment of dividends; • Our continued capital expenditures; • Future mergers or acquisitions, which may include brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage; • Future equity investments; • Seasonality of our operating cash flows, which could impact short-term liquidity; and • Fluctuations in our tax obligations. 45 TABLE OF CONTENTS SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION The Notes are fully and unconditionally guaranteed by certain of our direct and indirect subsidiaries (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by us and jointly and severally guarantee, subject to the release provisions described below, our obligations under the Notes. None of our subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries held by Maple Parent Holdings Corp. prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of our other indebtedness, our exercise of the legal defeasance option with respect to the Notes and the discharge of our obligations under the applicable indenture. The following schedules present the summarized financial information for Keurig Dr Pepper Inc. (the “Parent”) and the Guarantors on a combined basis after intercompany eliminations; the Parent and the Guarantors' amounts due from and amounts due to Non-Guarantors are disclosed separately. The consolidating schedules are provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries. The summarized financial information for the Parent and Guarantors were as follows: (in millions) For the First Six Months of 2021 Net sales $ 3,473 Income from operations 702 Net income attributable to KDP 773 (in millions) June 30, 2021 December 31, 2020 Current assets $ 1,887 $ 1,810 Non-current assets 43,692 43,333 Total assets (1) $ 45,579 $ 45,143 Current liabilities 4,303 5,148 Non-current liabilities 17,034 16,164 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. 46 TABLE OF CONTENTS NON-GAAP FINANCIAL MEASURES To supplement the consolidated financial statements presented in accordance with U.S. 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. GAAP. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. The adjusted measures are not substitutes for their comparable U.S. GAAP financial measures, such as income from operations, net income, diluted EPS, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures. The Company uses these non-GAAP financial measures, in addition to U.S. GAAP financial measures, to evaluate its operating and financial performance and to compare such performance to that of prior periods and to the performance of its competitors. Additionally, the Company uses these non-GAAP financial measures in making operational and financial decisions and in the Company’s budgeting and planning process. The Company believes that providing these non-GAAP financial measures to investors helps investors evaluate the Company’s operating performance, profitability and business trends in a way that is consistent with how management evaluates such performance and consistent with guidance previously provided by the Company. For the 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. Items affecting comparability : Defined as certain items that are excluded for comparison to prior year periods, adjusted for the tax impact as applicable. Tax impact is determined based upon an approximate rate for each item. For each period, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S. GAAP and do not have an offsetting risk reflected within the financial results; (ii) the amortization associated with definite-lived intangible assets; (iii) the amortization of the deferred financing costs associated with the DPS Merger; (iv) the amortization of the fair value adjustment of the senior unsecured notes obtained as a result of the DPS Merger; (v) stock compensation expense and the associated windfall tax benefit attributable to the matching awards made to employees who made an initial investment in KDP; (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; (iii) costs related to significant non-routine legal matters; (iv) the loss on early extinguishment of debt related to the redemption of debt; (v) incremental costs to our operations related to risks associated with the COVID-19 pandemic; and (vi) gains from insurance recoveries related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment. For the 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; (iii) transaction costs for significant business combinations (completed or abandoned) excluding the DPS Merger; (iv) costs related to significant non-routine legal matters; (v) the loss on early extinguishment of debt related to the redemption of debt, (vi) incremental costs to our operations related to risks associated with the COVID-19 pandemic and (vii) impairment recognized on our 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. We believe removing these costs reflects how management views our business results on a consistent basis. See Impact of COVID-19 on our Financial Statements for further information. For the 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. 47 TABLE OF CONTENTS KEURIG DR PEPPER INC. RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS For the Second Quarter 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 $ 1,370 $ 1,770 56.4 % $ 1,039 $ 734 23.4 % Items Affecting Comparability: Mark to market 17 (17) 21 (38) Amortization of intangibles — — (34) 34 Stock compensation — — (5) 5 Restructuring and integration costs — — (49) 49 Productivity (14) 14 (24) 38 Nonroutine legal matters — — (6) 6 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. 48 TABLE OF CONTENTS 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. 49 TABLE OF CONTENTS 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) Adjusted $ 2,657 $ 3,385 56.0 % $ 1,809 $ 1,580 26.2 % 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 $ 265 $ 105 $ 1,011 $ 238 23.5 % $ 773 $ 0.54 Items Affecting Comparability: Mark to market 7 — (83) (20) (63) (0.04) Amortization of intangibles — — 67 17 50 0.04 Amortization of deferred financing costs (4) — 4 — 4 — Amortization of fair value debt adjustment (10) — 10 2 8 — Stock compensation — — 11 14 (3) — Restructuring and integration costs — — 92 22 70 0.05 Productivity — — 71 18 53 0.04 Loss on early extinguishment of debt — (105) 105 25 80 0.06 Nonroutine legal matters — — 16 3 13 0.01 COVID-19 — — 27 7 20 0.01 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 Diluted earnings per common share may not foot due to rounding. 50 TABLE OF CONTENTS KEURIG DR PEPPER INC. RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS For the First Six Months 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 $ 2,463 $ 3,014 55.0 % $ 2,029 $ 1,027 18.8 % Items Affecting Comparability: Mark to market (44) 44 (27) 71 Amortization of intangibles — — (66) 66 Stock compensation — — (15) 15 Restructuring and integration costs — — (104) 104 Productivity (18) 18 (55) 73 Nonroutine legal matters — — (35) 35 COVID-19 (19) 19 (49) 68 Adjusted $ 2,382 $ 3,095 56.5 % $ 1,678 $ 1,459 26.6 % Interest expense Loss on early extinguishment of debt Impairment of investment and note receivable Income before provision for income taxes Provision for income taxes Effective tax rate Net income attributable to KDP Diluted earnings per share Reported $ 310 $ 4 $ 86 $ 611 $ 157 25.7 % $ 454 $ 0.32 Items Affecting Comparability: Mark to market (27) — — 98 26 72 0.05 Amortization of intangibles — — — 66 18 48 0.03 Amortization of deferred financing costs (6) — — 6 1 5 — Amortization of fair value debt adjustment (12) — — 12 3 9 0.01 Stock compensation — — — 15 3 12 0.01 Restructuring and integration costs — — 104 26 78 0.05 Productivity — — — 73 19 54 0.04 Loss on early extinguishment of debt — (4) — 4 1 3 — Impairment of investment and note receivable — — (86) 86 21 65 0.05 Nonroutine legal matters — — — 35 9 26 0.02 COVID-19 — — — 68 17 51 0.04 Adjusted $ 265 $ — $ — $ 1,178 $ 301 25.6 % $ 877 $ 0.62 Diluted earnings per common share may not foot due to rounding. 51 TABLE OF CONTENTS KEURIG DR PEPPER INC. RECONCILIATION OF SEGMENT ITEMS TO CERTAIN NON-GAAP ADJUSTED SEGMENT ITEMS (Unaudited) (in millions) Reported Items Affecting Comparability Adjusted GAAP For the second quarter of 2021: Income from Operations Coffee Systems $ 322 $ 49 $ 371 Packaged Beverages 258 28 286 Beverage Concentrates 254 2 256 Latin America Beverages 36 1 37 Unallocated corporate costs (136) 25 (111) Total income from operations $ 734 $ 105 $ 839 For the second quarter of 2020: Income from Operations Coffee Systems $ 290 $ 73 $ 363 Packaged Beverages 208 61 269 Beverage Concentrates 220 2 222 Latin America Beverages 21 2 23 Unallocated corporate costs (178) 76 (102) Total income from operations $ 561 $ 214 $ 775 KEURIG DR PEPPER INC. RECONCILIATION OF SEGMENT ITEMS TO CERTAIN NON-GAAP ADJUSTED SEGMENT ITEMS (Unaudited) (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 52 TABLE OF CONTENTS