What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-28 compared with 2021-07-29 · 236 added, 206 removed, 634 unchanged (41% of the section changed)

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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.

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 the impact of the global COVID-19 pandemic, inflation, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters, supply chain issues 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.

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

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

We manufacture 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:

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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.

Starbucks, Smuckers, Peet's, Dunkin', 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.

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

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 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 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.

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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.

and are sold or distributed to retailers and their warehouses by our own distribution network through our DSD and our WD systems, or by third party distributors, to all major retail channels.

BEVERAGE CONCENTRATES

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Louis, Missouri.

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

We are expanding our manufacturing capabilities to include a concentrate manufacturing facility in Ireland in the fourth quarter of 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.

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EXECUTIVE SUMMARY

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

Financial Overview - Third Quarter of 2021 as compared to Third 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.

Key Events During and Subsequent to the Third Quarter of 2021

During the third quarter of 2021, we made net repayments of our Notes, our commercial paper and our other credit agreements of $325 million.

On September 14, 2021, our Board of Directors declared a regular quarterly dividend of $0.1875 per share, which was paid on October 15, 2021 to shareholders of record as of October 1, 2021.

On October 1, 2021, we announced that our Board of Directors authorized a share repurchase program of up to $4 billion of our outstanding common stock, beginning on January 1, 2022, enabling us to opportunistically return value to shareholders.

On October 25, 2021, we acquired an ownership interest in Vita Coco for $20 million.

Uncertainties and Trends Affecting Our Business

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

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.

Some of these items, such as the ongoing COVID-19 pandemic and its resulting impacts on the global economy, including supply chain constraints and labor shortages, have led to inflation in input costs, logistics, manufacturing and labor costs.

During the third quarter of 2021, we have experienced supply chain disruptions and a significant inflationary impact compared to the prior year period.

These impacts have created headwinds for our products that we expect to continue during the remainder of 2021 and into 2022.

As a result of these inflationary pressures, we have increased the pricing on a number of our products.

As a result of these price increases, we may incur a reduction of volume or net sales, and combined with the inflationary pressures, could impact our margins and operating results.

Refer to Note 5 of the Notes to our Unaudited Condensed Consolidated Financial Statements and Item 3, Quantitative and Qualitative Disclosures About Market Risk for management's discussion of how we manage our exposure to commodity risk.

Impact of COVID-19 on our Financial Statements

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Inventory Write-Downs (5)

For the second quarter of 2021:

For the third quarter of 2021:

Coffee Systems $ 1 $ 1 $ — $ — $ 2

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Total $ 2 $ 2 $ — $ — $ 4

For the second quarter of 2020:

For the third quarter of 2020:

Coffee Systems $ 7 $ 5 $ — $ — $ 12

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Total $ 39 $ 10 $ — $ — $ 49

For the first six months of 2021:

For the first nine months of 2021:

Coffee Systems $ 3 $ 14 $ (2) $ — $ 15

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Total $ 10 $ 21 $ (13) $ — $ 18

For the first six months of 2020:

For the first nine months of 2020:

Coffee Systems $ 14 $ 7 $ 2 $ 8 $ 31

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GAAP measures.

Second Quarter of 2021 Compared to Second Quarter of 2020

Third Quarter of 2021 Compared to Third 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

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

Third Quarter Dollar Percentage

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

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Selling, general and administrative expenses 1,040 949 91 9.6

Other operating income, net (3) — (3) NM

Other operating expense (income), net — 2 (2) NM

Income from operations 795 753 42 5.6

Interest expense 116 148 (32) (21.6)

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

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

Impairment of investments and note receivable — 16 (16) NM

Other expense (income), net 1 5 (4) NM

Income before provision for income taxes 678 584 94 16.1

Provision for income taxes 149 141 8 5.7

Net income $ 448 $ 298 150 50.3

Net income including non-controlling interest 529 443 86 19.4

Net loss attributable to non-controlling interest (1) — (1) NM

Net income attributable to KDP $ 530 $ 443 87 19.6

Earnings per common share:

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Sales Volume.

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

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

Percentage Change

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NCB sales volume (6.4)

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%.

Net sales increased $230 million, or 7.6%, to $3,250 million for the third quarter of 2021 compared with $3,020 million in the prior year period.

This performance reflected higher net price realization of 3.6%, volume/mix growth of 3.2% and favorable FX translation of 0.8%.

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 profit increased $131 million for the third quarter of 2021 compared with the prior year period.

This performance primarily reflected higher net price realization, the impact of growth in volume/mix, the benefit of productivity and merger synergies, favorable FX impacts, including both transaction and translation, and lower COVID-19-related expenses.

These benefits were partially offset by higher manufacturing costs, due to both inflation and the growth in volume/mix, an unfavorable change in unrealized commodity mark-to-market impacts, and increased costs to achieve productivity.

Gross margin increased 10 bps versus the year ago period to 56.5%, 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.

SG&A expenses increased $91 million, or 9.6%, to $1,040 million for the third quarter of 2021 compared with $949 million in the prior year period.

The increase was driven by increases in logistics, due to both inflation and volume/mix, higher marketing expense, an unfavorable comparison in unrealized mark-to-market on commodities, higher expenses associated with restructuring and integration projects and unfavorable FX impacts.

These increases were partially offset by reduced expenses related to the COVID-19 pandemic 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%.

Income from operations increased $42 million to $795 million for the third quarter of 2021 compared to $753 million in the prior year period due to the increase in gross profit, partially offset by increased SG&A expenses.

Operating margin decreased 40 bps versus the year ago period to 24.5%.

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.

Interest expense decreased $32 million, or 21.6%, to $116 million for the third quarter of 2021 compared with $148 million in the prior year period.

This change was driven by our strategic refinancing initiatives, continued deleveraging, and realized gains on interest rate contracts.

Impairment of Investments and Note Receivable.

Impairment of investments and note receivable reflected a favorable comparison to a non-cash impairment charge of $16 million in the prior year period associated with our LifeFuels investment.

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.

The effective tax rate decreased 210 bps to 22.0% for the third quarter of 2021, compared to 24.1% in the prior year period, which was primarily driven by the decrease on the revaluation of state deferred tax liabilities due to state legislative and apportionment changes in 2021, as well as the benefit received from U.S.

provision-to-return adjustments.

Net Income Attributable to KDP.

Net income increased $87 million to $530 million for the third quarter of 2021 as compared to $443 million in the prior year period, driven by improved income from operations, reduced interest expense and the favorable comparison to the impairment of our LifeFuels investment in the prior year period.

Diluted EPS increased 19.4% to $0.37 per diluted share for the third quarter of 2021 as compared to $0.31 in the prior year period.

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

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

Third Quarter Dollar Percent

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

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Adjusted provision for income taxes 190 173 17 9.8

Adjusted net income 538 469 69 14.7

Adjusted net income attributable to KDP 631 557 74 13.3

Adjusted diluted EPS 0.44 0.39 0.05 12.8

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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 income from operations increased $57 million, or 6.5%, to $931 million for the third quarter of 2021 as compared to Adjusted income from operations of $874 million in the prior year period.

Driving this performance in the quarter were the growth in net sales and the benefits of productivity and merger synergies.

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

Adjusted operating margin declined 30 bps versus the year ago period to 28.6%.

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 interest expense decreased $29 million, or 20.9%, to $110 million for the third quarter of 2021 compared to Adjusted interest expense of $139 million in the prior year period.

This benefit was primarily the result of our reduced interest rates resulting from our strategic refinancing initiatives, continued deleveraging, and realized gains on 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.

The Adjusted effective tax rate decreased 50 bps to 23.2% for the third quarter of 2021, compared to the Adjusted effective tax rate of 23.7% in the prior year period.

This decrease was primarily driven by the benefit received from U.S.

provision-to-return adjustments.

Adjusted Net Income Attributable to KDP.

Adjusted net income attributable to KDP increased 13.3% to $631 million for the third quarter of 2021 as compared to Adjusted net income attributable to KDP of $557 million in the prior year period, driven by the growth in Adjusted income from operations and the decreased in Adjusted interest expense.

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.

Adjusted diluted EPS increased 12.8% to $0.44 per diluted share for the third quarter of 2021 as compared to Adjusted diluted EPS of $0.39 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

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

Third Quarter

(in millions) 2021 2020

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Net sales $ 3,250 $ 3,020

Second Quarter

Third Quarter

(in millions) 2021 2020

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

Second Quarter Dollar Percent

Third Quarter Dollar Percent

(in millions) 2021 2020 Change Change

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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%.

Volume growth for the Coffee Systems segment included K-Cup pod volume growth of 6.3%, reflecting growth in at-home pod shipments and improvement in our away-from-home businesses, which continues to be well below pre-pandemic levels.

Brewer volume increased 2.2% in the quarter, as compared to 33.7% in the year ago period.

Net sales increased 5.3% to $1,155 million for the third quarter of 2021 compared to net sales of $1,097 million in the prior year period, reflecting volume/mix growth of 5.7% and favorable FX translation of 0.7%, which was partially offset by lower net price realization of 1.1%.

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%.

Income from operations increased $14 million, or 4.4%, to $334 million for the third quarter of 2021, compared to $320 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, the benefit of volume/mix growth, and a favorable comparison to COVID-19-related expenses in the prior year period.

These impacts were partially offset by inflation, strategic pricing initiatives and increased marketing expense.

Operating margin decreased 30 bps versus the year ago period to 28.9%.

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 income from operations increased $4 million, or 1.1%, to $377 million for the third quarter of 2021, compared with Adjusted income from operations of $373 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, and the benefit of volume/mix growth.

These impacts were partially offset by inflation, strategic pricing initiatives and increased marketing expense.

Adjusted operating margin decreased 140 bps versus the year ago period to 32.6%.

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

Second Quarter Dollar Percent

Third Quarter Dollar Percent

(in millions) 2021 2020 Change Change

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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%.

Sales volume for the third quarter of 2021 increased 0.1%, as strength in CSDs, which benefited from the expansion of our route to market network, as well as increases in Polar and Mott’s, were mostly offset by declines in Snapple and Hawaiian Punch.

Net sales increased 6.9% to $1,547 million for the third quarter of 2021, compared with net sales of $1,447 million in the prior year period, driven by higher net price realization of 5.3%, due to the impact of lower trade and price increases, volume/mix growth of 1.5% and favorable FX translation of 0.1%.

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.

Income from operations increased $28 million, or 10.8%, to $288 million for the third quarter of 2021, compared with $260 million for the prior year period, driven by higher net price realization, the favorable comparison to COVID-19-related expenses in the prior year period, the benefits of productivity and merger synergies, and volume/mix growth.

These growth drivers were partially offset by inflation, increased costs due to higher volumes, driven by an expansion of our route to market network, expenses associated with productivity projects, higher marketing expense and increases in other operating costs.

Operating margin grew 60 bps versus the year ago period to 18.6%.

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 income from operations increased $8 million, or 2.6%, to $312 million for the third quarter of 2021, compared with Adjusted income from operations of $304 million for the prior year period, driven by higher net price realization, the benefits of productivity and merger synergies, and volume/mix growth.

These growth drivers were partially offset by inflation, increased costs due to higher volumes, driven by an expansion of our route to market network, higher marketing expense and increases in other operating costs.

Adjusted operating margin declined 80 bps versus the year ago period to 20.2%.

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

Second Quarter Dollar Percent

Third Quarter Dollar Percent

(in millions) 2021 2020 Change Change

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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%.

Sales volume for the third quarter of 2021 declined 0.6%, as improving trends in our fountain foodservice business, which services restaurants and hospitality, were more than offset by declines in our branded concentrates business, primarily driven by a shift in sales from concentrates to finished goods in our Packaged Beverages segment.

Net sales increased 11.4% to $392 million for the third quarter of 2021 compared to $352 million for the prior year period, reflecting higher net price realization of 11.4%, driven by the impact of our annual price increases and lower trade, as well as favorable FX translation of 0.6%, partially offset by unfavorable volume/mix of 0.6%.

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.

Income from operations increased $24 million, or 9.2%, to $286 million for the third quarter of 2021 compared to $262 million for the prior year period, driven by the impact of higher net sales, partially offset by higher marketing expense.

Operating margin declined 140 bps from versus the year ago period to 73.0%.

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 income from operations increased $24 million, or 9.1%, to $289 million for the third quarter of 2021 compared with Adjusted income from operations of $265 million for the prior year period, driven by the impact of higher net sales, partially offset by higher marketing expense.

Adjusted operating margin declined 160 bps versus the year ago period to 73.7%.

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

Second Quarter Dollar Percent

Third Quarter Dollar Percent

(in millions) 2021 2020 Change Change

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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%.

Sales volume for the third quarter of 2021 increased 5.3% compared to the prior year period, driven primarily by Peñafiel, Squirt and Clamato.

Net sales increased 25.8% to $156 million for the third quarter of 2021 compared to $124 million for the prior year period, driven by favorable FX translation of 11.3%, favorable volume/mix of 10.5% and higher net price realization of 4.0%.

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.

Income from operations increased 48.0% to $37 million for the third quarter of 2021 compared to $25 million in the prior year period, driven by favorable volume/mix, favorable FX effects, including both transaction and translation, higher net pricing, and the benefits of productivity, partially offset by inflation, higher marketing investments and increased operating costs due to higher volumes.

Operating margin increased 350 bps versus the year ago period to 23.7%.

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 income from operations increased 48.0% to $37 million for the third quarter of 2021 compared to $25 million in the prior year period, driven by favorable volume/mix, favorable FX effects, including both transaction and translation, higher net pricing, and the benefits of productivity, partially offset by inflation, higher marketing investments and increased operating costs due to higher volumes.

Adjusted operating margin grew 350 bps versus the prior year period to 23.7%.

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

First Nine Months of 2021 Compared to First Nine 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

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

First Nine Months Dollar Percentage

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

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Selling, general and administrative expenses 3,040 2,978 62 2.1

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

Other operating expense (income), net (4) (40) 36 NM

Income from operations 2,169 1,780 389 21.9

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Impairment of investments and note receivable — 102 (102) NM

Other (income) expense, net (7) 16 (23) NM

Other expense (income), net (6) 21 (27) NM

Income before provision for income taxes 1,689 1,195 494 41.3

Provision for income taxes 387 298 89 29.9

Net income $ 773 $ 454 319 70.3

Net income including non-controlling interest 1,302 897 405 45.2

Net loss attributable to non-controlling interest (1) — (1) NM

Net income attributable to KDP $ 1,303 $ 897 406 45.3

Earnings per common share:

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K-Cup Pods 6.6 %

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.

Net sales increased $795 million, or 9.4%, to $9,292 million for the first nine months of 2021 compared to $8,497 million in the prior year period.

This performance reflected volume/mix of 6.3%, net price realization of 2.1% and favorable FX translation of 1.0%.

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 profit increased $487 million, or 10.3%, to $5,205 million for the first nine months of 2021 compared to $4,718 million in the prior year period.

This performance primarily reflected strong growth in net sales, the benefit of productivity and merger synergies, 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.

Gross margin increased 50 bps versus the year ago period to 56.0%.

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.

SG&A expenses increased $62 million, or 2.1%, to $3,040 million for the first nine months of 2021 compared to $2,978 million in the prior year period.

The increase was driven by increases in logistics, driven by both inflation and higher volumes, higher marketing expense, FX effects and expenses associated with productivity projects.

These increases were partially offset by reduced expenses related to the COVID-19 pandemic of $97 million, productivity and merger synergies, and a favorable change in commodity mark-to-market impacts of $60 million.

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.

Other operating income, net had an unfavorable change of $36 million for the first nine 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.

Income from operations increased $389 million, or 21.9%, to $2,169 million for the first nine months of 2021 compared to $1,780 million in the prior year period, driven by the increase in gross profit, partially offset by the increase in SG&A expenses and the unfavorable change in other operating income, net.

Operating margin increased 240 bps versus the year ago period to 23.3%.

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.

Interest expense decreased $77 million, or 16.8%, to $381 million for the first nine months of 2021 compared to $458 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 $35 million, lower interest rates resulting from our strategic refinancing initiatives, and our continued deleveraging.

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.

Loss on early extinguishment of debt reflected expense of $105 million during the first nine 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.

Impairment on investments and note receivable reflected a favorable comparison to a non-cash impairment charge of $102 million in the prior year period associated with our Bedford and LifeFuels investments.

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 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.

The effective tax rate decreased 200 bps to 22.9% for the first nine months of 2021, compared to 24.9% in the prior year period, primarily driven by the tax benefit received from excess tax deductions that were generated from the vesting of RSUs in the first nine months of 2021, as well as the benefit received from the Company’s election of the high-tax exception to the GILTI calculation and U.S.

provision-to-return adjustments.

Net Income Attributable to KDP.

Net income attributable to KDP increased $406 million, or 45.3%, to $1,303 million for the first nine months of 2021 as compared to $897 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, partially offset by the loss on early extinguishment of debt in the first nine months of 2021.

Diluted EPS increased 44.4% to $0.91 per diluted share as compared to $0.63 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

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

First Nine Months Dollar Percent

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

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Adjusted provision for income taxes 510 474 36 7.6

Adjusted net income 1,009 877 132 15.1

Adjusted net income attributable to KDP 1,640 1,434 206 14.4

Adjusted diluted EPS 1.15 1.01 0.14 13.9

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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 income from operations increased $178 million, or 7.6%, to $2,511 million for the first nine months of 2021 compared to Adjusted income from operations of $2,333 million in the prior year period.

Driving this performance in the current period were strong growth in net sales, the benefit of productivity and merger synergies, and favorable changes in unrealized commodity mark-to-market impacts, which impacted both SG&A and cost of sales.

Partially offsetting these positive drivers were inflation, higher marketing expense, increased operating costs due to higher volumes, and an unfavorable comparison to a network optimization program gain of $42 million on the asset sale-leaseback of four facilities in the prior year period.

Adjusted operating margin declined 50 bps versus the year ago period to 27.0%.

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 interest expense decreased $36 million, or 8.9%, to $368 million for the first nine months of 2021 compared to Adjusted interest expense of $404 million in the prior year period, driven by reduced interest rates resulting from our strategic refinancing initiatives and continued deleveraging.

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.

The Adjusted effective tax rate decreased 110 bps to 23.7% for the first nine months of 2021, compared to 24.8% 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 nine months of 2021, as well as the benefit received from U.S.

provision-to-return adjustments.

Adjusted Net Income Attributable to KDP.

Adjusted net income attributable to KDP increased 14.4% to $1,640 million for the first nine months of 2021 as compared to Adjusted net income of $1,434 million in the prior year period.

This performance was driven primarily by strong growth in Adjusted income from operations and the decrease in Adjusted interest expense.

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 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

The following tables provide net sales and income from operations for our reportable segments for the first nine 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 Nine Months

Segment Results — Net sales 2021 2020

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Net sales $ 9,292 $ 8,497

First Six Months

First Nine Months

(in millions) 2021 2020

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

First Six Months Dollar Percent

First Nine Months Dollar Percent

(in millions) 2021 2020 Change Change

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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 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%.

Sales volume growth in the first nine months of 2021 compared to the prior year period for the Coffee Systems segment included K-Cup pod volume growth of 6.6%, reflecting strength in at-home consumption and modest improvement in the away-from-home businesses.

Brewer volume increased 22.5% in the first nine months of 2021, as compared to growth of 17.7% in the year-ago period, driven by our successful brewer innovation program.

Net sales increased 9.2% to $3,398 million for the first nine months of 2021 compared to $3,113 million in the prior year period, driven by volume/mix growth of 9.3% and favorable FX translation of 1.0%, partially offset by lower net price realization of 1.1%.

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.

Income from operations increased $110 million, or 12.5%, to $992 million for the first nine months of 2021, compared to $882 million in the prior year period, driven by the continued benefit of productivity and merger synergies, strong volume/mix, reduced costs associated with our productivity projects, a favorable comparison to an increase in our litigation reserve in the prior year, and favorable FX effects, including both transaction and translation.

These benefits were partially offset by declines due to inflation, 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 90 bps versus the year ago period to 29.2%.

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.

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.

Adjusted income from operations increased $54 million, or 5.0%, to $1,137 million for the first nine months of 2021, compared to $1,083 million in the prior year period, driven by the continued benefit of productivity, strong volume/mix, and favorable FX effects, including both transaction and translation.

Adjusted operating margin declined 130 bps versus the year ago period to 33.5%.

PACKAGED BEVERAGES

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

First Six Months Dollar Percent

First Nine Months Dollar Percent

(in millions) 2021 2020 Change Change

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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.

Sales volume for the first nine months of 2021 increased 1.4% 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%.

Net sales increased 7.3% to $4,352 million in the first nine months of 2021, compared to $4,056 million in the prior year period, driven by volume/mix of 4.7%, net price realization of 2.4% and favorable FX translation of 0.2%.

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.

Income from operations increased $64 million, or 9.7%, to $721 million for the first nine months of 2021 compared to $657 million for the prior year period, driven primarily by strong volume/mix growth, higher net price realization, 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, 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, higher marketing expense and increased operating costs due to higher volumes, driven by an expansion of our route to market network.

Operating margin grew 40 bps from the year ago period to 16.6%.

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.

Adjusted income from operations increased $19 million, or 2.4%, to $795 million for the first nine months of 2021 compared to $776 million for the prior year period, driven primarily by strong volume/mix growth, higher net price realization and the benefit of productivity and merger synergies.

These increases were partially offset by inflation, 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, higher marketing expense and increased operating costs due to higher volumes, driven by an expansion of our route to market network.

Adjusted operating margin decreased 80 bps versus the year ago period to 18.3%, 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

First Nine Months Dollar Percent

(in millions) 2021 2020 Change Change

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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 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%.

Sales volume for the first nine months of 2021 increased 2.4% 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 nine months of 2021 compared to the year-ago period.

Net sales increased 13.2% to $1,095 million in the first nine months of 2021, compared to $967 million in the prior year period, reflecting higher net price realization of 9.7%, volume/mix growth of 3.0% 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.

Income from operations increased $99 million, or 14.6%, to $778 million for the first nine months of 2021 compared to $679 million in the prior year period.

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

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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.

Adjusted income from operations increased $100 million, or 14.6%, to $784 million for the first nine months of 2021 compared to $684 million in the prior year period.

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

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

First Six Months Dollar Percent

First Nine Months Dollar Percent

(in millions) 2021 2020 Change Change

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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 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%.

Sales volume for the first nine months of 2021 as compared to the prior year period increased 2.6%, driven by Peñafiel and Clamato, partially offset by declines in Squirt and Crush.

Net sales grew 23.8% to $447 million for the first nine months of 2021, compared to $361 million in the prior year period, reflecting favorable FX translation of 9.1%, volume/mix growth of 8.6% and net price realization of 6.1%.

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%.

Income from operations increased $22 million, or 30.1%, to $95 million for the first nine months of 2021 compared to $73 million in the prior year period, driven by higher net price realization and favorable volume/mix, partially offset by inflation and higher marketing expense.

Operating margin increased 110 bps versus the year ago period to 21.3%.

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.

Adjusted income from operations increased $22 million, or 29.3%, to $97 million for the first nine months of 2021 compared to $75 million in the prior year period, driven by higher net price realization and favorable volume/mix, partially offset by inflation and higher marketing expense.

Adjusted operating margin improved 90 bps versus the year ago period to 21.7%.

CRITICAL ACCOUNTING ESTIMATES

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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.

Net cash provided by operations was $1,933 million for the first nine months of 2021 compared to $1,666 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.

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

Cash, cash equivalents, restricted cash and restricted cash equivalents decreased $52 million from December 31, 2020 to September 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.

Foreign cash balances were $163 million and $165 million as of September 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 $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.

Net cash provided by operating activities increased $267 million for the first nine months of 2021, as compared to the first nine 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 15 days to approximately 67 days as of June 30, 2021 as compared to 52 days in the prior year period.

Our cash conversion cycle improved 10 days to approximately 66 days as of September 30, 2021 as compared to 56 days in the prior year period.

The following table summarizes our cash conversion cycle:

September 30,

Cash conversion cycle (66) (56)

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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.

We also entered into agreements with third party administrators 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.

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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 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.

We have been informed by the third party administrators that as of September 30, 2021 and December 31, 2020, $3,027 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 $2,492 million and $2,022 million for the first nine 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 June 30, 2021, we have deferred a total of $59 million in such payments.

As of September 30, 2021, we have deferred a total of $59 million in such payments.

Sources of Liquidity - Financing

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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.

Commissions and fees paid under the ATM program were less than $1 million for the first nine 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 June 30, 2021, our credit ratings were as follows:

As of September 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 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.

As of September 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.

Through the remainder of 2021, our principal uses of our capital resources following the DPS Merger are deleveraging, providing shareholder return to our investors through regular quarterly dividends, and investing in KDP to capture market share and drive growth through innovation and routes to market.

See Expansion of Our Capital Allocation Strategy below.

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 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.

Since the DPS Merger, we have made net repayments of $4,047 million of our Notes, our commercial paper and our other credit agreements, including $872 million for the first nine 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.

Regular Quarterly 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.

For the first nine months of 2021, we have declared total dividends of $0.525 per share.

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.

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

Spartanburg, South Carolina;

and Allentown, Pennsylvania, in 2021 and 2020, in order to optimize our supply chain network through integration and productivity projects and to mitigate risk of business interruption.

Purchases of property, plant and equipment were $325 million and $356 million for the first nine 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 nine months of 2021 and 2020 primarily related to our continued investment in state-of-the-art manufacturing and warehousing facilities.

Capital expenditures included in accounts payable and accrued expenses were $180 million and $255 million for the first nine months of 2021 and 2020, respectively, which primarily related to these investments.

As we begin to move past the three-year period after the DPS Merger, we expect that purchases of property, plant and equipment will be approximately 3% of net sales on an annualized basis.

Purchases of Intangible Assets

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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 six months of 2021 and 2020, respectively.

Purchases of intangible assets were $31 million and $26 million for the first nine months of 2021 and 2020, respectively.

Expansion of Our Capital Allocation Strategy

Beginning on January 1, 2022, we intend to expand our capital allocation strategy to include inorganic options to drive total shareholder return.

Our primary inorganic option to drive total shareholder return will be through strategic acquisitions.

However, to the extent our primary option does not occur, we may employ secondary options, which may include the repurchase of shares or special dividends.

See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, for further information.

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, which could result in a reduction in our sales volume.

Customer and consumer demand for our products may also be impacted by the 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 intention to drive significant cash flow generation to enable continued deleveraging through the end of 2021;

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

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

• Our continued payment of dividends;

• Our continued payment of regular quarterly 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 opportunistic repurchases of our common stock or special dividends to drive total shareholder return;

• Future equity investments;

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

(in millions) For the First Six Months of 2021

(in millions) For the First Nine Months of 2021

Net sales $ 5,384

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Net income attributable to KDP 1,303

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

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

Current assets $ 1,774 $ 1,810

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$ 21,190 $ 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.

(1) Includes $133 million and $423 million of intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of September 30, 2021 and December 31, 2020, respectively.

(2) Includes $37 million and $30 million of intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of September 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 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.

GAAP, we have presented for the third quarter and first nine 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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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.

We use these non-GAAP financial measures, in addition to U.S.

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

Additionally, we use these non-GAAP financial measures in making operational and financial decisions and in our budgeting and planning process.

We believe that providing these non-GAAP financial measures to investors helps investors evaluate our 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 us.

For the third quarter and first nine 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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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;

For the third quarter and first nine 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 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;

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

(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 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.

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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.

For the third quarter and first nine 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 Second Quarter of 2021

For the Third Quarter of 2021

(Unaudited, in millions, except per share data)

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COVID-19 (3) 3 (1) 4

Transaction costs — — (1) 1

Malware incident — — 1 (1)

Adjusted $ 1,418 $ 1,832 56.4 % $ 901 $ 931 28.6 %

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Productivity — 44 11 33 0.02

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

Nonroutine legal matters — 7 2 5 —

COVID-19 — 4 1 3 —

Transaction costs — 1 — 1 —

Malware incident — (1) (1) — —

Change in deferred tax liabilities related to goodwill and other intangible assets — — 7 (7) —

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

For the Second Quarter of 2020

For the Third Quarter of 2020

(Unaudited, in millions, except per share data)

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Adjusted $ 1,333 $ 1,687 55.9 % $ 811 $ 874 28.9 %

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

Interest expense Impairment of investments and note receivable Income before provision for income taxes Provision for income taxes Effective tax rate

Net income including non-controlling interest Diluted earnings per share

Reported $ 148 $ 16 $ 584 $ 141 24.1 % $ 443 $ 0.31

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Productivity — — 30 8 22 0.02

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

Impairment on Investment — (16) 16 4 12 0.01

Nonroutine legal matters — — 8 1 7 —

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

For the First Six Months of 2021

For the First Nine Months of 2021

(Unaudited, in millions, except per share data)

10 unchanged sentences

COVID-19 (22) 22 (9) 31

Transaction costs — — (1) 1

Malware incident — — 3 (3)

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COVID-19 — — 31 8 23 0.02

Transaction costs — — 1 — 1 —

Malware incident — — (3) (1) (2) —

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

For the First Six Months of 2020

For the First Nine Months of 2020

(Unaudited, in millions, except per share data)

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(in millions) Reported Items Affecting Comparability Adjusted GAAP

For the second quarter of 2021:

For the third quarter of 2021:

Income from Operations

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Total income from operations $ 795 $ 136 $ 931

For the second quarter of 2020:

For the third quarter of 2020:

Income from Operations

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(in millions) Reported Items Affecting Comparability Adjusted GAAP

For the first six months of 2021:

For the first nine months of 2021:

Income from Operations

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Total income from operations $ 2,169 $ 342 $ 2,511

For the first six months of 2020:

For the first nine months of 2020:

Income from Operations

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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