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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 274 added, 333 removed, 400 unchanged (60% of the section changed)

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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;

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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.

As of December 31, 2020, we report our business in four operating segments:

Effective January 1, 2021, we modified our internal reporting and operating segments to reflect changes in the executive leadership team to further enhance speed-to-market and decision effectiveness.

These modifications did not change our reportable segments.

As of December 31, 2021, our reportable segments were as follows:

• The Coffee Systems segment reflects sales in the U.S.

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and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third-party brands, through our DSD and WD systems.

DSD and WD have both been identified as operating segments that the Company aggregated into Packaged Beverages due to similar economic characteristics and similarities in the nature of finished goods sales and route-to-markets.

• The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third-party bottlers, primarily in the U.S.

Most of the brands in this segment are CSDs.

Our FFS operating segment is aggregated with our Branded Concentrates operating segment into our Beverage Concentrates reportable segment due to similar economic characteristics and similarities in the nature of the product sold.

• The Latin America Beverages segment reflects sales in Mexico, the Caribbean, and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.

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GAAP measures.

EXECUTIVE SUMMARY

Financial Overview

As Reported, in millions (except Diluted EPS)

As Adjusted, in millions (except Diluted EPS)

During the years ended December 31, 2021 and 2020, we made net repayments of our Notes, our commercial paper and our other credit agreements of $1,721 million and $951 million, respectively.

On November 1, 2021, Coca-Cola announced that it had acquired full ownership of BodyArmor.

On December 15, 2021, we received $ 576 million of cash proceeds, net of holdback liabilities, from the sale of our equity interests in BodyArmor to Coca-Cola.

As a result, we recorded an estimated gain on the sale of approximately $ 524 million during the fourth quarter of 2021.

Refer to Note 14 of the Notes to our Consolidated Financial Statements for further information about the transaction.

In the fourth quarter of 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, potentially enabling us to return value to shareholders.

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, changes in consumer preferences and macroeconomic changes, have previously created and may continue to create category headwinds for a number of our products.

Refer to Item 1A, "Risk Factors", combined with the Uncertainties and Trends Affecting Liquidity section below, for more information about the risks and uncertainties we face.

COVID-19 Pandemic Disclosures

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

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

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

We are finding innovative ways to quickly adapt to changes in shopping behaviors, with the vast majority of North America impacted by a mix of occupancy limitations, stay-at-home or shelter-in-place orders, and closures of non-essential businesses.

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

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

The COVID-19 pandemic has had divergent impacts within our business.

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

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

In the future, the economic effects of the COVID-19 pandemic, including higher levels of unemployment, lower wages or a recessionary environment, may result in reduced demand for our products.

It could also lead to volatility in demand due to government actions, such as shelter-in-place notices, in response to increases in reported cases and hospitalizations in certain regions.

These government actions could impact consumers' movements and access to our products.

While we believe that there will continue to be strong long-term demand for our products, the timing and extent of economic recovery, and the uncertainties in short-term demand trends, make it difficult to predict the overall effects of the COVID-19 pandemic on our business.

We expect that there will be heightened volatility in net sales during and subsequent to the duration of the pandemic that may impact interim periods.

Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our critical frontline employees and our supply chain.

As food and agriculture is deemed part of the critical infrastructure by the Department of Homeland Security, our frontline employees have been identified as critical workers in maintaining the U.S.

food and beverage supply.

As a result, we have strived to follow recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our manufacturing and distribution facilities, which also included temporary incentive pay programs and benefits.

We intend to continue to work with government authorities and implement our employee safety measures;

however, disruptions to our supply chain, measures taken to protect employees, increased absenteeism or other local effects of the COVID-19 pandemic have impacted and could continue to impact our operations.

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

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

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

The COVID-19 pandemic has not materially impacted our liquidity position.

We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets enabled by our debt ratings.

Refer to Uncertainties and Trends Affecting Liquidity within the Liquidity and Capital Resources section below for more information.

EXECUTIVE SUMMARY

Refer to Item 1A, Risk Factors , as well as 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 challenges and labor shortages, have led to broad-based inflation in input costs, logistics, manufacturing and labor costs.

During the year ended December 31, 2021, we have experienced supply chain disruptions and a significant inflationary impact compared to the prior year.

These challenges intensified during the later part of the year due to the surge in cases resulting from the Omicron variant.

These impacts have created headwinds for our products that we expect to continue into 2022.

These inflationary pressures could impact our margins and operating results.

We, along with our competitors, have increased the pricing on a number of products in response to widespread inflation.

These pricing increases may result in future reductions in volume.

Refer to Note 6 of the Notes to our Consolidated Financial Statements and Item 7A, 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

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

The diversity of the Company’s broad portfolio and extensive route to market network enabled us to successfully navigate these mix impacts posed by the COVID-19 pandemic to drive overall performance.

• Coffee Systems experienced growth in K-Cup coffee pods for at-home consumption and strong double-digit growth in brewers, which more than offset the significant decline in away-from-home consumption due to weaknesses in the office coffee channel, as many companies shifted to a work-from-home model during 2020.

Sales in the e-commerce channel were very strong, as consumers shifted purchases to the online channel, including at the Keurig.com retail site.

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

Performance in large-format channels continued to be strong across multi-pack and take-home packages, which was partially offset by softness in the convenience and gas channels due to decreased consumer mobility.

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

• Latin America Beverages experienced limited growth in sales volumes, driven by reduced consumer mobility and tourism in Mexico.

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

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

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

• Reduced other discretionary costs, such as travel and entertainment expenses, within our business.

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

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

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

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

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

In addition, reported amounts under U.S.

GAAP also include additional costs, not included in the COVID-19 item affecting comparability, as presented in tables below.

GAAP also include additional costs, not included as the COVID-19 item affecting comparability, as presented in tables below.

Items Affecting Comparability (1)

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Total $ 12 $ 25 $ (13) $ — $ 24

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

(2) Primarily reflects temporary incremental frontline incentive pay and the associated taxes in order to maintain essential operations during the COVID-19 pandemic.

For the year ended December 31, 2020

Coffee Systems $ 15 $ 10 $ 2 $ 8 $ 35

Packaged Beverages 76 25 8 — 109

Beverage Concentrates — — 4 — 4

Latin America Beverages — 2 — — 2

Total $ 91 $ 37 $ 14 $ 8 $ 150

(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 primarily included 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.

In mid-September 2020, we discontinued the incremental frontline incentive pay program.

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

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

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

Impacts SG&A expenses.

(5) Inventory write-downs represent obsolescence charges, which impact cost of sales.

Financial Overview

The following table details our net income and diluted EPS for the years ended December 31, 2020 and 2019:

For the Year Ended December 31, Dollar Percent

(in millions, except per share data) 2020 2019 Change Change

Net income attributable to KDP $ 1,325 $ 1,254 $ 71 5.7 %

Adjusted net income attributable to KDP 1,988 1,727 261 15.1 %

0.93 0.88 0.05 5.7 %

Adjusted diluted EPS

1.40 1.22 0.18 14.8 %

Net income attributable to KDP increased $71 million, or 5.7%, to $1,325 million for the year ended December 31, 2020, compared to $1,254 million in the prior year, reflecting strong growth in income from operations, driven primarily by the continued benefit of productivity and merger synergies, volume/mix growth and lower discretionary expenses, primarily marketing, partially offset by $150 million of additional pre-tax expenses associated with COVID-19 and a non-cash impairment on our Bai brand intangible asset.

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

Adjusted net income attributable to KDP increased $261 million, or 15.1%, to $1,988 million, compared to $1,727 million in the prior year, reflecting the continued benefit of productivity and merger synergies, volume/mix growth and lower discretionary expenses, primarily marketing, which were partially offset by lower net price realization and higher operating and manufacturing costs associated with increased consumer retail demand for our products.

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

During the year ended December 31, 2020, we made net repayments of $951 million related to our Notes, our 2019 KDP Term Loan, and our commercial paper notes.

Additionally, we repaid $341 million and added $171 million of structured payables.

In February 2021, our Board has approved an increase of 25% in our quarterly dividend, which will begin with the second quarter dividend announcement.

(5) Impacts cost of sales.

RESULTS OF OPERATIONS

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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.

Consolidated Operations

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Interest expense 500 604 (104) (17.2)

Loss on early extinguishment of debt 4 11 (7) (63.6)

Loss on early extinguishment of debt 105 4 101 NM

Gain on sale of equity method investment (524) — (524) NM

Impairment of investments and note receivable 17 102 (85) NM

Other expense (income), net 17 19 (2) (10.5)

Other (income) expense, net (2) 17 (19) NM

Income before provision for income taxes 2,798 1,753 1,045 59.6

Provision for income taxes 653 428 225 52.6

1,325 1,254 71 5.7

Net income attributable to non-controlling interest — — — NM

Net income including non-controlling interest 2,145 1,325 820 61.9

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

Net income attributable to KDP

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NCB sales volume (5.5) %

Net sales for the year ended December 31, 2020 increased $498 million to $11,618 million compared with net sales of $11,120 million in the prior year.

This performance reflected higher volume/mix of 5.6%, partially offset by lower net price realization of 0.6% and unfavorable foreign currency translation of 0.5%, primarily in our Latin America Beverages segment.

Net sales increased $1,065 million, or 9.2%, to $12,683 million for the year ended December 31, 2021 compared to $11,618 million in the pri or year.

This performance reflected volume/mix of 5.7%, net price realization of 2.7% and favorable FX translation of 0.8%.

Gross Profit.

Gross profit for the year ended December 31, 2020 was $6,486 million, or 55.8% of net sales as compared to $6,342 million, or 57.0% of net sales in the prior year.

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

These benefits were partially offset by unfavorable net price realization, unfavorable FX translation, $52 million in COVID-19 charges and an increase in other manufacturing costs, associated with the strong consumer demand.

Gross margin decreased 120 bps from the prior year to 55.8%.

Gross profit increase d $491 million, or 7.6%, to $6,977 million for the year ended December 31, 2021 compared to $6,486 million in the prior year.

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

These benefits were partially offset by higher input and manufacturing costs, driven by both volume/mix growth and inflation, and unfavorable FX effects on our cost of sales.

Gross margin decreased 80 bps versus the year ago period to 55.0%.

Selling, General and Administrative Expenses.

SG&A expenses for the year ended December 31, 2020 increased $16 million to $3,978 million, compared with $3,962 million in the prior year.

The increase was driven by $98 million in COVID-19 charges, expenses associated with productivity projects, inflation in logistics, and higher operating costs associated with the strong consumer demand, such as logistics and labor.

These increases were partially offset by the benefit of strong productivity and merger synergies and lower discretionary expenses, primarily marketing.

SG&A expenses increased $175 million, or 4.4%, to $4,153 million for the year ended December 31, 2021 compared to $3,978 million in the prior year.

The increase was driven by increases in logistics, driven by both inflation and higher volumes, higher marketing expense, and unfavorable FX effects.

These increases were partially offset by reduced expenses of $100 million related to the COVID-19 pandemic and productivity and merger synergies.

Impairment of Intangible Assets.

Impairment of intangible assets reflects a $67 million non-cash impairment charge recorded for the Bai brand as a result of our annual impairment analysis as of October 1, 2020.

Refer to Note 4 of the Notes to our Consolidated Financial Statements for further information regarding the impairment analysis.

Other Operating (Income) Expense, Net.

Other operating (income) expense, net had a favorable change of $41 million for the year ended December 31, 2020 compared with the prior year, largely driven by the comparison to unfavorable fair value adjustments on real estate assets in the prior year.

Additionally, we had an incremental gain from our network optimization program in the current year, with a gain of $42 million from the sale-leaseback of four facilities in the current year, compared to a gain of $30 million in the prior year from the sale-leaseback of three facilities.

Impairment of intangible assets had a favorable change of $67 million for the year ended December 31, 2021 compared to the prior year, as a result of a non-cash impairment charge recorded for the Bai brand in the prior year as a result of our annual impairment analysis.

Other Operating Income, Net.

Other operating income, net had a favorable change of $31 million for the year ended December 31, 2021 compared to the prior year, largely driven by the increased gain of $28 million year-over-year on asset sale-leaseback transactions related to our strategic asset investment program.

Income from Operations.

Income from operations increased $102 million to $2,480 million for the year ended December 31, 2020, driven by the increase in gross profit and the favorable change in other operating (income) expense, net, partially offset by the non-cash impairment of the Bai brand intangible asset and the increase in SG&A expenses.

Operating margin decreased 10 bps versus the prior year to 21.3%.

Income from operations increased $414 million, or 16.7%, to $2,894 million for the year ended December 31, 2021 compared to $2,480 million in the prior year, driven by growth in all four segments.

The increase in gross profit and the favorable change in impairment of intangible assets and other operating income, net, were partially offset by the increase in SG&A expenses.

Operating margin increased 150 bps versus the year ago period to 22.8%.

Interest Expense.

Interest expense decreased $50 million or 7.6%, to $604 million for the year ended December 31, 2020 compared to $654 million in the prior year.

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

Interest expense decreased $104 million, or 17.2%, to $500 million for the year ended December 31, 2021 compared to $604 million for the prior year.

This change was primarily the result of lower interest rates resulting from our strategic refinancing initiatives, as well as our continued deleveraging and favorable unrealized mark-to-market activity on interest rate contracts.

Loss on Early Extinguishment of Debt.

Loss on early extinguis hment of debt decreased $7 million to $4 million for the year ended December 31, 2020 compared to $11 million for the prior year.

This change was primarily the result of the Company's focus on repaying commercial paper during the current year, versus our focus on voluntary repayments on our term loan in the prior year.

Impairment on Investments and Note Receivable.

Impairment on investments and note receivable reflected a non-cash impairment charge of $102 million for the year ended December 31, 2020 associated with our Bedford investment and the related note receivable and our LifeFuels investment.

Refer to Note 5 of the Notes to our Consolidated Financial Statements for additional information regarding the impairment charges.

Loss on early extinguishment of debt reflected expense of $105 million during the year ended December 31, 2021 due to our strategic refinancing initiatives, as compared to $4 million in the prior year period.

Gain on Sale of Equity Method Investment.

Gain on sale of investment reflects the gain recognized on the sale of our equity interests in BodyArmor during the year ended December 31, 2021.

Impairment of Investments and Note Receivable.

For the year ended December 31, 2021, Impairment on investments and note receivable reflected a charge of $17 million, as the investment in Bedford and the associated notes receivable made during the year were determined to be impaired as Bedford used these funds to begin the wind-down of their operations.

In the prior year, Impairment on investments and note receivable reflected a non-cash impairment charge of $102 million associated with the Bedford and LifeFuels investments.

Effective Tax Rate.

The effective tax rates for the years ended December 31, 2020 and 2019 were 24.4% and 26.0%, respectively.

The decrease from prior year primarily related to the tax benefit received in the current year due to a decrease in our uncertain tax positions as a result of examination settlements and the reversal of a valuation allowance related to the carryforward of net operating losses in a wholly-owned subsidiary.

The effective tax rate decreased 110 bps to 23.3% for the year ended December 31, 2021, compared to 24.4% in the prior year, primarily driven by the release of our valuation allowance against our U.S.

foreign tax credit carryforwards, the tax benefit received from excess tax deductions that were generated from the vesting of RSUs, and the benefit received from the deferred rate change on the deferred tax liability related to our indefinite-lived intangible assets during the year ended December 31, 2021.

These benefits were partially offset by an increase in our valuation allowance related to a deferred tax asset on our historical investment in Bedford.

Net Income Attributable to KDP.

Net income attributable to KDP increased $71 million, or 5.7%, to $1,325 million for the year ended December 31, 2020 as compared to $1,254 million in the prior year, driven by improved income from operations, reduced interest expense and reduced losses on early extinguishment of debt, as well as the decrease in the effective tax rate, which were partially offset by the non-cash impairment on investments and note receivable during the year ended December 31, 2020.

Net income attributable to KDP increased $821 million, or 62.0%, to $2,146 million for the year ended December 31, 2021 as compared to $1,325 million in the prior year, driven by the gain on sale of our equity method investment in BodyArmor, improved income from operations and reduced interest expense.

Diluted EPS increased 61.3% to $1.50 per diluted share as compared to $0.93 in the prior year.

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Adjusted Income from Operations.

Adjusted income from operations increased $301 million, or 10.4%, to $3,191 million for the year ended December 31, 2020 compared to $2,890 million in the prior year.

Driving this performance in the current year was the benefit of productivity and merger synergies, which impacted both SG&A and cost of sales, higher volume/mix, and lower discretionary expenses, primarily marketing.

Partially offsetting these positive drivers were unfavorable net price realization, $22 million of COVID-19 charges and higher operating and manufacturing costs associated with the strong consumer demand.

Adjusted operating margin grew 150 bps to 27.5%.

Adjusted income from operations increased $230 million, or 7.2%, to $3,421 million for the year ended December 31, 2021 compared to Adjusted income from operations of $3,191 million in the prior year.

Driving this performance in the current period was strong growth in net sales, the benefit of productivity and merger synergies, and the favorable year-over-year comparison of asset sale-leaseback activities related to our strategic asset investment program.

Partially offsetting these positive drivers were the impacts of broad-based inflation, higher marketing expense, increased operating costs due to higher volumes, and unfavorable foreign currency effects on our expenses.

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

Adjusted Interest Expense.

Adjusted interest expense decreased $11 million, or 2.0%, to $542 million for the year ended December 31, 2020 compared to $553 million in the prior year.

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

Adjusted interest expense decreased $62 million, or 11.4%, to $480 million for the year ended December 31, 2021 compared to Adjusted interest expense of $542 million in the prior year, driven by reduced interest rates resulting from our strategic refinancing initiatives and continued deleveraging.

Adjusted Effective Tax Rate.

The Adjusted effective tax rate decreased 100 bps to 24.5% for the year ended December 31, 2020 compared to 25.5% in the prior year.

The Adjusted effective tax rate decreased 180 bps to 22.7% for the year ended December 31, 2021, compared to 24.5% in the prior year, primarily driven by the tax benefit received from the release of our valuation allowance against our U.S.

foreign tax credit carryforwards, as well as the benefit of excess tax deductions that were generated from the vesting of RSUs, during the year ended December 31, 2021.

Adjusted Net Income Attributable to KDP.

Adjusted net income increased 15.1% to $1,988 million for the year ended December 31, 2020 as compared to $1,727 million in the prior year.

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

Adjuste d net income attributable to KDP increased $292 million, or 14.7%, to $2,280 million for the year ended December 31, 2021 as compared to Adjusted net income of $1,988 million in the prior year.

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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Sales Volume.

Sales volume growth for the year ended December 31, 2020 compared to the prior year for the Coffee Systems segment included strong K-Cup pod volume growth of 6.3%, reflecting strength in at-home consumption which was significantly offset by softness in the away-from-home business due to the COVID-19 pandemic.

Brewer volume increased 21.2% in the year ended December 31, 2020, as compared to 8.2% growth in the prior year, reflecting successful innovation introduced over the past two years and investments to drive household penetration.

Net sales increased $200 million, or 4.7%, to $4,433 million for the year ended December 31, 2020, compared to $4,233 million in the prior year due to volume/mix growth of 7.2%, driven by strong sales volume growth in both pods and brewers.

This growth was partially offset by lower net price realization of 2.4% and unfavorable foreign currency translation of 0.1%.

Sales volume growth in the year ended December 31, 2021 compared to the prior year included K-Cup pod volume growth of 5.6%, reflecting strength in at-home consumption and improvement in the away-from-home businesses.

Brewer volume increased 10.0% in the year ended December 31, 2021, successfully lapping growth of 21.2% in the year-ago period, driven by our successful brewer innovation program and continued marketing investment.

Net sales increased $283 million, or 6.4%, to $4,716 million for the year ended December 31, 2021 co mpared to $4,433 million in the prior year, driven by volume/mix growth of 6.5% and favorable FX translation of 0.8%, partially offset by lower net price realization of 0.9%.

Our net price realization primarily reflected continued moderation in strategic pod pricing and customer fines in the second half of the year stemming from challenged service levels, which was only partially offset by the benefit of list price increases on owned and licensed pods and brewers.

Income from Operations.

Income from operations increased $49 million, or 4.0%, to $1,268 million for the year ended December 31, 2020, compared to $1,219 million in the prior year, driven by the continued benefit of strong productivity and merger synergies, which impacted both cost of sales and SG&A, strong volume/mix growth and lower discretionary expenses, primarily marketing.

These benefits were partially offset by strategic pricing, $35 million in COVID-19 charges, and expenses associated with productivity projects.

Operating margin declined 20 bps to 28.6%.

Income from operations increased $50 million, or 3.9%, to $1,318 million for the year ended December 31, 2021, compared to $1,268 million in the prior year, driven by the continued benefit of productivity and merger synergies, strong volume/mix, and reduced costs associated with our productivity projects.

These benefits were partially offset by the impacts of broad-based inflation, continued moderation in strategic pod pricing, increased operating costs due to higher volumes and the unfavorable comparison to a strategic asset investment program gain of $16 million on an asset sale-leaseback of a manufacturing facility in the prior year.

Operating margin decreased 70 bps versus the year ago period to 27.9%.

Adjusted Income from Operations.

Adjusted income from operations increased $111 million, or 7.9%, to $1,514 million for the year ended December 31, 2020, compared to $1,403 million in the prior year, driven by the continued benefit of strong productivity and merger synergies, which impacted both cost of sales and SG&A, strong volume/mix, and lower discretionary expenses, primarily marketing.

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

Adjusted operating margin grew 110 bps to 34.2%.

Adjusted income from operations increased $1 million, or 0.1%, to $1,515 million for the year ended December 31, 2021, compared to $1,514 million in the prior year, driven by the continued benefit of productivity and merger synergies and strong volume/mix.

These benefits were largely offset by declines due to the impacts of broad-based inflation, continued moderation in strategic pod pricing, increased operating costs due to higher volumes, the unfavorable comparison to a strategic asset investment program gain of $16 million on an asset sale-leaseback of a manufacturing facility in the prior year, and customer fines in the second half of the year stemming from challenged service levels.

Adjusted operating margin declined 210 bps versus the year ago period to 32.1%.

PACKAGED BEVERAGES

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Sales Volume.

Sales volume for the year ended December 31, 2020 increased 7.3% compared to the prior year, reflecting the impact of COVID-19 and our strong in-market execution, which displayed strength in CSDs, juice and juice drinks, premium water and apple sauce.

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

Net sales increased $418 million, or 8.5%, to $5,363 million for the year ended December 31, 2020, compared to $4,945 million in the prior year, driven by higher volume/mix of 8.2% and favorable price realization of 0.3%.

Income from Operations.

Income from operations increased $65 million, or 8.6%, to $822 million for the year ended December 31, 2020, compared to $757 million in the prior year, driven primarily by strong volume/mix.

Other favorable drivers included the benefit of continued productivity and merger synergies and lower discretionary expenses, primarily marketing.

These growth drivers were partially offset by $109 million in COVID-19 charges, a non-cash impairment charge of $67 million related to the Bai brand, higher manufacturing and operating costs, such as logistics and labor, associated with the strong consumer demand, inflation in logistics, the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year and increased expenses associated with productivity projects.

Operating margin was flat versus the prior year at 15.3%.

Sales volume for the year ended December 31, 2021 increased 3.0% compared to the prior year, reflecting continued market share growth across the portfolio, with particular strength in CSDs across our flavor portfolio, the addition of Polar to our portfolio of partner brands, and growth in Mott’s.

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

Net sales increased $519 million, or 9.7%, to $5,882 million in the year ended December 31, 2021, compared to $5,363 million in the prior year, driven by volume/mix of 6.0%, net price realization of 3.5% and favorable FX translation of 0.2%.

Income from O perations.

Income from operations increased $188 million, or 22.9%, to $1,010 million for the year ended December 31, 2021 compared to $822 million for the prior year, driven primarily by strong net sales growth, the benefit of productivity and merger synergies, lower COVID-19-related expenses, the favorable comparison to both a non-cash impairment charge of $67 million related to the Bai brand and year-over-year favorable asset sale-leaseback activity of $44 million from our strategic asset investment program.

These increases were partially offset by the impacts of broad-based inflation, increased operating costs due to higher volumes, driven by an expansion of our route to market network and strong consumer demand, increased expenses associated with productivity projects and higher marketing expense.

Operating margin grew 190 bps from the year ago period to 17.2%.

Adjusted Income from Operations.

Adjusted income from operations increased $238 million, or 30.4%, to $1,021 million for the year ended December 31, 2020 compared to $783 million in the prior year, largely driven by strong volume/mix.

Other favorable drivers included the benefit of continued productivity and merger synergies and lower discretionary expenses, primarily marketing.

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

Adjusted operating margin grew 320 bps versus the prior year to 19.0%.

Adjusted income from operations increased $88 million, or 8.6%, to $1,109 million for the year ended December 31, 2021 compared to $1,021 million for the prior year, driven primarily by strong net sales growth, the benefit of productivity and merger synergies, and the favorable comparison of year-over-year asset sale-leaseback activity of $44 million from our strategic asset investment program.

Adjusted operating margin decreased 10 bps versus the year ago period to 18.9%.

BEVERAGE CONCENTRATES

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Sales Volume.

Sales volume for the year ended December 31, 2020 declined 5.1% compared to the prior year, primarily reflecting the decline in our fountain foodservice component of the business, which services restaurants and hospitality, reflecting the impact of shutdowns and reductions in occupant capacity.

Net sales decreased $89 million, or 6.3% to $1,325 million for the year ended December 31, 2020, compared to $1,414 million in the prior year, driven by unfavorable volume/mix of 5.8%, lower net price realization of 0.4% and unfavorable foreign currency translation of 0.1%.

Sales volume for the year ended December 31, 2021 increased 1.1% compared to the prior year, primarily 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 year ended December 31, 2021.

Net sales increased $161 million, or 12.2%, to $1,486 million in t he year ended December 31, 2021, compared to $1,325 million in the prior year, reflecting higher net price realization of 9.7%, volume/mix growth of 2.0% and favorable FX translation of 0.5%.

Income from Operations.

Income from operations decreased $23 million, or 2.4% to $932 million for the year ended December 31, 2020, compared to $955 million in the prior year, driven by the net sales decline and higher compensation costs, partially offset by lower discretionary expenses, primarily marketing.

Operating margin increased 280 bps versus the prior year to 70.3%.

Income from operations increased $112 million, or 12.0%, to $1,044 million for the year ended December 31, 2021 compared to $932 million in the prior yea r.

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

Operating margin was flat versus the year ago period at 70.3%.

Adjusted Income from Operations.

Adjusted income from operations decreased $19 million, or 2.0%, to $938 million for the year ended December 31, 2020 compared to $957 million in the prior year, driven by the net sales decline, partially offset by lower discretionary expenses, primarily marketing.

Adjusted operating margin grew 310 bps versus the prior year to 70.8%.

Adjusted income from operations increased $117 million, or 12.5%, to $1,055 million for the year ended December 31, 2021 compared to $938 million in the prior ye ar.

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

Adjusted operating margin increased 20 bps versus the year ago period to 71.0%.

LATIN AMERICA BEVERAGES

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Sales Volume.

Sales volume for the year ended December 31, 2020 increased 0.4% compared to the prior year, driven by Squirt.

Net sales decreased $31 million, or 5.9% to $497 million for the year ended December 31, 2020, compared to $528 million in the prior year, driven primarily by unfavorable FX translation of 9.7%.

Excluding the unfavorable impact of FX translation, net sales increased as a result of higher net price realization of 5.8%, partially offset by unfavorable volume/mix of 2.0%.

Sales volume for the year ended December 31, 2021 as compared to the prior year increased 3.0%, driven by Peñafiel and Clamato, partially offset by declines in Crush.

Net sales grew $102 million, or 20.5%, to $599 million for the year ended December 31, 2021, compared to $497 million in the prior year, reflecting volume/mix growth of 7.3%, net price realization of 6.8%, and favorable FX translation of 6.4%.

Income from Operations.

Income from operations increased $20 million, or 23.5%, to $105 million for the year ended December 31, 2020, compared to $85 million in the prior year, driven by higher net price realization, continued productivity and lower discretionary expenses, primarily marketing, partially offset by unfavorable FX effects (FX translation and transaction), unfavorable volume/mix, inflation in logistics and the comparison to a real estate gain in the prior year.

Operating margin increased 500 bps versus the prior year to 21.1%.

Income from operations increased $28 million, or 26.7%, to $133 million for the year ended December 31, 2021 compared to $105 million in the prior year, driven by higher net price realization, favorable volume/mix and the benefit of productivity, partially offset by the impacts of broad-based inflation and higher marketing expense.

Operating margin increased 110 bps versus the year ago period to 22.2%.

Adjusted Income from Operations.

Adjusted income from operations increased $26 million, or 31.7%, to $108 million for the year ended December 31, 2020, compared to $82 million in the prior year.

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

Adjusted operating margin grew 620 bps versus the prior year to 21.7%.

Adjusted income from operations increased $27 million, or 25.0%, to $135 million for the year ended December 31, 2021 compared to $108 million in the prior year, driven by higher net price realization, favorable volume/mix and the benefit of productivity, partially offset by the impacts of broad-based inflation, and higher marketing expense.

Adjusted operating margin improved 80 bps versus the year ago period to 22.5%.

LIQUIDITY AND CAPITAL RESOURCES

Our financial condition and liquidity remain strong.

We believe our financial condition and liquidity remain strong.

Net cash provided by operations was $2,874 million for the year ended December 31, 2021 compared to $2,456 million for the prior year.

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

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations and our $3.9 billion borrowing capacity currently available under our existing KDP Revolver and 2020 364-Day Credit Agreement.

Additionally, we have an uncommitted commercial paper program where we can issue up to $2.4 billion of unsecured commercial paper notes on a private placement basis, which provides us significant flexibility and short-term liquidity.

We believe this level of liquidity enables us to more than meet our commitments, even in a prolonged economic downturn, as we continue to exercise financial discipline to ensure our long-term financial health.

Refer to Note 3 of the Notes to our Consolidated Financial Statements for management's discussion of these financing arrangements.

As of December 31, 2020, we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.

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 additionally be impacted by all risk factors discussed in Item 1A, "Risk Factors" that could have a material effect on production, delivery and consumption of our products in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume.

Similarly, disruptions in financial and credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors.

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

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

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

• Our ability to access our other financing arrangements, including the KDP Revolver and the 2020 364-Day Credit Agreement, which have availability of $3,900 million as of December 31, 2020;

• A significant downgrade in our credit ratings could limit a financial institution's willingness to participate in our accounts payable program and reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions;

• Our continued payment of dividends;

• Our continued capital expenditures;

• Future mergers or acquisitions of 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;

• Fluctuations in our tax obligations.

LIBOR Considerations

In 2017, the U.K.

Financial Conduct Authority announced that LIBOR will no longer be published after 2021.

In the U.S., the Alternative Reference Rates Committee selected the Secured Overnight Financing Rate as the preferred alternative reference rate to LIBOR.

In December 2020, it was announced that certain LIBOR rates will continue to be published through June 30, 2023.

We have a number of financing arrangements which incorporate LIBOR as a benchmark rate and which extend past 2021, including the 2019 KDP Term Loan and the KDP Revolver.

The agreements related to such financing arrangements contain provisions for alternative reference rates, and we do not expect a significant change to our cost of debt as a result of the transition from LIBOR to an alternative reference rate.

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 years ended December 31, 2021, 2020 and 2019:

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $313 million from December 31, 2020 to December 31, 2021 primarily as a result of the proceeds from the sale of our BodyArmor investment and an increase in cash generated from our operations, which outpaced deleveraging.

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

periodically as working capital funding requirements where allowed.

Foreign cash balances were $216 million and $165 million as of December 31, 2021 and 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.

The following table summarizes our cash activity:

Year Ended December 31,

(in millions) 2020 2019 2018

Net cash provided by operating activities $ 2,456 $ 2,474 $ 1,613

Net cash used in investing activities (316) (150) (19,131)

Net cash (used in) provided by financing activities (1,990) (2,364) 17,577

NET CASH PROVIDED BY OPERATING ACTIVITIES

Net cash provided by operating activities decreased $18 million for the year ended December 31, 2020 as compared to year ended December 31, 2019, driven by the decline in working capital and an increase in income tax payments, partially offset by the increase in net income adjusted for non-cash items.

As of December 31, 2020, we had no deferred estimated tax payments, as compared to deferred estimated tax payments as of December 31, 2019 of $59 million, which were paid in January 2020.

Beginning in the second quarter of 2020 and continuing through the rest of the year, 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 December 31, 2021 with the remainder due by December 31, 2022.

As of December 31, 2020, we have deferred a total of $59 million in such payments.

Sources of Liquidity - Operations

Net cash provided by operating activities increased $418 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020, driven by the increase in net income, which includes the impact of the gain on the sale of our BodyArmor investment, adjusted for non-cash items and 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 declined (17) days to approximately (63) days as of December 31, 2020 as compared to (46) days as of December 31, 2019.

The following table summarizes our cash conversion cycle.

Cash conversion cycle (69) (63)

For the year ending December 31, 2021, DPO is expected to have a positive impact on our cash conversion cycle as a result of our supplier terms initiative, which has set our customary terms as we integrate our legacy businesses.

Accounts Payable Program

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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 enter 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 December 31, 2020 and December 31, 2019, $2,578 million and $2,097 million, respectively, of our outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

The amounts settled through the program and paid to the financial institutions were $2,770 million and $1,745 million for the years ended December 31, 2020 and 2019, respectively.

NET CASH USED IN INVESTING ACTIVITIES

Cash used in investing activities for the year ended December 31, 2020 was primarily driven by our purchases of property, plant and equipment of $461 million and purchases of intangible assets of $56 million, which was partially offset by proceeds of $203 million from sales of property, plant and equipment, primarily driven by our asset sale-leaseback transactions.

Cash used in investing activities for the year ended December 31, 2019 was primarily driven by our purchases of property, plant and equipment of $330 million, partially offset by proceeds of $247 million from sales of property, plant and equipment, primarily driven by our asset sale-leaseback transactions.

Other drivers of cash used investing activities included $35 million for purchases of intangible assets, primarily the reacquisition of distribution rights, and advances of $32 million to Bedford under its line of credit with us.

NET CASH USED IN FINANCING ACTIVITIES

Cash used in financing activities for the year ended December 31, 2020 consisted primarily of the net repayment of $1,246 million for commercial paper notes.

We made the decision to repay commercial paper notes with an equivalent amount of borrowings under our KDP Revolver, as the costs and ability to issue commercial paper became inefficient at the onset of the COVID-19 pandemic versus borrowings under our KDP Revolver.

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

Additionally, we made voluntary and mandatory repayments on the term loan facility of $955 million, dividend payments of $846 million, the repayment of the 2020 Notes of $250 million and net payments on structured payables of $170 million.

We also received $29 million from controlling shareholder stock transactions, which related to the disgorgement of short-swing profits pursuant to Section 16(b) of the Exchange Act.

Net cash used in financing activities for the year ended December 31, 2019 consisted primarily of the voluntary and mandatory repayments on the 2018 KDP Term Loan and 2019 KDP Term Loan of $1,203 million, dividend payments of $844 million, repayments of structured payables of $531 million and the repayment of the 2019 Notes of $250 million.

These cash outflows from financing activities were partially offset by net issuance of commercial paper notes of $167 million and proceeds from structured payables of $330 million.

We have been informed by the third party administrators that as of December 31, 2021 and December 31, 2020, $ 3,194 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 $3,331 million, $2,770 million and $1,745 million for the years ended December 31, 2021, 2020 and 2019, 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 was due by January 3, 2022, with the remainder due by December 31, 2022.

We deferred a total of $59 million in such payments since the CARES Act was implemented, and we timely paid approximately $30 million as of January 3, 2022.

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 benefit from 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.

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 year ended December 31, 2021.

Refer to Note 3 of the Notes to our 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 December 31, 2021, our credit ratings were as follows:

Rating Agency Long-Term Debt Rating Commercial Paper Rating Outlook

Moody's Baa2 P-2 Negative

S&P BBB A-2 Stable

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

LIBOR Considerations

In 2017, the U.K.

Financial Conduct Authority announced that LIBOR will no longer be published after 2021.

In the U.S., the Alternative Reference Rates Committee selected the Secured Overnight Financing Rate as the preferred alternative reference rate to LIBOR.

In December 2020, it was announced that certain LIBOR tenors will continue to be published through June 30, 2023.

We have a number of financing arrangements which incorporate LIBOR as a benchmark rate and which extend past 2021.

The agreements related to such financing arrangements use LIBOR tenors which will continue to be published through June 30, 2023.

Additionally, these agreements contain provisions for alternative reference rates.

We do not expect a significant change to our cost of debt as a result of the transition from LIBOR to an alternative reference rate.

Principal Uses of Capital Resources

Through 2021, our principal uses of our capital resources following the DPS Merger were 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.

Beginning in 2022, now that we have met our post-merger goals, we will look to invest in inorganic value creation through M&A, including portfolio expansion, distribution scale, geographic expansion, and new capabilities.

In addition to M&A, we may consider share repurchases and special dividends to our investors.

Our Board of Directors authorized a four-year share repurchase program of up to $4 billion of our outstanding common stock, beginning on January 1, 2022, potentially enabling us to return value to shareholders.

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.

Since the DPS Merger, we have made net repayments of $4,896 million of our Notes, our commercial paper and our other credit agreements, including $1,721 million for the year ended December 31, 2021.

These amounts include a make-whole premium paid during the year ended December 31, 2021 of $95 million.

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.

For the year ended December 31, 2021, we have declared total dividends of $0.7125 per share.

Capital Expenditures

Purchases of property, plant and equipment were $461 million and $330 million for the years ended December 31, 2020 and 2019, respectively.

Capital expenditures, which includes purchases of property, plant and equipment and amounts reflected in accounts payable and accrued expenses, for the year ended December 31, 2020 primarily related to our continued investment in state-of-the-art manufacturing facilities and equipment through the build-out of our Spartanburg manufacturing facility, the purchase of real estate in Ireland and the associated build out of the manufacturing facility and the build-out of our Allentown manufacturing facility.

Capital expenditures for the year ended December 31, 2019 primarily related to manufacturing equipment, our continued investment in the construction of our new Spartanburg facility in South Carolina and information technology infrastructure.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $144 million to $255 million as of December 31, 2020 compared to $111 million as of December 31, 2019.

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

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

periodically as working capital funding requirements in those jurisdictions allow.

Foreign cash balances were $165 million and $70 million as of December 31, 2020 and December 31, 2019, respectively.

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

Contractual Commitments and Obligations

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

Based on our current and anticipated level of operations, we believe that our proceeds from operating cash flows will be sufficient to meet our anticipated obligations.

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.

Refer to Note 3 of the Notes to our Consolidated Financial Statements for obligations related to our senior unsecured notes and our KDP Credit Agreements.

Refer to Note 9 of the Notes to our Consolidated Financial Statements for future minimum lease commitments.

The following table summarizes our contractual obligations as of December 31, 2020:

Payments Due in Year

(in millions) Total 2021 2022 2023 2024 2025 After 2025

Interest payments $ 5,266 $ 504 $ 457 $ 406 $ 349 $ 326 $ 3,224

Purchase obligations (1)

1,893 1,131 296 178 110 91 87

(1) Amounts represent payments under agreements to purchase goods or services that are legally binding and that specify all significant terms, including capital obligations and long-term contractual obligations.

Amounts excluded from our table

As of December 31, 2020, we had $11 million of non-current unrecognized tax benefits, related interest and penalties classified as a long-term liability.

The table above does not reflect any payments related to these amounts as it is not possible to make a reasonable estimate of the amount or timing of the payment.

Refer to Note 7 of the Notes to our Consolidated Financial Statements for further information.

The total accrued benefit liability representing the underfunded position for pension recognized as of December 31, 2020 was approximately $25 million.

This amount is impacted by, among other items, funding levels, plan amendments, changes in plan assumptions and the investment return on plan assets.

We did not include estimated payments related to our total accrued benefit liability in the table above.

The Pension Protection Act of 2006 was enacted in August 2006 and established, among other things, new standards for funding of U.S.

defined benefit pension plans.

We generally expect to fund all future contributions with cash flows from operating activities.

Our international pension plans are generally funded in accordance with local laws and income tax regulations.

We did not include our estimated contributions to our various single employer plans in the table above.

We have a deferred compensation plan where the assets are maintained in a rabbi trust and the corresponding liability related to the plan is recorded in other non-current liabilities.

We did not include estimated payments related to the deferred compensation liability as the timing and payment of these amounts are determined by the participants and outside our control.

In general, we are covered under conventional insurance programs with high deductibles or are self-insured for large portions of many different types of claims.

Our accrued liabilities for our losses related to these programs are estimated through actuarial procedures of the insurance industry and by using industry assumptions, adjusted for our specific expectations based on our claim history.

As of December 31, 2020, our accrued liabilities for our losses related to these programs totaled approximately $107 million.

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 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 $ 423 million, $ 461 million and $ 330 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Capital expenditures, which includes both purchases of property, plant and equipment and amounts included in accounts payable and accrued expenses, for the years ended December 31, 2021, 2020 and 2019 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 $ 189 million, $ 280 million and $ 163 million for the years ended December 31, 2021, 2020 and 2019, 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

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 cost to re-acquire our distribution rights.

Purchases of intangible assets were $ 32 million, $ 56 million and $ 35 million for the years ended December 31, 2021, 2020 and 2019, 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.

Strategic acquisitions are our primary inorganic option.

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 5, for further information.

Residual Value Guarantees

We have a number of leasing arrangements and one licensing arrangement with special purpose entities associated with the same sponsor.

Each one of these arrangements contain a residual value guarantee.

As of December 31, 2021, we have not recorded any liabilities as it is not probable that we will have to make any payments required under the residual value guarantee.

Refer to Note 19 of the Notes to our Consolidated Financial Statements for further information about the residual value guarantees.

UNCERTAINTIES AND TRENDS AFFECTING LIQUIDITY AND CAPITAL RESOURCES

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 ability to either repay existing debt maturities through cash flow from operations or refinance through future issuances of senior unsecured notes;

• Our ability to access and/or renew our committed financing arrangements ;

• A significant downgrade in our credit ratings could limit i) our ability to issue debt at terms that are favorable to us, or ii) a financial institution's willingness to participate in our accounts payable program and reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions, which could impact our accounts payable program;

• Our continued payment of regular quarterly dividends;

• Our continued capital expenditures;

• Seasonality of our operating cash flows, which could impact short-term liquidity;

• 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;

• 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;

• Fluctuations in our tax obligations.

CRITICAL ACCOUNTING ESTIMATES

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For purposes of impairment testing, we assign goodwill to the reporting unit that benefits from the synergies arising from each business combination, and we also assign indefinite lived intangible assets to our reporting units.

We define our six reporting units as the following:

Segments Reporting Units

Effective January 1, 2021, we modified our internal reporting and operating segments to reflect changes in the executive leadership team to further enhance speed-to-market and decision effectiveness.

Although this did not change our reportable segments, our reporting units and operating segments were redefined.

For 2021, we defined our six reporting units as the following:

Reportable Segments Reporting Units

Packaged Beverages DSD

Coffee Systems Coffee Systems US

Coffee Systems Canada

Beverage Concentrates Beverage Concentrates

Coffee Systems Coffee Systems

Beverage Concentrates Branded Concentrates

Fountain Foodservice

Latin America Beverages Latin America Beverages

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• The impairment tests for goodwill include comparing fair value of the respective reporting unit with its carrying value, including goodwill and considering any indefinite lived intangible asset impairment charges.

For the year ended December 31, 2020, we performed a quantitative analysis, whereby we used an income approach, or in some cases a combination of income and market based approaches, to determine the fair value of our assets, as well as an overall consideration of market capitalization and enterprise value.

For the year ended December 31, 2021, we performed a quantitative analysis for goodwill and certain indefinite lived brand assets, whereby we used an income approach, or in some cases a combination of income and market based approaches, to determine the fair value of our assets, as well as an overall consideration of market capitalization and enterprise value.

We performed a qualitative Step 0 analysis for other indefinite lived intangible assets, including trade names, contractual arrangements, and distribution rights.

These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies.

These assumptions could be negatively impacted by various risks discussed in Item 1A, Risk Factors , in this Annual Report on Form 10-K.

Critical assumptions for quantitative analyses include revenue growth and profit performance, including the achievability of productivity and synergies, over the next five year period, as well as an appropriate discount rate, long term growth rate and royalty rates, as applicable.

Critical assumptions for quantitative analyses include revenue growth and profit performance, including the achievability of productivities, over the next five year period, as well as an appropriate discount rate and long-term growth rate, as applicable.

Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums.

Long-term growth rates are based on the long-term inflation forecast, industry growth and the long-term economic growth potential.

Royalty rates are based on observable market participant information.

The following table provides the range of rates used in the analysis as of October 1, 2021:

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Long-term growth rates — % 3.8 %

Royalty rates 1.0 % 10.0 %

The carrying values of goodwill and indefinite lived intangible assets as of December 31, 2021, were $20,182 million and $22,553 million , respectively.

During the year ended December 31, 2020, the Company recorded an impairment of $ 67 million for the indefinite lived brand asset of Bai.

No other impairment of goodwill or indefinite lived intangible assets was identified during the year ended December 31, 2020, and no impairment was identified in each of the years ended December 31, 2019 and 2018.

No impairment was identified for the years ended December 31, 2021 or 2019.

We recorded impairment of $ 67 million for the year ended December 31, 2020 for Bai, an indefinite lived brand asset.

Sensitivity Analysis - Discount Rate

For goodwill, holding all other assumptions in the analysis constant, including the revenue and profit performance assumption, the effect of a 0.50% increase in the discount rate used to determine the fair value of the reporting units as of October 1, 2021, would not change our conclusion.

For the indefinite-lived intangible assets, holding all other assumptions in the analysis constant, including the revenue and profit performance assumption, the effect of a 0.50% increase in the discount rate used to determine the fair value of our brands and trade names as of October 1, 2020, would impact the amount of headroom over the carrying value of our brands and trade names as follows (in millions):

For the indefinite-lived intangible assets, holding all other assumptions in the analysis constant, including the revenue and profit performance assumption, the effect of a 0.50% increase in the discount rate used to determine the fair value of our brands as of October 1, 2021, would impact the amount of headroom over the carrying value of our brands as follows (in millions):

Selected Discount Rate Discount Rate Increase of 0.50%

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26 - 50% 5,335 7,456 4,677 6,193

11 - 25% 4,464 5,150 2,986 3,492

26 - 50% 2,261 2,993 10,916 15,867

In excess of 50% 11,173 21,982 10,063 18,068

$ 19,819 $ 33,101 $ 19,819 $ 29,711

Potential impairment $ — $ — $ — $ —

0 - 10% 1 1 1 1

11 - 25% — — — —

26 - 50% — — — —

In excess of 50% 2,479 6,990 2,479 6,420

$ 2,480 $ 6,991 $ 2,480 $ 6,421

(1) The amounts listed in the Selected Discount Rate columns represent the carrying value of Bai as of the October 1, 2020 measurement date, prior to the $67 million impairment recorded during the fourth quarter of 2020.

Sensitivity Analysis - Long-Term Growth Rate

For goodwill, holding all other assumptions in the analysis constant, including the discrete period revenue and profit performance assumptions as well as the discount rates, the effect of a 0.50% decrease in the long-term growth rate used to determine the fair value of the reporting units as of October 1, 2021, would not change our conclusion.

For the indefinite-lived intangible assets, holding all other assumptions in the analysis constant, including the discrete period revenue and profit performance assumptions as well as the discount rates, the effect of a 0.50% decrease in the long-term revenue growth rate used to determine the fair value of our brands and trade names as of October 1, 2020, would impact the amount of headroom over the carrying value of our brands and trade names as follows (in millions):

For the indefinite-lived intangible assets, holding all other assumptions in the analysis constant, including the discrete period revenue and profit performance assumptions as well as the discount rates, the effect of a 0.50% decrease in the long-term revenue growth rate used to determine the fair value of our brands as of October 1, 2021, would impact the amount of headroom over the carrying value of our brands as follows (in millions):

Selected Long-Term Growth Rate Long-Term Growth Rate Decrease of 0.50%

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26 - 50% 5,335 7,456 4,839 6,523

11 - 25% 4,464 5,150 2,644 3,142

26 - 50% 2,261 2,993 3,060 4,269

In excess of 50% 11,173 21,982 10,063 18,435

$ 19,819 $ 33,101 $ 19,819 $ 30,316

Potential impairment $ — $ — $ — $ —

0 - 10% 1 1 1 1

11 - 25% — — — —

26 - 50% — — — —

In excess of 50% 2,479 6,990 2,479 6,540

$ 2,480 $ 6,991 $ 2,480 $ 6,541

(1) The amounts listed in the Selected Long-Term Growth Rate columns represent the carrying value of Bai as of the October 1, 2020 measurement date, prior to the $67 million impairment recorded during the fourth quarter of 2020.

Revenue Recognition

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If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the consolidated financial statements may be exposed to potential impairment of the intangible assets and goodwill, as discussed in the Goodwill and Other Indefinite Lived Intangible Assets critical accounting estimate section above.

OFF-BALANCE SHEET ARRANGEMENTS

Distribution Rights Associated with Residual Value Guarantee

On December 28, 2020, one of our third-party bottlers sold their manufacturing and distribution rights to Veyron SPE.

Subsequently, we entered into a distribution arrangement with Veyron SPE, which provided us access to distribute certain CSD beverages, such as Canada Dry, 7UP and A&W in a number of counties in New York and New Jersey in exchange for a fixed service fee and a residual value guarantee.

As a result of the residual value guarantee, Veyron SPE was determined to be a VIE;

however, we did not consolidate the VIE as we were not the primary beneficiary.

Since the agreement provided us immediate distribution access without reacquiring ownership of the distribution rights asset and includes a guarantee on the assets of Veyron SPE, we believe this is an off-balance sheet arrangement.

Revenues and expenses related to the arrangement for the year ended December 31, 2020 were not significant.

Refer to Note 16 of the Notes to our Consolidated Financial Statements for additional information.

Multi-Employer Pension Plans

We currently participate, and have in the past participated, in multi-employer pension plans in the U.S.

If, in the future, we choose to withdraw from participation in one of these plans, or we are deemed to have withdrawn from any of the multi-employer pension plans in which we currently participate or have participated in the past, the plan will assess us a withdrawal liability for exiting the plan, and U.S.

GAAP would require us to record the withdrawal charge as an expense in our consolidated statements of income and as a liability on our consolidated balance sheets once the multi-employer pension withdrawal charge is probable and estimable.

Refer to Note 10 of the Notes to our Consolidated Financial Statements for additional information regarding our multi-employer pension plans.

There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our results of operations, financial condition, liquidity, capital expenditures or capital resources other than letters of credit outstanding.

Refer to Note 3 of the Notes to our Consolidated Financial Statements for additional information regarding outstanding letters of credit.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

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

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

We early adopted the amendments to one item resulting in the elimination of Item 301, Selected Financial Data, from Part II, Item 6 of our Form 10-K for the year ended December 31, 2020, and we adopted the remaining amendments in this Annual Report for the year ended December 31, 2021.

Refer to Note 2 of the Notes to our Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S.

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Net income attributable to KDP 2,146

(in millions) December 31, 2020 December 31, 2019

(in millions) 2021 2020

Current assets $ 1,594 $ 1,810

$ 1,810 $ 1,404

Non-current assets 43,972 43,333

Current liabilities (2)

Total assets (1)

$ 45,566 $ 45,143

Current liabilities $ 3,470 $ 5,148

Non-current liabilities 17,125 16,164

(1) Includes $423 million and $241 million of current intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of December 31, 2020 and December 31, 2019, respectively.

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

Total liabilities (2)

$ 20,595 $ 21,312

(1) Includes $209 million and $423 million of intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of December 31, 2021 and December 31, 2020, respectively.

(2) Includes $40 million and $30 million of intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of December 31, 2021 and December 31, 2020, respectively.

NON-GAAP FINANCIAL MEASURES

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

GAAP, we have presented for the years ended December 31, 2020 and 2019 (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 years ended December 31, 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, (v) Adjusted diluted EPS, (vi) Adjusted gross margin, (vii) Adjusted operating margin, and (viii) Adjusted effective tax rate, 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.

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.

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Items affecting comparability:

Defined as certain items that are excluded for comparison to the prior year, adjusted for the tax impact as applicable.

Defined as certain items that are excluded for comparison to prior years, adjusted for the tax impact as applicable.

Tax impact is determined based upon an approximate rate for each item.

For each year, 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;

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, as well as the unrealized mark-to-market impact of our Vita Coco investment;

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

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

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

(iv) the amortization of the fair value adjustment of the senior unsecured notes obtained as a result of the DPS Merger;

(v) stock compensation expense attributable to the matching awards made to employees who made an initial investment in the EOP, the 2009 Incentive Plan or the 2019 Incentive Plan;

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

(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 years.

For the year ended December 31, 2021, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations;

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

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

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

and (vii) impairment recognized on the Bai brand.

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

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

(vii) the gain on the sale of our investment in BodyArmor;

(viii) impairment recognized on our equity method investment with Bedford as a result of funding our share of their wind-down costs;

and (ix) transaction costs for significant business combinations (completed or abandoned).

For the year ended December 31, 2020, 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, (vi) impairment recognized on our equity method investments with Bedford and LifeFuels and (vii) impairment recognized on the Bai brand.

Costs related to significant non-routine legal matters relate to the antitrust litigation.

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 year ended December 31, 2019, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations;

(ii) productivity expenses;

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

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

(v) the impact of the step-up of acquired inventory not associated with the DPS Merger;

(vi) the loss on early extinguishment of debt related to the redemption of debt and (vii) the loss related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment.

For the years ended December 31, 2020 and 2019, the supplemental financial data set forth below includes reconciliations of Adjusted income from operations, Adjusted net income and Adjusted diluted EPS to the applicable financial measure presented in the consolidated financial statement for the same year.

For the years ended December 31, 2021 and 2020, the supplemental financial data set forth below includes reconciliations of Adjusted gross margin, Adjusted income from operations, Adjusted operating margin, Adjusted net income and Adjusted diluted EPS to the applicable financial measure presented in the consolidated financial statement for the same year.

KEURIG DR PEPPER INC.

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(Unaudited, in millions, except per share data)

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Impairment of intangible assets Income from operations Operating margin

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Income from operations Operating margin

Reported $ 5,706 $ 6,977 55.0 % $ 4,153 $ 2,894 22.8 %

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Productivity (72) 72 (91) 163

Impairment of intangible assets — — — (67) 67

Non-routine legal matters — — (30) 30

COVID-19 (26) 26 (11) 37

Transaction costs — — (2) 2

Malware incident — — 2 (2)

Adjusted $ 5,640 $ 7,043 55.5 % $ 3,692 $ 3,421 27.0 %

Interest expense Impairment on investments and note receivable Loss on early extinguishment of debt Income before provision for income taxes Provision for income taxes Effective tax rate Net income Weighted Average Diluted shares Diluted earnings per share

Interest expense Loss on early extinguishment of debt Impairment of investments and note receivable Gain on sale of equity-method investment Other (income) expense, net Income before provision for income taxes Provision for income taxes Effective tax rate Net income attributable to KDP Diluted earnings per share

Reported $ 500 $ 105 $ 17 $ (524) $ (2) $ 2,798 $ 653 23.3 % $ 2,146 $ 1.50

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Productivity — — — — — 163 40 123 0.09

Impairment on intangible asset — — 67 15 52 0.04

Impairment of investment — — (17) — — 17 (45) 62 0.04

Loss on early extinguishment of debt — (105) — — — 105 24 81 0.06

Investment impairment — (102) — 102 25 77 0.05

Non-routine legal matters — — — — — 30 7 23 0.02

COVID-19 — — — — — 37 9 28 0.02

Gain on sale of equity-method investment — — — 524 — (524) (124) (400) (0.28)

Transaction costs — — — — — 2 — 2 —

Malware incident — — — — — (2) — (2) —

Change in deferred tax liabilities related to goodwill and other intangible assets $ — $ — $ — $ — $ — $ — $ 19 $ (19) $ (0.01)

Adjusted $ 480 $ — $ — $ — $ (8) $ 2,949 $ 670 22.7 % $ 2,280 $ 1.60

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(Unaudited, in millions, except per share data)

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Other operating (income) expense, net Income from operations Operating margin

Cost of sales Gross profit Gross margin Selling, general and administrative expenses Impairment of intangible assets Income from operations Operating margin

Reported $ 5,132 $ 6,486 55.8 % $ 3,978 $ 67 $ 2,480 21.3 %

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Productivity (29) 29 (99) — 128

Transaction costs — — (9) — 9

Impairment on intangible asset — — — (67) 67

Non-routine legal matters — — (57) — 57

Inventory step-up (3) 3 — — 3

Malware incident (2) 2 (6) — 8

COVID-19 (44) 44 (84) — 128

Adjusted $ 5,092 $ 6,526 56.2 % $ 3,374 $ — $ 3,191 27.5 %

Interest expense Loss on early extinguishment of debt Income before provision for income taxes Provision for income taxes Effective tax rate Net income Weighted Average Diluted shares Diluted earnings per share

Interest expense Loss on early extinguishment of debt Impairment of investments 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 $ 604 $ 4 $ 102 $ 1,753 $ 428 24.4 % $ 1,325 $ 0.93

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Productivity — — — 128 33 95 0.07

Transaction costs (16) — 25 7 18 0.01

Impairment on intangible asset — — — 67 15 52 0.04

Loss on early extinguishment of debt — (4) — 4 1 3 —

Impairment of investment — — (102) 102 25 77 0.05

Non-routine legal matters — — — 57 14 43 0.03

Inventory step-up — — 3 1 2 —

Malware incident — — 8 2 6 —

COVID-19 — — — 128 31 97 0.07

Adjusted $ 542 $ — $ — $ 2,632 $ 644 24.5 % $ 1,988 $ 1.40

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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-K

Item 7. Management’s Discussion and Analysis