Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Audited Consolidated Financial Statements and the related Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors, including the factors described under "Risk Factors" within Item 1A and elsewhere in this Annual Report on Form 10-K, including documents incorporated by reference.

References in the following discussion to "we", "our", "KDP" or "the Company" refer to Keurig Dr Pepper Inc. and all entities included in our Audited Consolidated Financial Statements.

This Annual Report on Form 10-K contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands. All of the product names included in this Annual Report on Form 10-K are either our registered trademarks or those of our licensors.

DR PEPPER SNAPPLE GROUP, INC. MERGER

On January 29, 2018, DPS entered into a Merger Agreement by and among DPS, Maple and Merger Sub, whereby Merger Sub would be merged with and into Maple, with Maple surviving the DPS Merger as a wholly-owned subsidiary of DPS. The DPS Merger was consummated on July 9, 2018, at which time DPS changed its name to "Keurig Dr Pepper Inc.".

Maple owns Keurig, a leader in specialty coffee and innovative single-serve brewing systems. The combined businesses created KDP, a new beverage company of scale with a portfolio of iconic consumer brands and expanded distribution capability to reach virtually every point-of-sale in North America.

See Note 1 and Note 3 of the Notes to our Audited Consolidated Financial Statements for further information related to the DPS Merger.

OVERVIEW

KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including ready-to-drink teas and coffee, juices, juice drinks, water and mixers, and specialty coffee, and is a leading producer of innovative single-serve brewing systems. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountain and The Original Donut Shop. KDP has some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. KDP offers more than 125 owned, licensed and partner brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S. according to IRi, available nearly everywhere people shop and consume beverages.

KDP operates as an integrated brand owner, manufacturer and distributor. We believe our integrated business model strengthens our route-to-market and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our DSD system and our WD delivery system. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, pure-play e-commerce retailers, and office superstores; to restaurants, hotel chains, office product and coffee distributors, and partner brand owners; and directly to consumers through its websites. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.

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 increased health consciousness and changes in consumer preferences and economic factors, have previously created category headwinds for a number of our products. Refer to Item 1A, "Risk Factors", of this Annual Report on Form 10-K for information about risks and uncertainties facing us.

We expect Adjusted diluted EPS growth for the year ending December 31, 2019 in the range of 15% to 17%, or $1.20 to $1.22, in line with our long-term merger target. Supporting this guidance are the following expectations:

•	Net sales growth of approximately 2%, consistent with our long-term merger target of 2-3%, despite the impact of the changes in partner brands in the Packaged Beverage segment.

•	Merger synergies of $200 million for the year ending December 31, 2019, consistent with our long-term merger target for $200 million per year over the 2019-2021 period.

•	Other (income) expense, net is expected to be approximately $30 million of expense for the year ending December 31, 2019 and assumes no gains related to changes in our Packaged Beverages partner brands, such as the impacts during the year ended December 31, 2018 from BODYARMOR and Core Nutrition, LLC ("Core"), which recorded gains of $24 million and $12 million, respectively.

•	The Adjusted effective tax rate is expected to be in the range of 25.0% - 25.5%.

•	Adjusted interest expense is expected to be in the range of $570 million - $590 million, reflecting ongoing deleveraging and the continued benefit of unwinding swaps.

•	Shares outstanding of approximately 1,420 million.

SEASONALITY

The beverage market is subject to some seasonal variations. Our cold beverage sales are generally higher during the warmer months, while hot beverage sales are generally higher during the cooler months. Overall beverage sales can be influenced by the timing of holidays and weather fluctuations.

SEGMENTS

As of December 31, 2018, we report our business in four operating segments:

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

•	The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third-party brands, through our DSD and WD systems.

•	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.

•	The Coffee Systems segment reflects sales in the U.S. and Canada of the manufacture and distribution of finished goods relating to the Company's single-serve brewing system, K-Cup pods and other coffee products.

VOLUME

In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, pods or brewers.

Beverage Concentrates Sales Volume

In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales. The unit of measurement for concentrate case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.

Concentrate case sales represent units of measurement for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases.

Packaged Beverages and Latin America Beverages Sales Volume

In our Packaged Beverages and Latin America Beverages segments, we measure volume as case sales to customers. A case sale represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case sales include both our owned brands and certain brands licensed to and/or distributed by us.

Appliance and K-Cup Pod Sales Volume

In our Coffee Systems segments, we measure our sales volume as the number of appliances and the number of individual K-Cup pods sold to our customers.

COMPARABLE RESULTS OF OPERATIONS

As a result of the recent DPS Merger, in order for management to discuss our results on a comparable basis, we prepared unaudited pro forma condensed combined financial information to illustrate the estimated effects of the DPS Merger, which was consummated on July 9, 2018, based on the historical results of operations of DPS and Maple. See Supplemental Unaudited Pro Forma Condensed Combined Financial Information section at the end of Management's Discussion and Analysis for further information on the assumptions used in the preparation of the financial information.

Furthermore, management believes that there are certain non-GAAP financial measures that allow management to evaluate our results, trends and ongoing performance on a comparable basis. In order to derive the adjusted financial information, we adjust certain financial statement captions and metrics prepared on a pro forma basis for certain items affecting comparability. See Non-GAAP Financial Measures for further information on the certain items affecting comparability used in the preparation of the financial information. These items are referred to within the Adjusted Pro Forma Results of Operations section, which is located at the end of Management's Discussion and Analysis discussion, as Adjusted pro forma net sales, Adjusted pro forma income from operations, Adjusted pro forma net income and Adjusted pro forma diluted EPS.

EXECUTIVE SUMMARY

2018 Financial Overview

•	The following table details our net income and diluted earnings per share for 2018 compared to the year ended December 31, 2017:

	For the Year Ended December 31,								Dollar				Percent
(in millions, except per share data)	2018				2017				Change				Change
Net income attributable to KDP	$	586			$	847			$	(261	)		(31	)%
Diluted EPS	0.53				1.07				(0.54		)		(50	)%

Net income attributable to KDP decreased $261 million to $586 million, or $0.53 per diluted EPS, compared to $847 million, or $1.07 per diluted EPS, driven primarily by the unfavorable comparison of the income tax benefits related to the TCJA in 2017 and the higher interest expense, transaction costs and restructuring and integration charges associated with the DPS Merger, partially offset by the incremental income from operations impact of the DPS Merger.

•	During the last six months of 2018, we paid down approximately $938 million of our Term Loan, Commercial Paper and Revolver since the DPS Merger.

Recent Developments

•	In late October 2018, we entered into a long-term distribution agreement with Danone Waters of America to sell, distribute and merchandise evian, the leading global brand of premium natural spring water, across the U.S.

•	On November 30, 2018, we completed our acquisition of Core, a rapidly-growing brand that participates in the premium enhanced water segment.

•	On December 3, 2018, we announced that our Board of Directors declared a quarterly dividend of $0.15 per share, which was paid on January 18, 2019, to shareholders of record on January 4, 2019.

•	On February 14, 2019, we announced that our Board of Directors declared a quarterly dividend of $0.15 per share, which will be paid on April 19, 2019 to shareholders of record on April 5, 2019.

RESULTS OF OPERATIONS

As our financial information prior to the Keurig Acquisition is not comparable to the financial information subsequent to the Keurig Acquisition, predecessor and successor periods are presented to indicate the application of the different bases of accounting between the periods presented. As a result and when combined with the change in year-end for Maple as of December 31, 2017, we have provided our results of operations for individual periods that are also not comparable. See Note 1 of the Notes to our Audited Consolidated Financial Statements for additional information.

Our results of operations include the following periods, which reflect the results of operations of Maple:

•	year ended December 31, 2018 ("2018"), which also includes 176 days of the results of operations of DPS subsequent to the DPS Merger, which was completed on July 9, 2018,

•	three months ended December 31, 2017 ("Transition 2017"),

•	fiscal year ended September 30, 2017 ("Fiscal 2017"), and

•	the period of December 4, 2015 through September 24, 2016 ("Successor 2016").

Additionally, the predecessor period of September 27, 2015 through March 2, 2016 ("Predecessor 2016") is included and only reflects Keurig activity within the period.

Predecessor 2016, combined with 2018, Transition 2017, Fiscal 2017 and Successor 2016, collectively, are defined herein as the "Periods".

We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees.

References in the financial tables to percentage changes that are not meaningful are denoted by "NM."

2018

Consolidated Operations

The following table sets forth our consolidated results of operations for 2018 and the calendar year ended December 31, 2017:

	2018							For the Year Ended December 31, 2017(1)
($ in millions)	Dollars				Percent of Net Sales			Dollars				Percent of Net Sales
Net sales	$	7,442			100.0	%		$	4,226			100.0	%
Cost of sales	3,560				47.8			2,201				52.1
Gross profit	3,882				52.2			2,025				47.9
Selling, general and administrative expenses	2,635				35.4			1,163				27.5
Other operating (income) expense, net	10				0.1			—				—
Income from operations	1,237				16.6			862				20.4
Interest expense	401				5.4			86				2.0
Interest expense - related party	51				0.7			100				2.4
Loss on early extinguishment of debt	13				0.2			59				1.4
Other (income) expense, net	(19		)		(0.3	)		95				2.2
Income before provision (benefit) for income taxes	791				10.6			522				12.4
Provision (benefit) for income taxes	202				2.7			(335		)		(7.9	)
Net income	589				7.9			857				20.3
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	3				—			10				0.2
Net income attributable to KDP	$	586			7.9	%		$	847			20.0	%
Earnings per common share:
Basic	$	0.54						$	1.07
Diluted	0.53							1.07
Effective tax rate	25.5		%					(64.2		)%

(1)	The calendar year ended December 31, 2017 was prepared in order to populate the unaudited pro forma combined financial information for calendar year ended December 31, 2017 which will then provide a comparable period to 2018. See Reconciliation of Calendar Year Statement of Income for the Year Ended December 31, 2017 for the full reconciliation of the calendar year ended December 31, 2017.

Net Sales. Net sales for 2018 were $7,442 million. The primary change in our net sales during 2018 as compared to the calendar year ended December 31, 2017 of $3,328 million was the result of the DPS Merger.

Gross Profit. Gross profit for 2018 was $3,882 million, or 52.2% of net sales as compared to $2,025 million, or 47.9% of net sales for the calendar year ended December 31, 2017. This increase in gross profit is driven primarily by the higher margins associated with net sales as a result of the DPS Merger.

Selling, General and Administrative Expenses. SG&A expenses for 2018 were $2,635 million, or 35.4% of net sales as compared to $1,163 million, or 27.5% of net sales for the calendar year ended December 31, 2017. The increase in SG&A expenses was driven by the DPS Merger and reflects the incremental expenses associated with the DPS operations as well as the transaction costs and restructuring and integration charges associated with the DPS Merger.

Income from Operations. Total operating costs during 2018 were $6,205 million, resulting in an operating income of $1,237 million, or 16.6% of net sales.

Interest Expense. Interest expense during 2018 was $401 million, or 5.4% of net sales, due primarily to the increased borrowings and assumption of the existing senior unsecured notes as a result of the DPS Merger, partially offset by the realized gains associated with the termination of receive-variable, pay-fixed interest rate swaps during the fourth quarter of 2018.

Interest Expense - Related Party. Interest expense - related party during 2018 was $51 million, or 0.7% of net sales. These related party loans were capitalized into additional paid in capital at the time of the DPS Merger and no longer incur any future interest expense.

Loss on Early Extinguishment of Debt. We recognized a $13 million loss on early extinguishment of debt during 2018 as we voluntarily paid off the Term Loan A upon the consummation of the DPS Merger, compared to a $59 million loss on extinguishment of debt generated from voluntary prepayments of long term debt during calendar year ended December 31, 2017.

Other (income) expense, net. Other (income) expense, net in 2018 was a benefit of $19 million, primarily due to the distribution from BODYARMOR, which resulted in a gain of approximately $24 million, compared to expense of $95 million during the calendar year ended December 31, 2017, primarily due to the termination of our cross currency swap on Euro denominated debt during the period.

Effective Tax Rate. The effective tax rate for 2018 and the calendar year ended December 31, 2017 was 25.5% and (64.2)%, respectively. For the year ended December 31, 2017, the provision for income taxes included an income tax benefit of $484 million driven by the impact of the TCJA. See Note 6 of the Notes to our Audited Consolidated Financial Statements for additional information.

Results of Operations by Segment

The following tables set forth net sales and income from operations for our segments for 2018, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:

(in millions)
Segment Results — Net sales	2018
Beverage Concentrates	$	669
Packaged Beverages	2,415
Latin America Beverages	244
Coffee Systems	4,114
Net sales	$	7,442
(in millions)	2018
Segment Results — Income from Operations
Beverage Concentrates	$	430
Packaged Beverages	257
Latin America Beverages	29
Coffee Systems	1,163
Unallocated corporate costs	642
Income from operations	1,237
Interest expense	401
Interest expense - related party	51
Loss on early extinguishment of debt	13
Other (income) expense, net	(19		)
Income before provision for income taxes	$	791

BEVERAGE CONCENTRATES

The following table details our Beverage Concentrates segment's net sales and income from operations for 2018:

	2018
(in millions)	Dollars				Percent of Net Sales
Net sales	$	669			100.0	%
Income from operations	430				64.3	%

Sales volume. The following table details the sales volume mix by product type within our Beverage Concentrates segment for 2018:

CSDs	99	%
NCBs	1	%

Net Sales. Net sales were $669 million for 2018, which were wholly incremental as a result of the DPS Merger.

Income from Operations. Income from operations was $430 million for 2018, which were wholly incremental as a result of the DPS Merger, as net sales were reduced by SG&A expenses and cost of sales. SG&A expenses were primarily comprised of marketing investments and employee salaries. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs.

PACKAGED BEVERAGES

The following table details our Packaged Beverages segment's net sales and income from operations for 2018:

	2018
(in millions)	Dollars				Percent of Net Sales
Net sales	$	2,415			100.0	%
Income from operations	257				10.6	%

Sales Volume. The following table details the sales volume mix by product type within our Packaged Beverages segment for 2018:

CSDs	46	%
NCBs	40	%
Other(1)	14	%
Total Packaged Beverages volume	100	%

(1)	Includes contract manufacturing

Net Sales. Net sales were $2,415 million for 2018, which were wholly incremental as a result of the DPS Merger.

Income from Operations. Income from operations was $257 million for 2018, which were wholly incremental as a result of the DPS Merger, as net sales were reduced by cost of sales and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of employee salaries, marketing investments and logistics expense.

LATIN AMERICA BEVERAGES

The following table details our Latin America Beverages segment's net sales and income from operations for 2018:

	2018
(in millions)	Dollars				Percent of Net Sales
Net sales	$	244			100.0	%
Income from operations	29				11.9	%

Sales Volume. The following table details the sales volume mix by product type within our Latin America Beverages segment for 2018:

CSDs	88	%
NCBs	12	%
Total Latin America Beverages volume	100	%

Net Sales. Net sales were $244 million for 2018, which were wholly incremental as a result of the DPS Merger.

Income from Operations. Income from operations was $29 million for 2018, which was wholly incremental as a result of the DPS Merger, as net sales were reduced by cost of sales and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of logistics expense, employee salaries and marketing investments.

COFFEE SYSTEMS

The following table details our Coffee Systems segment's net sales and income from operations for 2018 and the calendar year ended December 31, 2017:

	2018							For the Year Ended December 31, 2017
(in millions)	Dollars				Percent of Net Sales			Dollars				Percent of Net Sales
Net sales	$	4,114			100.0	%		$	4,226			100.0	%
Income from operations	1,163				28.3	%		1,039				24.6	%

Net Sales. Net sales were $4,114 million for 2018, compared to $4,226 million for the year ended December 31, 2017. Our net sales declined as a result of lower net price realization, reflecting the continued moderation in strategic K-cup pod pricing and the absence of the 53rd week of operations in 2018 that were reflected for the year ended December 31, 2017, partially offset by volume/mix growth and favorable foreign currency translation.

Income from Operations. Income from operations was $1,163 million for 2018, compared to $1,039 million for the year ended December 31, 2017, primarily reflecting strong productivity that more than offset inflation in input costs and logistics as well as the absence of the 53rd week of operations in 2018.

Transition 2017

Consolidated Operations

The following table sets forth our consolidated results of operations for Transition 2017 and the three months ended December 31, 2016:

								Three Months Ended December 31, 2016
	Transition 2017							(unaudited)
(in millions)	Dollars				Percent of Net Sales			Dollars				Percent of Net Sales			Dollar Change				Percentage Change
Net sales	$	1,170			100.0	%		$	1,213			100.0	%		$	(43	)		(3.5	)%
Cost of sales	643				55.0	%		667				55.0	%		(24		)		(3.6	)%
Gross profit	527				45.0	%		546				45.0	%		(19		)		(3.5	)%
Selling, general and administrative expenses	298				25.5	%		282				23.2	%		16				5.7	%
Other operating (income) expense, net	—				—	%		—				—	%		—				NM
Income from operations	229				19.6	%		264				21.8	%		(35		)		(13.3	)%
Interest expense	10				0.9	%		25				2.1	%		(15		)		(60.0	)%
Interest expense - related party	25				2.1	%		25				2.1	%		—				—	%
Loss on early extinguishment of debt	5				0.4	%		31				2.6	%		(26		)		(83.9	)%
Other (income) expense, net	7				0.6	%		(44		)		(3.6	)%		51				NM
Income before provision (benefit) for income taxes	182				15.6	%		227				18.7	%		(45		)		(19.8	)%
Provision (benefit) for income taxes	(437		)		(37.4	)%		82				6.8	%		(519		)		NM
Net income	619				52.9	%		145				12.0	%		474				326.9	%
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	7				0.6	%		2				0.2	%		5				NM
Net income attributable to KDP	$	612			52.3	%		$	143			11.8	%		469				328.0	%
Earnings per common share:
Basic	$	0.77						$	0.18
Diluted	0.77							0.18
Effective tax rate	(240.1		)%					36.1		%

Sales Volumes. Brewer sales volumes increased 3%, driven primarily by new brewer models, while pod sales volumes increased by 5%, as a result of growth in the pod category.

Net Sales. Net sales for Transition 2017 decreased by $43 million, or 3.5%, to $1,170 million as compared to $1,213 million reported in the same fiscal period in 2016. The primary drivers of the change in net sales included:

•	Unfavorable rate, primarily driven by strategic price alignment and increased trade spend with our pod business partners, which decreased net sales by 5%;

•	Unfavorable product mix, which lowered net sales by 3%; and

•	Increase in sales volume, which increased net sales by 4%.

Gross Profit. Gross profit for Transition 2017 was $527 million, or 45.0% of net sales (gross margin), a decrease of 3.5% as compared to $546 million, or 45.0% of net sales (gross margin), in the same fiscal period in 2016. The following significant drivers impacted the gross margin for Transition 2017 compared to the same fiscal period in 2016:

•	Unfavorable pod net price realization which reduced gross margin by approximately 360 basis points;

•	Unfavorable pod mix due to a higher mix of partner and private label brands, which reduced gross margin by approximately 60 basis points; and

•	Approximately 340 basis points improvement driven primarily by ongoing pod and brewer productivity improvements.

Selling, General and Administrative Expenses. SG&A expenses increased 5.7% to $298 million in Transition 2017 from $282 million in the same fiscal period in 2016. As a percentage of net sales, SG&A expenses increased to 25.5% in Transition 2017 compared to 23.2% in the same fiscal period in 2016. The 5.7% increase was primarily attributable to a 38%, or $14 million, increase in planned advertising and promotional spending primarily associated with television media campaigns aimed at driving household penetration of the Keurig single-serve system.

Income from Operations. Income from operations in Transition 2017 was $229 million, a decrease of $35 million as compared to $264 million in the same fiscal period in 2016.

Interest Expense. Interest expense was $10 million in Transition 2017 as compared to $25 million in the same fiscal period in 2016. The $15 million decrease in interest expense was primarily due to mark-to-market gains from interest rate swaps that economically hedge our variable interest rate exposure.

Loss on Extinguishment of Debt. We realized $5 million in losses related to the extinguishment of debt from voluntary prepayments of our long term debt in Transition 2017 as compared to $31 million in losses related to the extinguishment of debt in the same fiscal period in 2016.

Effective Tax Rate. Our effective income tax rate was (240.1)% for Transition 2017 as compared to a 36.1% effective tax rate for the same fiscal period in 2016. The effective tax rate for Transition 2017 was primarily impacted by a 24.5% blended (as defined in the Internal Revenue Code) U.S. federal statutory rate as well as the net tax benefits related to a U.S. deferred tax rate change of $493 million as a result of the enactment of the TCJA, and Section 199 deduction, which is partially offset by a repatriation tax as a result of the enactment of the TCJA and state taxes. The effective tax rate for the three months ended December 24, 2016 was primarily impacted by a 35% U.S. Federal statutory rate, and net tax benefits related to Section 199 deductions and foreign tax rate differential, which was partially offset by state taxes.

Net Income. Net income in Transition 2017 was $619 million, an increase of $474 million, or 326.9%, as compared to $145 million in the same fiscal period in 2016.

Fiscal 2017

Consolidated Operations

The following table sets forth our consolidated results of operations for Fiscal 2017:

	Fiscal 2017
($ in millions)	Dollars				Percent
Net sales	$	4,269			100.0	%
Cost of sales	2,225				52.1
Gross profit	2,044				47.9
Selling, general and administrative expenses	1,147				26.9
Other operating (income) expense, net	—				—
Income from operations	897				21.0
Interest expense	101				2.4
Interest expense - related party	100				2.3
Loss on early extinguishment of debt	85				2.0
Other (income) expense, net	44				1.0
Income before provision (benefit) for income taxes	567				13.3
Provision (benefit) for income taxes	184				4.3
Net income	383				9.0
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	5				0.1
Net income attributable to KDP	$	378			8.9	%
Earnings per common share:
Basic	$	0.48			NM
Diluted	$	0.47			NM
Effective tax rate	32.5		%		NM

Net Sales. Net sales for Fiscal 2017 were $4,269 million. Fiscal 2017 included a 53rd week which added approximately $91 million or 2.1% to Fiscal 2017 net sales growth. Our net sales were positively impacted by improved volume, but such improvements were offset by negative mix and increased trade spend.

Gross Profit. Gross profit for Fiscal 2017 was $2,044 million, or 47.9% of net sales. Our gross profit was positively impacted by ongoing pod and brewer productivity programs, the discontinuation of the Keurig Kold product line, product mix primarily associated with selling fewer Keurig K2.0 brewing systems versus Keurig 1.0 brewing systems and negatively impacted by an increase in other manufacturing costs.

Selling, General and Administrative Expenses. SG&A expenses for Fiscal 2017 were $1,147 million, or 26.9% of net sales. Our SG&A expenses were primarily attributable to increased expenses related to amortization of intangible assets of $96 million, stock compensation of $54 million and restructuring charges of $45 million.

Income from Operations. For Fiscal 2017, total operating costs were $1,147 million resulting in income from operations of $897 million, or 21.0% of net sales.

Interest Expense and Interest Expense—Related Party. For Fiscal 2017, third party interest expense was $101 million and related party interest expense was $100 million for a total interest expense of $201 million. The change in interest expenses was primarily attributable to incurring a full year of interest expense on the outstanding debt obtained in March 2016 in connection with the Keurig Acquisition partially offset by mark to market activity on interest rate swaps, as well as the outstanding term loans with two related parties, the Sponsor and Mondelēz, with a combined principal balance of approximately $1,815 million which bear an interest rate of 5.5% and mature in 2023.

Loss on Extinguishment of Debt. For Fiscal 2017, we realized a net loss of $85 million from voluntary prepayments of our long term debt.

Other (income) expense, net. For Fiscal 2017, we realized expense of $44 million, which was primarily attributable to a realized loss of $61 million upon termination of a cross currency swap on our Euro denominated debt. The realized loss was partially offset by a realized gain on the extinguishment of the related debt.

Effective Tax Rate. For Fiscal 2017, income tax expense was $184 million, or 32.5% of income before income tax. The effective tax rate for Fiscal 2017 was primarily impacted by a 35.0% U.S. federal statutory rate, and the net tax benefits of tax credits generated from current year foreign earnings recognized in the U.S., Section 199 deductions, foreign tax rate differential, partially offset by U.S. taxation of foreign earnings, state taxes, valuation allowance for deferred tax assets, and uncertain tax positions.

Net Income. For Fiscal 2017, net income was $383 million, or 9.0% of net sales.

Successor 2016

The following table sets forth our consolidated results of operations for Successor 2016:

	Successor 2016
($ in millions)	Dollars				Percent
Net sales	$	2,293			100.0	%
Cost of sales	1,220				53.2
Gross profit	1,073				46.8
Selling, general and administrative expenses	680				29.7
Other operating (income) expense, net	—				—
Income from operations	393				17.1
Interest expense	163				7.1
Interest expense - related party	60				2.6
Loss on early extinguishment of debt	5				0.2
Other (income) expense, net	1				—
Income before provision (benefit) for income taxes	164				7.2
Provision (benefit) for income taxes	55				2.4
Net income	$	109			4.8
Earnings per common share:
Basic	$	0.19			NM
Diluted	$	0.18			NM
Effective tax rate	33.5		%		NM

Net Sales. Net sales for Successor 2016 were $2,293 million. Our net sales were negatively impacted by a decrease in hot pod sales, a decrease in hot brewers and accessories sales and a decrease in other product sales.

Gross Profit. Gross profit for Successor 2016 was $1,073 million, or 46.8% of net sales. Our gross profit was positively impacted by ongoing pod and brewer productivity initiatives and other manufacturing costs improvements, lower obsolescence expense and the accounting treatment of logistics costs following the Keurig Acquisition.

SG&A Expenses. SG&A expenses for Successor 2016 were $680 million, or 29.7% of net sales. Our SG&A expenses included Keurig Acquisition transaction costs of $102 million, which were offset by lower R&D costs and advertising and promotional spending.

Income from Operations. Total operating costs were $680 million resulting in an operating income of $393 million, or 17.1% of net sales.

Interest Expense. Third party interest expense was $163 million and related party interest expense was $60 million for a total interest expense of $223 million. Our interest expense was primarily attributable to an increase in our outstanding debt balance associated with the Keurig Acquisition and an increase in related party interest.

Loss on Early Extinguishment of Debt. Maple realized a net loss of $5 million from voluntary prepayments of its long term debt.

Effective Tax Rate. Income tax expense was $55 million, or 33.5% of income before income tax. The effective tax rate for Successor 2016 was primarily impacted by a 35.0% U.S. federal statutory rate, and the net tax benefits related to foreign tax rate differential, transaction cost deductions, deferred state rate change, and Section 199 deductions, partially offset by uncertain tax positions and U.S. state taxes.

Net Income. In Successor 2016, net income was $109 million, or 4.8% of net sales.

Predecessor 2016

	Predecessor 2016
($ in millions)	Dollars				Percent
Net sales	$	2,025			100.0	%
Cost of sales	1,225				60.5
Gross profit	800				39.5
Selling, general and administrative expenses	653				32.2
Other operating (income) expense, net	—				—
Income from operations	147				7.3
Interest expense	3				0.1
Interest expense - related party	—				—
Loss on early extinguishment of debt	6				0.3
Other (income) expense, net	(1		)		—
Income before provision (benefit) for income taxes	139				6.9
Provision (benefit) for income taxes	39				1.9
Net income	$	100			4.9
Earnings per common share:
Basic	$	0.66			NM
Diluted	$	0.66			NM
Effective tax rate	28.1		%		NM

Net Sales. Net sales for Predecessor 2016 were $2,025 million. Our net sales were negatively impacted by a decrease in hot pod sales, decrease in hot brewers and accessories sales and a decrease in other product sales.

Gross Profit. Gross profit for Predecessor 2016 was $800 million, or 39.5% of net sales. Our gross profit was positively impacted by ongoing pod and brewer productivity initiatives and other manufacturing costs improvements, lower obsolescence expense and the accounting treatment of logistics costs following the Keurig Acquisition.

SG&A Expenses. SG&A expenses for Predecessor 2016 were $653 million, or 32.2% of net sales. Our SG&A expenses included Keurig Acquisition transaction costs of $187 million and reflected the benefit from the discontinuation of the Keurig Kold product line, which lowered recurring costs.

Income from operations. For Predecessor 2016, total operating costs were $653 million resulting in an operating income of $147 million, or 7.3% of net sales.

Interest expense. For Predecessor 2016, interest expense was $3 million. Our interest expense was primarily attributable to borrowings under the Company's revolver.

Loss on early extinguishment of debt. For Predecessor 2016, Maple realized a net loss of $6 million from voluntary prepayments of long term debt.

Effective Tax Rate. For Predecessor 2016, income tax expense was $39 million, with an effective tax rate of 28.1%. The effective tax rate was primarily impacted by a 35.0% U.S. federal statutory rate, and the net tax benefits related to state refunds, R&D credits, foreign tax rate differential, Section 199 deductions, which was partially offset by tax expenses related to uncertain tax positions, capitalization of transaction costs, and U.S. state taxes.

Net income. Net income was $100 million, or 4.9% of net sales.

LIQUIDITY AND CAPITAL RESOURCES

Trends and Uncertainties Affecting Liquidity

Customer and consumer demand for our products may 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. 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.

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 ("Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of $2,400 million;

•	our integration of DPS;

•	our continued payment of dividends;

•	our continued capital expenditures;

•	seasonality of our operating cash flows, which includes our payable extension program and structured payables, which could impact short-term liquidity;

•	fluctuations in our tax obligations;

•	future equity investments; and

•	future mergers or acquisitions of brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.

Financing Arrangements

Refer to Note 8 of the Notes to our Audited Consolidated Financial Statements for management's discussion of financing arrangements.

Liquidity

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 for the Periods:

	Successor																Predecessor
(in millions)	2018				Transition 2017				Fiscal 2017				Successor 2016				Predecessor 2016
Net cash provided by operating activities	$	1,613			$	385			$	1,749			$	280			$	837
Net cash (used in) provided by investing activities	(19,131		)		(18		)		180				(13,772		)		(75		)
Net cash provided by (used in) financing activities	17,577				(620		)		(2,026		)		13,937				(647		)

NET CASH PROVIDED BY OPERATING ACTIVITIES

Net cash provided by operating activities for 2018 primarily consisted of $589 million in net income, adjusted for $462 million in depreciation and amortization expense. Other significant changes in assets and liabilities affecting net cash provided by operating activities were an increase in accounts payable and accrued expenses of $206 million, primarily attributable to increases in accounts payable as a result of the accounts payable program as discussed below.

Net cash provided by operating activities for Transition 2017 primarily consisted of $619 million in net income, adjusted for deferred income taxes of $484 million as a result of the enactment of the TCJA. Other significant changes in assets and liabilities affecting net cash provided by operating activities were an increase in accounts payable and accrued expenses of $98 million, primarily attributable to increases in accounts payable as a result of the accounts payable program as discussed below and a decrease in inventories of $89 million, primarily attributable to decreases in brewer and pod inventories.

Net cash provided by operating activities for Fiscal 2017 primarily consisted of $383 million in net income, adjusted for $256 million in depreciation and amortization expense. Net cash was also impacted by other changes in working capital during the period, driven primarily by the $861 million increase in accounts payable as a result of the accounts payable program as discussed below.

Net cash provided by operating activities for Successor 2016 primarily consisted of generation of $109 million in net income, adjusted for $138 million in depreciation and amortization expense related to fixed assets and intangibles. Net cash provided by operating activities was also impacted by the $128 million increase in accounts payable as a result of improved payment terms, partially offset by reduction from $84 million in accounts receivable.

Net cash provided by operating activities for Predecessor 2016 primarily consisted of generation of $100 million in net income, adjusted by $125 million in depreciation and amortization expense related to fixed assets and intangibles and $141 million in deferred compensation and stock compensation. Additionally, net cash was favorably impacted by an increase in accounts payable and accrued expenses of $136 million from improved payment terms.

Accounts payable program

The Company entered into agreements with third parties to allow participating suppliers to track payment obligations from the Company, and if elected, sell payment obligations from the Company to financial institutions. Suppliers can sell one or more of the the Company's payment obligations at their sole discretion and the rights and obligations of the Company to its suppliers are not impacted. The Company has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. The Company’s obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted. As of December 31, 2018 and 2017, $1,676 million and $1,319 million, respectively, of the Company's outstanding payment obligations are payable to suppliers who utilize these third party services.

NET CASH USED IN INVESTING ACTIVITIES

Cash used in investing activities for 2018 consisted primarily of our business acquisitions of the DPS Merger, the Big Red Acquisition and Core Acquisition of $19,114 million, net of cash acquired of $169 million, and purchases of property, plant and equipment of $180 million.

Cash used in investing activities for Transition 2017 consisted primarily of $11 million of capital expenditures, primarily related to portion pack manufacturing.

Cash provided by investing activities for Fiscal 2017 consisted primarily of $250 million of proceeds which were recovered from the sale of Keurig Kold assets, which was partially offset by $66 million of capital expenditures.

Cash used in investing activities for Successor 2016 consisted primarily of $13,717 million for the Keurig Acquisition and purchases of property, plant and equipment of $33 million.

Cash used in investing activities for Predecessor 2016 consisted primarily of purchases of property, plant and equipment of $79 million.

NET CASH USED IN FINANCING ACTIVITIES

Cash provided by financing activities for 2018 consisted primarily of proceeds from the issuance of common stock of $9,000 million, issuance of unsecured notes of $8,000 million, proceeds from the term loan facility of $2,700 million and net issuance of commercial paper of $1,080 million. These cash inflows from financing activities were partially offset by repayments on the term loan facility of $3,447 million. These activities were used to accommodate the DPS Merger and reflect subsequent repayments since the DPS Merger.

Net cash used in financing activities for Transition 2017 consisted primarily of $505 million in repayments of the term loan facility, $100 million in repayments of the revolving credit facility, and $11 million in dividend payments.

Net cash used in financing activities for Fiscal 2017 consisted primarily of $3,168 million of repayment of the term loan facility, which was refinanced by proceeds of $1,200 million of a new term loan in March 2017. In Fiscal 2017, $100 million was drawn against our revolving credit facility, a portion of which was used to fund repayments of our long-term debt. In addition, Maple paid $55 million in dividends.

Net cash provided by financing activities for Successor 2016 consisted primarily of proceeds form the issuance of common stock of $6,385 million, proceeds from the term loan facility of $5,947 million and proceeds from the related party unsecured notes of $1,815 million, which were all used to accommodate the acquisition of Keurig Green Mountain. These cash inflows from financing activities were partially offset by repayments on the term loan facility of $147 million and payments of deferred financing fees of $122 million.

Net cash used in financing activities for Predecessor 2016 consisted primarily of the Company's share repurchases and the net change in the Company's revolving line of credit.

Debt Ratings

As of December 31, 2018, our credit ratings were as follows:

Rating Agency	Long-Term Debt Rating	Commercial Paper Rating	Outlook	Date of Last Change
Moody's	Baa2	P-2	Negative	May 11, 2018
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.

Capital Expenditures

Capital expenditures for 2018 were $180 million and primarily related to machinery and equipment, information technology infrastructure, logistics equipment and replacement of existing cold drink equipment.

Capital expenditures for Transition 2017 were $11 million and primarily related to machinery and equipment.

Capital expenditures for Fiscal 2017 were $66 million and primarily related to information technology infrastructure and systems and machinery and equipment.

Capital expenditures for Successor 2016 and Predecessor 2016 were $33 million and $79 million, respectively, primarily related to machinery and equipment and information technology infrastructure.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $44 million from December 31, 2017 to $139 million as of December 31, 2018, primarily driven by by operating cash flows.

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 $59 million and $58 million as of December 31, 2018 and December 31, 2017, 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.

The following table summarizes our contractual obligations and contingencies as of December 31, 2018:

	Payments Due in Year
(in millions)	Total				2019				2020				2021				2022				2023				After 2023
Long-term obligations(1)	$	14,808			$	385			$	385			$	2,385			$	385			$	4,543			$	6,725
Interest payments	5,453				571				536				514				467				386				2,979
Capital leases(2)	281				34				34				33				32				29				119
Operating leases(3)	312				58				53				44				34				25				98
Purchase obligations(4)	1,841				1,124				241				149				129				77				121
Payable to Mondelēz	15				15				—				—				—				—				—
Financing obligations(5)	112				10				10				10				10				10				62
Total	$	22,822			$	2,197			$	1,259			$	3,135			$	1,057			$	5,070			$	10,104

(1)	Amounts represent payments for the senior unsecured notes issued by us and the term loan credit agreement. Please refer to Note 8 of the Notes to our Audited Consolidated Financial Statements for additional information.

(2)

Amounts represent our contractual payment obligations for our lease arrangements classified as capital leases. These amounts exclude renewal options, which were not yet executed but were included in the lease term to determine capital lease obligation as the lease imposes a penalty on us in such amount that the renewal appeared reasonably assured at lease inception. Refer to Note 13 for additional information.

(3)	Amounts represent minimum rental commitments under our non-cancelable operating leases. Refer to Note 13 for additional information

(4)	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.

(5)	Amounts represent our contractual payment obligations for our build-to-suit financing lease obligations. Refer to Note 13 for additional information.

Amounts excluded from our table

As of December 31, 2018, we had $62 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 6 of the Notes to our Audited Consolidated Financial Statements for further information.

The total accrued benefit liability representing the underfunded position for pension and other postretirement benefit plans recognized as of December 31, 2018 was approximately $30 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 is 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, 2018, our accrued liabilities for our losses related to these programs totaled approximately $94 million.

CRITICAL ACCOUNTING ESTIMATES

The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. We have not made any material changes in the accounting methodology we use to assess or measure our critical accounting estimates. We have identified the items described below as our critical accounting estimates. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use in our critical accounting estimates. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material to our consolidated financial statements. See Note 2 of the Notes to our Audited Consolidated Financial Statements for a discussion of these and other accounting policies.

Description		Judgments and Uncertainties		Effect if Actual Results Differ from Assumptions
Goodwill and Other Indefinite Lived Intangible Assets
For goodwill and other indefinite lived intangible assets, we conduct tests for impairment annually, as of October 1, or more frequently if events or circumstances indicate the carrying amount may not be recoverable. We use present value and other valuation techniques to make this assessment. If the carrying amount of goodwill or an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For purposes of impairment testing we assign goodwill to the reporting unit that benefits from the synergies arising from each business combination and also assign indefinite lived intangible assets to our reporting units. We define our six reporting units (in italics below) as the following: Packaged Beverages - DSD - WD Coffee Systems - US - Canada Beverage Concentrates Latin America Beverages For both goodwill and other indefinite lived intangible assets, we have the option to first assess qualitative factors to determine whether the fair value of either the reporting unit or indefinite lived intangible asset is not "more likely than not" less than its carrying value ("Step 0"). If a quantitative analysis is required, the following would be required: - The impairment test for indefinite lived intangible assets encompasses calculating a fair value of an indefinite lived intangible asset and comparing the fair value to its carrying value. If the carrying value exceeds the estimated fair value, impairment is recorded. - The impairment tests for goodwill include comparing a fair value of the respective reporting unit with its carrying value, including goodwill and considering any indefinite lived intangible asset impairment charges.		For our detailed impairment analysis, we used an income based approach to determine the fair value of our assets, as well as an overall consideration of market capitalization and our enterprise value. 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 "Risk Factors" in this Annual Report on Form 10-K. Critical assumptions for quantitative analyses include revenue growth and profit performance, including the allocation of synergies, over the next ten year period, as well as an appropriate discount rate, long term growth rate and royalty rates, as applicable. Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums. For 2018, such discount rates ranged from 8.5% to 9.5%. Long term growth rates are based on the long-term inflation forecast, industry growth and the long-term economic growth potential. For 2018, the long term growth rates ranged from 0.9% to 2.4%. Royalty rates are based on observable market participant information. For 2018, such royalty rate used in the impairment analysis of trade names ranged from 6.0% to 7.0%.		The carrying values of goodwill and indefinite lived intangible assets as of December 31, 2018, were $20,011 million and $22,310 million, respectively. We have not identified any other impairments in goodwill or other indefinite lived intangible assets during 2018, 2017, 2016 or 2015. For purposes of goodwill and other indefinite lived intangible assets acquired in the DPS Merger, we performed a Step 0 test, concluding no further analysis was required. For the goodwill within the Coffee Systems segment, 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, 2018 would not change our conclusion. For the trade names within the Coffee Systems segment, 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, 2018 would impact the amount of headroom over the carrying value of our trade names as follows (in millions):
				Fair Value								Carrying Value
		Headroom Percentage		Result				+0.50%				Result				+0.50%
		0 - 25%		$	—			$	—			$	—			$	—
		26 - 50%		—				—				—				—
		In excess of 50%		4,600				4,360				2,479				2,479
				$	4,600			$	4,360			$	2,479			$	2,479

Description		Judgments and Uncertainties		Effect if Actual Results Differ from Assumptions
Revenue Recognition
We recognize revenue when performance obligations under the terms of a contract with the customer are satisfied. Accruals for customer incentives, sales returns and marketing programs are established for the expected payout based on contractual terms, volume-based metrics and/or historical trends.		Our customer incentives, sales returns and marketing accrual methodology contains uncertainties because it requires management to make assumptions and to apply judgment regarding our contractual terms in order to estimate our customer participation and volume performance levels which impact the expense recognition. Our estimates are based primarily on a combination of known or historical transaction experiences. Differences between estimated expenses and actual costs are normally insignificant and are recognized to earnings in the period differences are determined. Further judgment is required to ensure the classification of the spend is correctly recorded as either a reduction from gross sales or advertising and marketing expense, which is a component of our SG&A expenses.		A 10% change in the accrual for our customer incentives, sales returns and marketing programs as of December 31, 2018, would have affected our income from operations by $34 million for the year ended December 31, 2018.
Income Taxes
We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount, or (3) the tax position is “more likely than not” to be sustained , but not in the financial period in which the tax position was originally taken. We assess the likelihood of realizing our deferred tax assets. Valuation allowances reduce deferred tax assets to the amount more likely than not to be realized.		Our liability for uncertain tax positions contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various tax positions. We base our judgment of the recoverability of our deferred tax assets primarily on historical earnings, our estimate of current and expected future earnings and prudent and feasible tax planning strategies.		Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. As these audits progress, events may occur that cause us to change our liability for uncertain tax positions. To the extent we prevail in matters for which a liability for uncertain tax positions has been established, or are required to pay amounts in excess of our established liability, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective tax rate in the period of resolution. If results differ from our assumptions, a valuation allowance against deferred tax assets may be increased or decreased which would impact our effective tax rate.
Business Combinations
We record acquisitions using the purchase method of accounting. All of the assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill.		The application of the purchase method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed, in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. The fair value assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Significant assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset, if applicable.		If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the 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.

OFF-BALANCE SHEET ARRANGEMENTS

We currently participate in three multi-employer pension plans. In the event that we withdraw from participation in one of these plans, the plan will ultimately 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 7 of the Notes to our Audited 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 8 of the Notes to our Audited Consolidated Financial Statements for additional information regarding outstanding letters of credit.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

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

SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION AND NON-GAAP FINANCIAL MEASURES

Supplemental Unaudited Pro Forma Combined Financial Information

The following unaudited pro forma combined financial information is presented to illustrate the estimated effects of the DPS Merger, which was consummated on July 9, 2018, based on the historical results of operations of KDP (Maple) and DPS and reflects the change in year-end for Maple. See Notes 1 and 3 of our Notes to our Audited Consolidated Financial Statements for additional information on the DPS Merger.

The following unaudited pro forma combined statements of income for the years ended December 31, 2018 and 2017 are based on the historical financial statements of KDP (Maple) and DPS after giving effect to the DPS Merger, related equity investments, and the assumptions and adjustments described in the accompanying notes to these unaudited pro forma combined statements of income. The KDP (Maple) statement of income information for the years ended December 31, 2018 and 2017 were derived from the audited consolidated financial statements included elsewhere in this Form 10-K. See Reconciliation of Calendar Year Statement of Income for the Year Ended December 31, 2017 for further information.

The DPS statement of income information for the year ended December 31, 2017 was derived from its audited consolidated financial statements included in its Annual Report on Form 10-K dated February 14, 2018. The unaudited pro forma combined statements of income are presented as if the DPS Merger had been consummated on December 31, 2016, and combine the historical results of KDP (Maple) and DPS.

The unaudited pro forma combined statements of income set forth below primarily give effect to the following assumptions and adjustments:

•	Application of the acquisition method of accounting;

•	The issuance of Maple common stock to JAB in connection with the equity investments;

•	The conversion of Maple Parent Corporation into KDP shares in accordance with the Merger Agreement;

•	The pre-closing Maple share conversion;

•	The exchange of one share of KDP common stock for each share of DPS common stock;

•	The change in year-end for Maple; and

•	The alignment of accounting policies.

The unaudited pro forma combined financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized estimated fair values at the Merger Date for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. During the measurement period, we will continue to obtain information to assist in determining the fair value of net assets acquired, which may differ materially from these preliminary estimates.

The unaudited pro forma combined financial information has been prepared and presented in a form consistent with SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results. In addition, the accompanying unaudited pro forma combined statements of income do not reflect any anticipated synergies, operating efficiencies, cost savings or any integration costs that may result from the DPS Merger.

The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma combined statements of income to give effect to unaudited pro forma events that are (1) directly attributable to the DPS Merger, (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of KDP. As a result, under SEC Regulation S-X Article 11, certain expenses such as transaction costs and costs associated with the impact of the step-up of inventory related to the DPS Merger are eliminated from pro forma results in all periods presented. In contrast, under the U.S. GAAP presentation in Note 3, Acquisitions and Investments in Unconsolidated Subsidiaries, these expenses are required to be included in prior year pro forma results. See Note 3 of the Notes to our Audited Consolidated Financial Statements for additional information.

The unaudited pro forma combined financial information, including the related notes, should be read in conjunction with the historical consolidated financial statements and related notes of DPS, and with our Audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Reconciliation of Unaudited Calendar Year Statement of Income for the Year Ended December 31, 2017

The following table provides a reconciliation of our results of operations under U.S. GAAP for the calendar year ended December 31, 2017 in order to prepare the unaudited pro forma combined financial information for calendar year ended December 31, 2017 to provide a comparable period to 2018. The calendar year ended December 31, 2017 was prepared to reflect the change in year-end for Maple assumption for the unaudited pro forma combined financial information. Refer to Note 1 of the Notes to our Audited Consolidated Financial Statements for a discussion of the change in fiscal year-end.

(in millions, except per share data)	Fiscal 2017				Add: Transition 2017				Deduct: Three Months Ended December 30, 2016(1)				Calendar Year Ended December 31, 2017
Net sales	$	4,269			$	1,170			$	1,213			$	4,226
Cost of sales	2,225				643				667				2,201
Gross profit	2,044				527				546				2,025
Selling, general and administrative expenses	1,147				298				282				1,163
Other operating income, net	—				—				—				—
Income from operations	897				229				264				862
Interest expense	101				10				25				86
Interest expense - related party	100				25				25				100
Loss on early extinguishment of debt	85				5				31				59
Other (income) expense, net	44				7				(44		)		95
Income before provision (benefit) for income taxes	567				182				227				522
Provision (benefit) for income taxes	184				(437		)		82				(335		)
Net income	383				619				145				857
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	5				7				2				10
Net income attributable to KDP	$	378			$	612			$	143			$	847
Earnings per common share:
Basic	$	0.48			$	0.77			$	0.18			$	1.07
Diluted	0.47				0.77				0.18				1.07
Weighted average common shares outstanding:
Basic	790.5				790.5				790.5				790.5
Diluted	790.5				790.5				790.5				790.5

(1)	Refer to Note 23 to our Audited Consolidated Financial Statements for further information.

Keurig Dr Pepper Inc.

Pro Forma Condensed Combined Statement of Income

For the Year Ended December 31, 2018

(Unaudited)

(in millions, except per share data)	Reported KDP(1)				DPS January 1 - July 8, 2018(2)				Pro Forma Adjustments(3)				Pro Forma Combined
Net sales	$	7,442			$	3,605			$	(27	)		$	11,020
Cost of sales	3,560				1,529				(150		)		4,939
Gross profit	3,882				2,076				123				6,081
Selling, general and administrative expenses	2,635				1,639				(367		)		3,907
Other operating expense (income), net	10				(14		)		2				(2		)
Income from operations	1,237				451				488				2,176
Interest expense	401				88				182				671
Interest expense - related party	51				—				(51		)		—
Loss on early extinguishment of debt	13				—				—				13
Other (income) expense, net	(19		)		5				—				(14		)
Income before provision for income taxes	791				358				357				1,506
Provision for income taxes	202				82				114				398
Net income	589				276				243				1,108
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	3				—				(3		)		—
Net income attributable to KDP	$	586			$	276			$	246			$	1,108
Earnings per common share:
Basic	$	0.54											$	0.80
Diluted	0.53												0.79
Weighted average common shares outstanding:
Basic	1,086.3								303.5				1,389.8
Diluted	1,097.6								303.5				1,401.1

(1)	Refer to the Statements of Income, which includes DPS activity subsequent to the Merger Date.

(2)	Refers to DPS activity during the year ended December 31, 2018 prior to the Merger Date.

(3)	Refer to Summary of Pro Forma Adjustments.

Keurig Dr Pepper Inc.

Pro Forma Condensed Combined Statement of Income

For the Year Ended December 31, 2017

(Unaudited)

(in millions, except per share data)	Historical DPS(1)				Reported KDP(2)				Reclassifications(3)				Pro Forma Adjustments(4)				Pro Forma Combined
Net sales	$	6,690			$	4,226			$	—			$	(141	)		$	10,775
Cost of sales	2,695				2,201				—				(60		)		4,836
Gross profit	3,995				2,025				—				(81		)		5,939
Selling, general and administrative expenses	2,556				1,163				102				(14		)		3,807
Depreciation and amortization	102				—				(102		)		—				—
Other operating income, net	(51		)		—				—				—				(51		)
Income from operations	1,388				862				—				(67		)		2,183
Interest expense	164				86				—				366				616
Interest expense - related party	—				100				—				(100		)		—
Interest income	(3		)		—				3				—				—
Loss on early extinguishment of debt	62				59				—				—				121
Other (income) expense, net	(8		)		95				(1		)		(3		)		83
Income before provision for income taxes	1,173				522				(2		)		(330		)		1,363
Provision for income taxes	95				(335		)		—				(124		)		(364		)
Income before equity in loss of unconsolidated subsidiaries	1,078				857				(2		)		(206		)		1,727
Equity in loss of unconsolidated subsidiaries, net of tax	2				—				(2		)		—				—
Net income	1,076				857				—				(206		)		1,727
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—				10				—				(10		)		—
Net income attributable to KDP	$	1,076			$	847			$	—			$	(196	)		$	1,727
Earnings per common share:
Basic	$	5.91															$	1.25
Diluted	5.89																1.25
Weighted average common shares outstanding:
Basic	182.0												1,206.4				1,386.5
Diluted	182.8												1,203.7				1,386.5

(1)	Refer to the DPS Annual Report on Form 10-K as filed on February 14, 2018, for the year ended December 31, 2017.

(2)	Refer to Reconciliation of Calendar Year Statement of Income for the Year Ended December 31, 2017.

(3)	Refer to Summary of Reclassifications.

(4)	Refer to Summary of Pro Forma Adjustments.

Summary of Pro Forma Adjustments

Pro forma adjustments included in the Pro Forma Combined Statements of Income are as follows:

a.	A decrease in Net sales to remove the historical deferred revenue associated with DPS' arrangements with PepsiCo, Inc. and The Coca-Cola Company, which were eliminated in the fair value adjustments for DPS as part of purchase price accounting.

b.	An increase in Net sales to remove the historical amortization of certain capitalized upfront customer incentive program payments. These were eliminated in the fair value adjustments for DPS as these upfront payments were revalued within the customer relationship intangible assets recorded in purchase price accounting.

c.	Adjustment to remove the impact of the step-up of inventory recorded in purchase price accounting.

d.	Adjustments to SG&A expenses due to changes in amortization as a result of the fair value adjustments for DPS' intangible assets with definite lives as part of purchase price accounting.

e.	Adjustments to SG&A expenses due to changes in depreciation as a result of the fair value adjustments for DPS' property, plant and equipment as part of purchase price accounting.

f.	A decrease to SG&A expenses for both DPS and Maple to remove non-recurring transaction costs as a result of the DPS Merger.

g.	Removal of the Interest expense - related party caption for Maple, as the related party debt was capitalized into Additional paid-in capital immediately prior to the DPS Merger.

h.	Adjustments to Interest expense to remove the historical amortization of deferred debt issuance costs, discounts and premiums and to record incremental amortization as a result of the fair value adjustments for DPS' senior unsecured notes as part of purchase price accounting.

i.	Adjustments to Interest expense to record incremental interest expense and amortization of deferred debt issuance costs for borrowings related to the DPS Merger.

j.	Removal of the Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards caption as the Maple non-controlling interest was eliminated to reflect the capital structure of KDP.

k.	Adjustments to SG&A expenses to remove accelerated stock-based compensation expense as a result of the DPS Merger.

l.	As a result of the change in year-end for Maple, the Company has removed the 53rd week from its Pro Forma Condensed Combined Statement of Income as it would not be representative of the Company if the DPS Merger had occurred on December 31, 2016.

Summary of Reclassifications

Reclassifications included in the Pro Forma Combined Statements of Income for the year ended December 31, 2017 are as follows:

a.	Foreign currency transaction gains and losses were reclassified from Cost of sales and SG&A expenses in the historical DPS Statements of Income to Other (income) expense, net.

b.	Depreciation and amortization expenses were reclassified from Depreciation and amortization in the historical DPS Statements of Income to SG&A expenses.

c.	Interest income was reclassified from Interest income in the historical DPS Statements of Income to Other (income) expense, net.

Keurig Dr Pepper Inc.

Reconciliation of Pro Forma Segment Information

(Unaudited)

(in millions)	Reported KDP(1)				DPS January 1 - July 8, 2018(2)				Pro Forma Adjustments(3)				Pro Forma Combined
For the Year Ended December 31, 2018
Net Sales
Beverage Concentrates	$	669			$	689			$	(27	)		$	1,331
Packaged Beverages	2,415				2,654				—				5,069
Latin America Beverages	244				262				—				506
Coffee Systems	4,114				—				—				4,114
Total net sales	$	7,442			$	3,605			$	(27	)		$	11,020
Income from Operations
Beverage Concentrates	$	430			$	438			$	(15	)		$	853
Packaged Beverages	257				297				123				677
Latin America Beverages	29				40				10				79
Coffee Systems	1,163				—				—				1,163
Unallocated Corporate	(642		)		(324		)		370				(596		)
Total income from operations	$	1,237			$	451			$	488			$	2,176
	Reported KDP				Historical DPS(4)				Pro Forma Adjustments(3)				Pro Forma Combined
For the Year Ended December 31, 2017
Net Sales
Beverage Concentrates	$	—			$	1,332			$	(50	)		$	1,282
Packaged Beverages	—				4,871				—				4,871
Latin America Beverages	—				487				—				487
Coffee Systems	4,226				—				(91		)		4,135
Total net sales	$	4,226			$	6,690			$	(141	)		$	10,775
Income from Operations
Beverage Concentrates	$	—			$	865			$	(50	)		$	815
Packaged Beverages	—				743				8				751
Latin America Beverages	—				64				—				64
Coffee Systems	1,039				—				(28		)		1,011
Unallocated Corporate	(177		)		(284		)		3				(458		)
Total income from operations	$	862			$	1,388			$	(67	)		$	2,183

(1)	Refer to the Statements of Income, which includes DPS activity subsequent to the Merger Date.

(2)	Refers to DPS activity during the year ended December 31, 2018 prior to the Merger Date.

(3)	Refer to Summary of Pro Forma Adjustments.

(4)	Agrees to the DPS Annual Report on Form 10-K as filed on February 14, 2018 for the year ended December 31, 2017. These numbers have been adjusted for the allocation of other operating income, net.

Non-GAAP Financial Measures

To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented in this report selected unaudited pro forma combined financial information. We also present (i) Adjusted pro forma net sales, (ii) Adjusted pro forma income from operations, (iii) Adjusted pro forma net income and (iv) Adjusted pro forma diluted EPS, which are considered non-GAAP financial measures. This pro forma financial information and non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. The adjusted measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, income from operations, net income, diluted EPS, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

We define our Adjusted non-GAAP financial measures as certain pro forma financial statement captions and metrics adjusted for certain items affecting comparability, which are defined below.

Items affecting comparability: Defined as certain items that are excluded for comparison to prior year periods, adjusted for the tax impact as applicable. Tax impact is determined based upon an approximate rate for each item. For each period, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S. GAAP and do not have an offsetting risk reflected within the financial results; (ii) the amortization associated with definite-lived intangible assets; (iii) the amortization of the deferred financing costs associated with the DPS Merger and Keurig Acquisition; (iv) stock compensation expense attributable to the matching awards made to employees who made an initial investment in the Keurig Green Mountain, Inc. Executive Ownership Plan or the Keurig Dr Pepper Omnibus Incentive Plan of 2009; and (v) other certain items that are excluded for comparison purposes to prior year periods.

For the year ended December 31, 2018, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) transaction costs not associated with the DPS Merger; (iv) the impact of the step-up of acquired inventory not associated with the DPS Merger; (v) provision for legal settlements; (vi) the loss on early extinguishment of debt related to the redemption of debt and (vii) tax reform associated with the TCJA.

For the year ended December 31, 2017, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) transaction costs not associated with the DPS Merger; (iv) provision for legal settlements; (v) the loss on early extinguishment of debt related to the redemption of debt and (vi) tax reform associated with the TCJA.

The supplemental financial data set forth below includes reconciliations of Adjusted pro forma net sales, Adjusted pro forma income from operations, Adjusted pro forma net income and Adjusted pro forma diluted EPS for the relevant periods to the applicable financial measure presented in the unaudited pro forma condensed combined financial statements for the relevant period. For a reconciliation of the applicable financial measure presented in the unaudited pro forma condensed combined financial statements to the applicable historical financial measure presented in accordance with U.S. GAAP, please see "Supplemental Unaudited Pro Forma Condensed Combined Financial Information" above.

Keurig Dr Pepper Inc.

Reconciliation of Certain Pro Forma Items to Certain Non-GAAP Adjusted Pro Forma Items

(Unaudited)

	For the Twelve Months Ended December 31, 2018
									Amortization of
	Pro Forma				Mark to Market				Intangibles				Deferred Financing Costs				Stock Compensation				Restructuring and Integration Expenses				Productivity				Transaction Costs				Step-up of acquired inventory				Provision for Settlements				Loss on Early Payment of Debt				Tax Reform				Adjusted
Net sales	$	11,020			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	4			$	—			$	—			$	11,024
Cost of sales	4,939				(53		)		—				—				—				(2		)		(12		)		—				(2		)		—				—				—				4,870
Gross profit	6,081				53				—				—				—				2				12				—				2				4				—				—				6,154
Gross margin	55.2		%																																														55.8		%
Selling, general and administrative expenses	$	3,907			$	(19	)		$	(121	)		$	—			$	(21	)		$	(160	)		$	(14	)		$	(4	)		$	—			$	(18	)		$	—			$	—			$	3,550
Other operating income, net	(2		)		—				—				—				—				(8		)		(6		)		—				—				—				—				—				(16		)
Income from operations	2,176				72				121				—				21				170				32				4				2				22				—				—				2,620
Operating margin	19.7		%																																														23.8		%
Interest expense	$	671			$	(3	)		$	—			$	(9	)		$	—			$	—			$	2			$	(4	)		$	—			$	—			$	—			$	—			$	657
Loss on early extinguishment of debt	13				—				—				—				—				—				—				—				—				—				(13		)		—				—
Other income, net	(14		)		3				—				—				—				—				—				—				—				—				—				—				(11		)
Income before provision for income taxes	1,506				72				121				9				21				170				30				8				2				22				13				—				1,974
Provision for income taxes	398				16				31				3				4				43				9				3				—				6				3				7				523
Effective tax rate	26.4		%																																														26.5		%
Net income	$	1,108			$	56			$	90			$	6			$	17			$	127			$	21			$	5			$	2			$	16			$	10			$	(7	)		$	1,451
	Pro Forma EPS																																																Pro Forma Adjusted EPS
Diluted earnings per common share	$	0.79																																															$	1.04
Shares	1,401.1																																																1,401.1

Keurig Dr Pepper Inc.

Reconciliation of Certain Pro Forma Items to Certain Non-GAAP Adjusted Pro Forma Items

(Unaudited)

	For the Twelve Months Ended December 31, 2017
									Amortization of
	Pro Forma				Mark to Market				Intangibles				Deferred Financing Costs				Stock Compensation				Restructuring and Integration Expenses				Productivity				Transaction Costs				Provision for Settlements				Loss on Early Payment of Debt				Tax Reform				Adjusted
Net sales	$	10,775			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	10,775
Cost of sales	4,836				25				—				—				—				(11		)		(9		)		—				—				—				—				4,841
Gross profit	5,939				(25		)		—				—				—				11				9				—				—				—				—				5,934
Gross margin	55.1		%																																										55.1		%
Selling, general and administrative expenses	$	3,807			$	—			$	(111	)		$	—			$	(32	)		$	(55	)		$	(55	)		$	(23	)		$	2			$	—			$	—			$	3,533
Other operating income, net	(51		)		—				—				—				—				(4		)		—				—				—				—				—				(55		)
Income from operations	2,183				(25		)		111				—				32				70				64				23				(2		)		—				—				2,456
Operating margin	20.3		%																																										22.8		%
Interest expense	$	616			$	72			$	—			$	(24	)		$	—			$	16			$	—			$	—			$	—			$	—			$	—			$	680
Loss on early extinguishment of debt	121				—				—				—				—				—				—				—				—				(121		)		—				—
Other income, net	83				(2		)		—				—				—				—				—				—				—				—				—				81
Income before provision for income taxes	1,363				(95		)		111				24				32				54				64				23				(2		)		121				—				1,695
Provision for income taxes	(364		)		(28		)		32				7				7				7				27				8				(1		)		37				781				513
Effective tax rate	(26.7		)%																																										30.3		%
Net income	$	1,727			$	(67	)		$	79			$	17			$	25			$	47			$	37			$	15			$	(1	)		$	84			$	(781	)		$	1,182
	Pro Forma EPS																																												Pro Forma Adjusted EPS
Diluted earnings per common share	$	1.25																																											$	0.85
Shares	1,386.5																																												1,386.5

Keurig Dr Pepper Inc.

Reconciliation of Pro Forma Segment Information to Certain Non-GAAP Adjusted Pro Forma Segment Information

(Unaudited)

(in millions)	Pro Forma				Items Affecting Comparability				Adjusted Pro Forma
For the Year Ended December 31, 2018
Net Sales
Beverage Concentrates	$	1,331			$	—			$	1,331
Packaged Beverages	5,069				—				5,069
Latin America Beverages	506				—				506
Coffee Systems	4,114				4				4,118
Total net sales	$	11,020			$	4			$	11,024
Income from Operations
Beverage Concentrates	$	853			$	5			$	858
Packaged Beverages	677				11				688
Latin America Beverages	79				3				82
Coffee Systems	1,163				166				1,329
Unallocated Corporate	(596		)		259				(337		)
Total income from operations	$	2,176			$	444			$	2,620
For the Year Ended December 31, 2017
Net Sales
Beverage Concentrates	$	1,282			$	—			$	1,282
Packaged Beverages	4,871				—				4,871
Latin America Beverages	487				—				487
Coffee Systems	4,135				—				4,135
Total net sales	$	10,775			$	—			$	10,775
Income from Operations
Beverage Concentrates	$	815			$	1			$	816
Packaged Beverages	751				12				763
Latin America Beverages	64				—				64
Coffee Systems	1,011				204				1,215
Unallocated Corporate	(458		)		56				(402		)
Total income from operations	$	2,183			$	273			$	2,456

ADJUSTED PRO FORMA RESULTS OF OPERATIONS

Consolidated Operations

The following table details certain consolidated adjusted pro forma results of operations for the years ended December 31, 2018 and 2017:

	For the Year Ended December 31,
(in millions)	2018				2017				Dollar Change				Percentage Change
Adjusted pro forma net sales	$	11,024			$	10,775			$	249			2.3	%
Adjusted pro forma income from operations	2,620				2,456				164				6.7	%
Adjusted pro forma net income	1,451				1,182				269				22.8	%
Adjusted pro forma diluted EPS	1.04				0.85				0.19				22.4	%
Adjusted pro forma operating margin	23.8		%		22.8		%						100 bps

Adjusted pro forma net sales. Adjusted pro forma net sales increased 2.3% to $11,024 million for the year ended December 31, 2018, driven by higher underlying pro forma sales volume/mix of 3.7%, with strong performances registered across most categories, partially offset by the net unfavorable impact of 0.5% related to changes in the our Allied Brands portfolio during the year. Also partially offsetting the growth was unfavorable net price realization of 0.8%, driven by continued moderation in strategic pod pricing investments in the Coffee Systems segment which more than offset higher net pricing in the balance of the portfolio. Unfavorable foreign currency translation also impacted the year by 0.1%.

Retail market performance, as measured by IRi, remained strong for the year. Our CSD and enhanced flavored and premium water portfolios registered market share growth in both units and dollars, driven by strong performance of Dr Pepper, Canada Dry, Core and Bai. Likewise, the coffee portfolio also performed well for the year, driven by single-serve K-cup pod category unit growth, combined with an increase in market share of K-cup pods we manufactured.

Adjusted pro forma income from operations. Adjusted pro forma income from operations increased $164 million or 6.7% to $2,620 million, compared to $2,456 million in the prior year. This performance primarily reflected the benefit of the net sales growth and strong productivity, despite inflation in input costs and logistics that were not fully offset by third quarter of 2018 pricing actions in the Packaged Beverages segment. Also impacting the performance was the unfavorable comparison between gains of $49 million related to Bai during the year ended December 31, 2017 versus the $22 million gain on Big Red during the year ended December 31, 2018. Adjusted pro forma income from operations as a percentage of adjusted pro forma net sales grew 100 basis points to 23.8% for the year ended December 31, 2018, compared to 22.8% in the prior year.

Adjusted pro forma net income. Adjusted pro forma net income advanced 22.8% to $1,451 million, compared to $1,182 million in the prior year, primarily reflecting the growth in adjusted pro forma income from operations and a significantly lower effective tax rate due to the TCJA. Additionally, adjusted pro forma net income was impacted by the non-operating benefits in 2018 of a cash distribution from BODYARMOR in connection with our unit-holder interest and a gain related to the Core acquisition. Adjusted pro forma diluted EPS increased 22.4% to $1.04 per diluted share, compared to $0.85 per diluted share in the prior year.

Beverages Concentrates

The following table details our Beverage Concentrates segment's adjusted pro forma net sales and adjusted pro forma income from operations for the years ended December 31, 2018 and 2017:

	For the Year Ended December 31,
(in millions)	2018				2017				Dollar Change				Percentage Change
Adjusted pro forma net sales	$	1,331			$	1,282			$	49			3.8	%
Adjusted pro forma income from operations	858				816				42				5.1	%
Adjusted pro forma operating margin	64.5		%		63.7		%						80 bps

Pro forma sales volume. The following table details the pro forma sales volume changes by product type within our Beverage Concentrates segment for the year ended December 31, 2018 compared to the year ended December 31, 2017:

CSDs	0.5	%
NCBs	30.3	%

Shipment volume growth for the segment was led by Canada Dry, due to product innovation and continued growth in the ginger ale category, along with increases for Hawaiian Punch and Big Red, partially offset by Crush and, to a lesser extent, 7UP.

Adjusted pro forma net sales. Adjusted pro forma net sales increased 3.8% to $1,331 million for the year ended December 31 2018, driven by higher net price realization of 3.2% and favorable pro forma sales volume/mix growth of 0.6%.

Adjusted pro forma income from operations. Adjusted pro forma income from operations increased 5.1% to $858 million, compared to $816 million in the prior year, primarily reflecting the growth in adjusted pro forma net sales and lower marketing spend.

Packaged Beverages

The following table details our Packaged Beverages segment's adjusted pro forma net sales and adjusted pro forma income from operations for the years ended December 31, 2018 and 2017:

	For the Year Ended December 31,
(in millions)	2018				2017				Dollar Change				Percentage Change
Adjusted pro forma net sales	$	5,069			$	4,871			$	198			4.1	%
Adjusted pro forma income from operations	688				763				(75		)		(9.8	)%
Adjusted pro forma operating margin	13.6		%		15.7		%						(210) bps

Pro forma sales volume. The following table details the pro forma sales volume changes by product type within our Packaged Beverages segment for the year ended December 31, 2018 compared to the year ended December 31, 2017:

CSDs	Flat
NCBs	1.6	%
Other	20.1	%

Shipment volume growth for the segment was led by contract manufacturing, Canada Dry, Body Armor and Core, partially offset by Fiji and 7UP.

Adjusted pro forma net sales. Adjusted pro forma net sales increased by 4.1% to $5,069 million for the year ended December 31, 2018, driven by strong underlying volume/mix of 5.4%, partially offset by the expected 1.2% unfavorable impact as a result of changes in our Allied Brands portfolio and lower net price realization of 0.1%, which includes the pricing actions taken in September 2018.

Adjusted pro forma income from operations. Adjusted pro forma income from operations decreased 9.8% to $688 million, compared to $763 million in the prior year period due primarily to inflation in input costs and logistics, a $49 million unfavorable comparison due primarily to the $28 million gain on the step-acquisition of Bai Brands and a $21 million benefit as a result of the renegotiation of a manufacturing contract acquired during the Bai Brands acquisition in the prior year and higher general and administrative expenses. These drivers were partially offset by the increase in adjusted pro forma net sales and productivity improvements

Latin America Beverages

The following table details our Latin America Beverages segment's adjusted pro forma net sales and adjusted pro forma income from operations for the years ended December 31, 2018 and 2017:

	For the Year Ended December 31,
(in millions)	2018				2017				Dollar Change				Percentage Change
Adjusted pro forma net sales	$	506			$	487			$	19			3.9	%
Adjusted pro forma income from operations	82				64				18				28.1	%
Adjusted pro forma operating margin	16.2		%		13.1		%						310 bps

Pro forma sales volume. The following table details the pro forma sales volume changes by product type within our Latin America Beverages segment for the year ended December 31, 2018 compared to the year ended December 31, 2017:

CSDs	(0.4	)%
NCBs	(3.4	)%

Shipment volume growth for the segment was led by Penafiel, Clamato and Mott’s.

Adjusted pro forma net sales. Adjusted pro forma net sales increased by 3.9% to $506 million for the year ended December 31, 2018 driven by higher net price realization of 5.5% and favorable volume/mix of 0.7%, partially offset by unfavorable foreign currency translation of 2.3%.

Adjusted pro forma income from operations. Adjusted pro forma income from operations increased 28.1% to $82 million, compared to $64 million in the prior year, driven by the growth in adjusted pro forma net sales and productivity savings, partially offset by inflation in input costs and logistics.

Coffee Systems

The following table details our Coffee Systems segment's adjusted pro forma net sales and adjusted pro forma income from operations for the years ended December 31, 2018 and 2017:

	For the Year Ended December 31,
(in millions)	2018				2017				Dollar Change				Percentage Change
Adjusted pro forma net sales	$	4,118			$	4,135			$	(17	)		(0.4	)%
Adjusted pro forma income from operations	1,329				1,215				114				9.4	%
Adjusted pro forma operating margin	32.3		%		29.4		%						290 bps

Pro forma sales volume. The following table details the pro forma net sales volume changes by product type within our Coffee Systems segment for the year ended December 31, 2018 compared to the year ended December 31, 2017:

Appliances	(1.5	)%
Pods	7.4	%

Adjusted pro forma net sales. Adjusted pro forma net sales declined 0.4% to $4,118 million for the year ended December 31 2018 due to lower net price realization of 3.7%, reflecting the continued moderation in strategic pod pricing investments, significantly offset by volume/mix growth of 3.2% and favorable foreign currency translation of 0.1%.

The volume/mix growth for the Coffee Systems segment reflected a 7.4% increase in K-Cup pod volume, largely due to branded and private label partner growth, partially offset by a 1.5% volume decline in brewers due to innovation mix compared to the prior year. For the year, Keurig brewer household penetration grew approximately 7% to approximately 22%.

Adjusted pro forma income from operations. Adjusted pro forma income from operations increased 9.4% to $1,329 million, compared to $1,215 million in the prior year, primarily reflecting strong productivity that more than offset inflation on input costs and logistics.