Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



		Page Number
Reports of Independent Registered Accounting Firm		59
Consolidated Statements of Income		61
Consolidated Statements of Comprehensive Income		62
Consolidated Balance Sheets		63
Consolidated Statements of Cash Flows		64
Consolidated Statements of Changes in Stockholders' Equity		65
Notes to Audited Consolidated Financial Statements		67
1. Business and Basis of Presentation		67
2. Significant Accounting Policies		71
3. Acquisitions and Investments in Unconsolidated Subsidiaries		80
4. Revenue Recognition		87
5. Goodwill and Other Intangible Assets		88
6. Income Taxes		89
7. Employee Benefit Plans		93
8. Debt		98
9. Derivatives		102
10. Stock-Based Compensation		104
11. Earnings per Share		106
12. Accumulated Other Comprehensive (Loss) Income		107
13. Leases		107
14. Property, Plant and Equipment		108
15. Other Financial Information		110
16. Supplemental Cash Flow Information		112
17. Integration and Restructuring Costs		113
18. Non-controlling Interest		114
19. Commitments and Contingencies		115
20. Related Parties		117
21. Segments		118
22. Guarantor and Non-Guarantor Financial Information		120
23. Unaudited Quarterly Financial Information		124
24. Subsequent Events		126

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and Board of Directors of

Keurig Dr Pepper Inc.

Burlington, Massachusetts

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Keurig Dr Pepper Inc. and subsidiaries (the "Company") as of December 31, 2018 (Successor) and 2017 (Successor), and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2018 (Successor), the three months ended December 31, 2017 (Successor), the fiscal year ended September 30, 2017 (Successor), the period from December 4, 2015 through September 24, 2016 (Successor), and the period from September 27, 2015 through March 2, 2016 (Predecessor), and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 (Successor) and 2017 (Successor), and the results of its operations and its cash flows for the year ended December 31, 2018 (Successor), the three months ended December 31, 2017 (Successor), the fiscal year ended September 30, 2017 (Successor), the period from December 4, 2015 through September 24, 2016 (Successor), and the period from September 27, 2015 through March 2, 2016 (Predecessor), in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 28, 2019

We have served as the Company’s auditor since 2016.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and Board of Directors of

Keurig Dr Pepper Inc.

Burlington, Massachusetts

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Keurig Dr Pepper Inc. and subsidiaries (the "Company") as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018 of the Company and our report dated February 28, 2019 expressed an unqualified opinion on those financial statements.

As described in management’s Report on Internal Control over Financial Reporting appearing under Item 9A, as a result of the merger between Dr Pepper Snapple Group, Inc. (“Legacy DPS”) and Maple Parent Holdings Corp. (“Legacy Maple”) on July 9, 2018, management excluded from its assessment the internal control over financial reporting of Legacy Maple which constitutes 97% of total assets and 55% of total net sales as of and for the year ended December 31, 2018. Accordingly, our audit did not include the internal control over financial reporting at Legacy Maple; rather it focused exclusively on the internal control over financial reporting related to ongoing Legacy DPS operations.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s Report on Internal Control over Financial Reporting, appearing under Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 28, 2019

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF INCOME



	Successor										Predecessor
(in millions, except per share data)	Year Ended December 31, 2018			Three Months Ended December 31, 2017			Fiscal Year Ended September 30, 2017		December 4, 2015 through September 24, 2016		September 27, 2015 through March 2, 2016
Net sales	$	7,442		$	1,170		$	4,269	$	2,293	$	2,025
Cost of sales	3,560			643			2,225		1,220		1,225
Gross profit	3,882			527			2,044		1,073		800
Selling, general and administrative expenses	2,635			298			1,147		680		653
Other operating (income) expense, net	10			—			—		—		—
Income from operations	1,237			229			897		393		147
Interest expense	401			10			101		163		3
Interest expense - related party	51			25			100		60		—
Loss on early extinguishment of debt	13			5			85		5		6
Other (income) expense, net	(19		)	7			44		1		(1		)
Income before provision (benefit) for income taxes	791			182			567		164		139
Provision (benefit) for income taxes	202			(437		)	184		55		39
Net income	589			619			383		109		100
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	3			7			5		—		—
Net income attributable to KDP	$	586		$	612		$	378	$	109	$	100
Earnings per common share:
Basic	$	0.54		$	0.77		$	0.48	$	0.19	$	0.66
Diluted	0.53			0.77			0.47		0.18		0.66
Weighted average common shares outstanding:
Basic	1,086.3			790.5			790.5		590.3		150.5
Diluted	1,097.6			790.5			790.5		590.3		151.2

The accompanying notes are an integral part of these consolidated financial statements.

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Successor											Predecessor
(in millions)	Year Ended December 31, 2018			Three Months Ended December 31, 2017			Fiscal Year Ended September 30, 2017			December 4, 2015 through September 24, 2016		September 27, 2015 through March 2, 2016
Net income	$	589		$	619		$	383		$	109	$	100
Other comprehensive income
Foreign currency translation adjustments	(225		)	(7		)	81			26		(9		)
Net change in pension and post-retirement liability, net of tax of $1	(4		)	—			—			—		—
Total other comprehensive (loss) income	(229		)	(7		)	81			26		(9		)
Comprehensive income	360			612			464			135		91
Comprehensive income attributable to non-controlling interest	(3		)	(7		)	(5		)	—		—
Foreign currency translation adjustments attributable to non-controlling interest	—			—			(1		)	—		—
Comprehensive income attributable to KDP	$	357		$	605		$	458		$	135	$	91

The accompanying notes are an integral part of these consolidated financial statements.

KEURIG DR PEPPER INC.

CONSOLIDATED BALANCE SHEETS



	December 31,
(in millions, except share and per share data)	2018			2017
Assets
Current assets:
Cash and cash equivalents	$	83		$	90
Restricted cash and restricted cash equivalents	46			5
Trade accounts receivable, net	1,150			483
Inventories	626			384
Prepaid expenses and other current assets	254			94
Total current assets	2,159			1,056
Property, plant and equipment, net	2,310			790
Investments in unconsolidated subsidiaries	186			97
Goodwill	20,011			9,819
Other intangible assets, net	23,967			3,834
Other non-current assets	259			121
Deferred tax assets	26			27
Total assets	$	48,918		$	15,744
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	2,300		$	1,580
Accrued expenses	1,012			201
Structured payables	526			—
Short-term borrowings and current portion of long-term obligations	1,458			219
Current portion of capital lease and financing obligations	26			6
Other current liabilities	380			12
Total current liabilities	5,702			2,018
Long-term obligations	14,201			3,064
Long-term obligations, related party	—			1,815
Capital lease and financing obligations, less current	305			97
Deferred tax liabilities	5,923			1,031
Other non-current liabilities	254			56
Total liabilities	26,385			8,081
Commitments and contingencies
Employee redeemable non-controlling interest and mezzanine equity awards	—			265
Stockholders' equity:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued	—			—
Common stock, $0.01 par value, 2,000,000,000 and 800,000,000 shares authorized, 1,405,944,922 and 790,478,141 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively	14			8
Additional paid-in capital	21,471			6,377
Retained earnings	1,178			914
Accumulated other comprehensive (loss) income	(130		)	99
Total stockholders' equity	22,533			7,398
Total liabilities and stockholders' equity	$	48,918		$	15,744

The accompanying notes are an integral part of these consolidated financial statements.

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Successor												Predecessor
(in millions)	Year Ended December 31, 2018			Three Months Ended December 31, 2017			Fiscal Year Ended September 30, 2017			December 4, 2015 through September 24, 2016			September 27, 2015 through March 2, 2016
Operating activities:
Net income	$	589		$	619		$	383		$	109		$	100
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	233			33			142			70			103
Amortization expense	229			33			114			68			22
Provision for sales returns	54			19			65			46			55
Deferred income taxes	(81		)	(484		)	16			(24		)	(6		)
Employee stock based compensation expense	35			15			58			6			141
Loss on early extinguishment of debt	13			5			85			5			6
Gain on step acquisition of unconsolidated subsidiaries	(18		)	—			—			—			—
Unrealized (gain) or loss on foreign currency	28			4			(41		)	(6		)	(16		)
Unrealized (gain) or loss on derivatives	49			(19		)	4			14			(1		)
Other, net	25			13			27			7			9
Changes in assets and liabilities, net of effects of acquisition:
Trade accounts receivable	82			(55		)	(54		)	(84		)	41
Inventories	185			89			108			(43		)	175
Income taxes receivable, prepaid and payables, net	71			20			(16		)	(32		)	41
Other current and non current assets	(49		)	(5		)	(9		)	7			44
Accounts payable and accrued expenses	206			98			861			128			136
Other current and non current liabilities	(38		)	—			6			9			(13		)
Net change in operating assets and liabilities	457			147			896			(15		)	424
Net cash provided by operating activities	1,613			385			1,749			280			837
Investing activities:
Acquisitions of businesses	(19,114		)	—			—			(13,717		)	—
Cash acquired in acquisitions	169			—			—			—			—
Issuance of related party note receivable	(11		)	—			(6		)	—			—
Investments in unconsolidated subsidiaries	(39		)	—			250			—			—
Proceeds from capital distributions from investments in unconsolidated subsidiaries	35			—			—			—			—
Purchases of property, plant and equipment	(180		)	(11		)	(66		)	(33		)	(79		)
Other, net	9			(7		)	2			(22		)	4
Net cash (used in) provided by investing activities	(19,131		)	(18		)	180			(13,772		)	(75		)
Financing activities:
Proceeds from issuance of common stock	9,000			—			—			6,385			—
Proceeds from unsecured credit facility	1,900			—			100			—			—
Proceeds from senior unsecured notes	8,000			—			—			—			—
Proceeds from term loan	2,700			—			1,200			5,947			—
Proceeds from related party note	—			—			—			1,815			—
Net issuance of Commercial Paper	1,080			—			—			—			—
Proceeds from structured payables	526			—			—			—			—
Repayment of unsecured credit facility	(1,900		)	(100		)	—			—			(330		)
Repayment of term loan	(3,447		)	(505		)	(3,168		)	(147		)	—
Payments on capital leases	(17		)	(4		)	(15		)	(1		)	(37		)
Deferred financing charges paid	(55		)	—			(5		)	(122		)	—
Proceeds from issuance of common stock under compensation plans	3			—			—			—			17
Cash contributions (distributions) from (to) redeemable NCI shareholders	18			—			4			60			(4		)
Cash dividends paid	(232		)	(11		)	(55		)	(10		)	(93		)
Share repurchases	—			—			—			—			(235		)
Cross currency swap	—			—			(87		)	13			—
Other, net	1			—			—			(3		)	35
Net cash provided by (used in) financing activities	17,577			(620		)	(2,026		)	13,937			(647		)
Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from:
Operating, investing and financing activities	59			(253		)	(97		)	445			115
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents	(15		)	(1		)	8			(7		)	17
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	95			349			438			—			59
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	139		$	95		$	349		$	438		$	191

See Note 16 for supplemental cash flow information. The accompanying notes are an integral part of these consolidated financial statements.

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

Successor



	Common Stock Issued			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Stockholders' Equity
(in millions)	Shares	Amount
Balance as of December 4, 2015	—	$	—	$	—	$	—		$	—		$	—
Proceeds from issuance of common stock	790.5	8		6,377		—			—			6,385
Dividends declared	—	—		—		(10		)	—			(10		)
Net income	—	—		—		109			—			109
Other comprehensive income	—	—		—		—			26			26
Balance as of September 24, 2016	790.5	$	8	$	6,377	$	99		$	26		$	6,510
Adjustment of non-controlling interests to fair value	—	—		—		(86		)	—			(86		)
Dividends declared	—	—		—		(54		)	—			(54		)
Net income attributable to KDP	—	—		—		378			—			378
Other comprehensive income	—	—		—		—			80			80
Balance as of September 30, 2017	790.5	$	8	$	6,377	$	337		$	106		$	6,828
Adjustment of non-controlling interests to fair value	—	—		—		(25		)	—			(25		)
Dividends declared	—	—		—		(10		)	—			(10		)
Net income income attributable to KDP	—	—		—		612			—			612
Other comprehensive income	—	—		—		—			(7		)	(7		)
Balance as of December 31, 2017	790.5	$	8	$	6,377	$	914		$	99		$	7,398
Adoption of new accounting standards	—	—		—		(4		)	—			(4		)
Net income attributable to KDP	—	—		—		586			—			586
Other comprehensive income	—	—		—		—			(229		)	(229		)
Issuance of common stock	407.0	4		8,996		—			—			9,000
Acquisition of Dr Pepper Snapple Group, Inc.	182.5	2		3,641								3,643
Conversion of subsidiary shares	7.9	—		172		—			—			172
Capitalization of loans with related parties	—	—		1,815		—			—			1,815
Adjustment of non-controlling interests to fair value	—	—		—		(16		)				(16		)
Reclassification of historical Maple Parent Corporation employee redeemable non-controlling interest and mezzanine equity awards	—	—		9		139			—			148
Acquisition of Core Nutrition, LLC	16.7	—		441		—			—			441
Dividends declared	—	—		—		(441		)	—			(441		)
Shares issued under employee stock-based compensation plans and other	1.3	—		—		—			—			—
Stock-based compensation	—	—		20		—			—			20
Balance as of December 31, 2018	1,405.9	$	14	$	21,471	$	1,178		$	(130	)	$	22,533

Predecessor



	Common Stock Issued				Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Stockholders' Equity
(in millions)	Shares		Amount
Balance as of September 26, 2015	153.2		$	15	$	880		$	2,015		$	(199	)	2,711
Shares issued under employee stock-based compensation plans	0.8		—		17			—			—			17
Stock-based compensation, net of tax of $5	—		—		20			—			—			20
Reclassification of stock-based compensation to liability	—		—		(39		)	—			—			(39	)
Dividends paid	—		—		—			(49		)	—			(49	)
Net income	—		—		—			100			—			100
Other comprehensive income	—		—		—			—			(9		)	(9	)
Repurchase of common stock	(4.4	)	—		(235		)	—			—			(235	)
Balance as of March 2, 2016	149.6		$	15	$	643		$	2,066		$	(208	)	2,516

The accompanying notes are an integral part of these consolidated financial statements.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business and Basis of Presentation

NATURE OF OPERATIONS

Keurig Dr Pepper Inc. ("KDP" or the "Company") is a leading coffee and beverage company in North America with a diverse portfolio of flavored (non-cola) carbonated soft drinks ("CSDs"), specialty coffee and non-carbonated beverages ("NCBs"), and is a leader in single serve coffee brewing systems in the United States ("U.S.") and Canada.

ORGANIZATION

On January 29, 2018, Dr Pepper Snapple Group, Inc. ("DPS") entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among DPS, Maple Parent Holdings Corp. (“Maple”) and Salt Merger Sub, Inc. (“Merger Sub”), whereby Merger Sub would be merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS (the “DPS Merger”). The DPS Merger was consummated on July 9, 2018 (the "Merger Date"), at which time DPS changed its name to "Keurig Dr Pepper Inc.".

Immediately prior to the consummation of the DPS Merger (the “Effective Time”), each share of common stock of Maple issued and outstanding was converted into the right to receive a number of fully paid and nonassessable shares of common stock of Merger Sub determined pursuant to an exchange ratio set forth in the Merger Agreement (the “Acquisition Shares”). As a result of the DPS Merger, the stockholders of Maple as of immediately prior to the Effective Time owned approximately 87% of KDP common stock on a fully diluted basis following the closing, and the stockholders of DPS as of immediately prior to the Effective Time owned approximately 13% of KDP common stock on a fully diluted basis following the closing of the DPS Merger. Upon consummation of the DPS Merger, KDP declared a special cash dividend equal to $103.75 per share, subject to any withholding of taxes required by law, payable to holders of its common stock as of July 6, 2018. Refer to Note 3 for additional information.

On December 4, 2015, JAB Holding Company S.a.r.l ("JAB") formed an indirect wholly-owned subsidiary, Maple Holdings Acquisition Corp. On February 19, 2016, Maple was formed by JAB and capitalized with a contribution of $6,385 million of cash from JAB. On March 3, 2016, Maple, through Maple Holdings Acquisition Corp., acquired Keurig Green Mountain, Inc. ("Keurig") for $13,925 million ("Keurig Acquisition"). In contemplation of the acquisition, JAB had agreed with Mondelēz International, Inc. ("Mondelēz") that it would acquire a 24.24% interest in Maple, which was consummated March 7, 2016. The March 7, 2016 transaction occurred between JAB and Mondelēz.

References in this Annual Report on Form 10-K to "KDP" or "the Company" refer to Keurig Dr Pepper Inc. and all wholly-owned subsidiaries included in the consolidated financial statements.

This Annual Report on Form 10-K refers to some of KDP's owned or licensed trademarks, trade names and service marks, which are referred to as the Company's brands. All of the product names included herein are either KDP registered trademarks or those of the Company's licensors.

BASIS OF PRESENTATION

The operations of Keurig succeeded to substantially all of the operations of Maple after the closing of the Keurig Acquisition, and so Keurig is presented as the predecessor entity for purposes of the consolidated financial statements. Subsequent to the Keurig Acquisition, the Consolidated Statements of Income include amortization expense relating to the fair value adjustments and depreciation expense based on the fair value of Keurig's property, plant and equipment that had previously been carried at historical cost less accumulated depreciation. Therefore, financial information prior to the acquisition is not comparable to the financial information subsequent to the acquisition. As a result, the financial statements and certain note presentations are separated into two distinct periods, the periods of Keurig before the consummation of the Keurig Acquisition (labeled "Predecessor") and the periods of Maple subsequent to and including the Keurig Acquisition, as well as the newly formed KDP (labeled "Successor"), to indicate the application of the different bases of accounting between the periods presented. The predecessor period began on September 25, 2015 and concluded on March 2, 2016. The successor period began on December 4, 2015, the incorporation date of Maple Holdings Acquisition Corp. and includes Keurig as of and from the acquisition date of March 3, 2016. Between December 4, 2015 and March 3, 2016, Maple incurred transaction costs associated with the Keurig Acquisition of approximately $54 million, net of tax. Operations did not commence until the Keurig Acquisition on March 3, 2016.

For financial reporting and accounting purposes, Maple was the acquirer of DPS upon completion of the DPS Merger. The consolidated financial statements as of December 31, 2018 and 2017 and for the year ended December 31, 2018 ("2018"), three months ended December 31, 2017 ("Transition 2017"), the fiscal year ended September 30, 2017 ("Fiscal 2017") and the period of December 4, 2015 through September 24, 2016 ("Successor 2016") reflect the results of operations and financial position of Maple for the periods presented and includes 176 days of the results of operations of DPS for the year ended December 31, 2018 subsequent to the DPS Merger, which was completed on July 9, 2018.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The predecessor period of September 25, 2015 through March 2, 2016 ("Predecessor 2016"), combined with 2018, Transition 2017, Fiscal 2017 and Successor 2016, collectively, are defined herein as the "Periods".

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

Change in Year End

On July 9, 2018, upon the consummation of the DPS Merger, as a result of the DPS Merger being accounted for as a reverse merger with Maple as the accounting acquirer, the board of directors of KDP (the "Board") approved a change in KDP’s fiscal year end from the last Saturday in September to December 31, which was DPS’s fiscal year end prior to the consummation of the DPS Merger, and Maple’s fiscal year end changed from the last Saturday in September to the last Saturday in December to closely align Maple’s fiscal year with that of the Company’s.

The change to a calendar fiscal year was made on a prospective basis and prior operating results have not been adjusted. The Company filed a transition report with the Securities and Exchange Commission ("SEC") for this change in fiscal year for purposes of reporting in accordance with Rule 13a-10 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on August 7, 2018, on a Form 10-QT. As part of the Annual Report on Form 10-K, we have presented the transition period of the three months ended December 31, 2017 as part of the audited consolidated financial statements followed by the year ended December 31, 2018. Refer to Note 23 for additional information.

PRINCIPLES OF CONSOLIDATION

KDP consolidates all wholly owned subsidiaries. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes KDP's proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors or similar governing body, participation in policy-making decisions and material intercompany transactions.

The Company is also required to consolidate entities that are variable interest entities (“VIEs”) of which KDP is the primary beneficiary. Judgments are made in assessing whether KDP is the primary beneficiary, including determination of the activities that most significantly impact the VIE’s economic performance.

KDP eliminates from its financial results all intercompany transactions between entities included in the consolidated financial statements and the intercompany transactions with its equity method investees.

RECLASSIFICATIONS

In 2018, the Company made certain reclassifications in the prior year presentation of the Consolidated Statements of Income and Consolidated Balance Sheets as management believes this presentation enhances the comparability of the Company's financial statements with industry peers. In 2018, the Company made certain reclassifications in the prior year presentation of the Consolidated Statements of Cash Flows to conform to the current year presentation.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Consolidated Statements of Income

The following table presents the reclassifications made to the Consolidated Statements of Income for the Periods:



			Successor									Predecessor
(in millions)	Prior Presentation	Revised Presentation	Transition 2017			Fiscal 2017			Successor 2016			Predecessor 2016
Transportation and warehouse costs	Transportation and warehouse costs	Selling, general and administrative ("SG&A") expenses	$	66		$	250		$	135		$	—
Transportation and warehouse costs	Cost of sales	SG&A expenses	14			21			—			129
Transaction costs	Transaction costs	SG&A expenses	—			—			102			187
Restructuring expenses	Restructuring expenses	SG&A expenses	6			45			4			3
Gains and losses on foreign currency	(Gain) loss on foreign currency, net	Other (income) expense, net	5			(32		)	(5		)	2
Commodity contracts	(Gain) loss on financial instruments, net	Cost of sales	1			7			—			—
Interest rate contracts	(Gain) loss on financial instruments, net	Interest expense	(19		)	(74		)	6			—
FX contracts	(Gain) loss on financial instruments, net	Other (income) expense, net	(2		)	53			8			(1		)

Consolidated Balance Sheets

The following table presents the reclassifications made to the Consolidated Balance Sheets for the Periods:



(in millions)	Prior Presentation	Revised Presentation	December 31, 2017
Income taxes receivable	Income taxes receivable	Prepaid expenses and other current assets	$	45
Deferred revenue	Deferred revenue	Other current liabilities	3
Income taxes payable	Income taxes payable	Other current liabilities	3

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Consolidated Statements of Cash Flow

The following table presents the reclassifications made within the cash flows provided by operations section within the Consolidated Statements of Cash Flow for the Periods:



			Successor									Predecessor
(in millions)	Prior Presentation	Revised Presentation	Transition 2017			Fiscal 2017			Successor 2016			Predecessor 2016
Amortization of deferred financing fees	Amortization of deferred financing fees	Amortization expense	$	4		$	18		$	13		$	1
Asset impairment and non-cash restructuring	Asset impairment and non-cash restructuring	Other, net	6			16			—			8
Excess tax benefits from equity based compensation plans	Excess tax benefits from equity based compensation plans	Other, net	—			—			—			(5		)
Provision for doubtful accounts	Provision for doubtful accounts	Other, net	—			—			2			1
Acquisition Costs	Acquisition costs	Accounts payable and accrued expenses	—			—			—			59
Working Capital: Acquisition Costs	Payment of acquisition related costs	Accounts payable and accrued expenses	—			(10		)	(59		)	—
Working capital: Other current assets	Other current assets	Other current and non-current assets	(9		)	(9		)	21			43
Working capital: Other non-current assets	Other non-current assets	Other current and non-current assets	4			—			(14		)	1
Working capital: Other short-term liabilities	Other short-term liabilities	Other current and non-current liabilities	—			(6		)	(8		)	—
Working capital: Other long-term liabilities	Other long-term liabilities	Other current and non-current liabilities	—			12			17			(13		)

The following table presents the reclassifications made within the cash flows provided by (used in) investing activities section within the Consolidated Statements of Cash Flow for the Periods:



			Successor							Predecessor
(in millions)	Prior Presentation	Revised Presentation	Transition 2017		Fiscal 2017			Successor 2016		Predecessor 2016
Related party note receivable	Other investing activities	Issuance of related party note receivable	$	—	$	(6	)	$	—	$	—

The following table presents the reclassifications made within the cash flows provided by (used in) financing activities section within the Consolidated Statements of Cash Flow for the Periods:



			Successor						Predecessor
(in millions)	Prior Presentation	Revised Presentation	Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Excess tax benefits from equity based compensation plans	Excess tax benefits from equity based compensation plans	Operating Section: Other, net	$	—	$	—	$	—	$	5

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Significant Accounting Policies

USE OF ESTIMATES

The process of preparing the Company's consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. These estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates.

SIGNIFICANT ACCOUNTING POLICIES

The financial statement information presented as part of the disclosure of significant accounting policies is presented within the tables at the end of the footnote, unless otherwise noted within the respective policy section.

Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Based upon the transparency of inputs to the valuation of an asset or liability, a three-level hierarchy has been established for fair value measurements. The three-level hierarchy for disclosure of fair value measurements is as follows:

Level 1 - Quoted market prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 - Valuations with one or more unobservable significant inputs that reflect the reporting entity's own assumptions.

The fair value of senior unsecured notes and marketable securities as of December 31, 2018 and 2017 are based on quoted market prices for publicly traded securities.

The Company estimates fair values of financial instruments measured at fair value in the financial statements on a recurring basis to ensure they are calculated based on market rates to settle the instruments. These values represent the estimated amounts the Company would pay or receive to terminate agreements, taking into consideration current market rates and creditworthiness.

As of December 31, 2018 and 2017, the Company did not have any assets or liabilities measured on a recurring basis without observable market values that would require a high level of judgment to determine fair value (Level 3).

Transfers between levels are recognized at the end of each reporting period. There were no transfers of financial instruments between the three levels of fair value hierarchy during the Periods presented.

Refer to Notes 7, 8, 9, and 16 for additional information.

Business Combinations

The Company includes the results of operations of the acquired business in the Company’s consolidated financial statements prospectively from the acquisition date. The Company allocates the purchase consideration to the assets acquired and liabilities assumed in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed in the acquired entity is recorded as goodwill. During the measurement period, the Company will continue to obtain information to assist in determining the fair value of net assets acquired, which may differ materially from these preliminary estimates. Measurement period adjustments, if applicable, will be applied in the reporting period in which the adjustment amounts are determined.

Transaction expenses are recognized separately from the business combination and are expensed as incurred. These charges primarily include direct third-party professional fees for advisory and consulting services and other incremental costs related to the acquisition.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Cash and Cash Equivalents

Cash and cash equivalents include cash and investments in short-term, highly liquid securities, with original maturities of three months or less.

The Company is exposed to potential risks associated with its cash and cash equivalents. The Company places its cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand and, therefore, the Company believes the financial risks associated with these financial instruments are minimal.

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.

The Company is exposed to potential credit risks associated with its accounts receivable, as it generally does not require collateral on its accounts receivable. The Company determines the required allowance for doubtful collections using information such as its customer credit history and financial condition, industry and market segment information, economic trends and conditions and credit reports. Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies. Account balances are charged against the allowance when it is determined that the receivable will not be recovered. The Company has not experienced significant credit-related losses.

Activity in the allowance for doubtful accounts during the Periods was as follows:



	Successor									Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016			Predecessor 2016
Balance, beginning of the period	$	2	$	2	$	2	$	4		$	4
Charges to bad debt expense	5		—		—		2			—
Write-offs and adjustments	1		—		—		(4		)	(2		)
Balance, end of the period	$	8	$	2	$	2	$	2		$	2

The majority of the Company's customers are located in the U.S. and Canada. Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers in various channels comprising the Company's customer base. As Walmart is a major customer as of December 31, 2018 and 2017 and Costco is a major customer as of December 31, 2017 as described in Note 21, Segments, we have determined to disclose the related trade receivables. As of December 31, 2018 and 2017, Walmart Inc. ("Walmart") accounted for approximately $188 million and $67 million of trade receivables, respectively, which exceeded 10% of the Company's total trade accounts receivable. As of December 31, 2017, Costco Wholesale Corp ("Costco") accounted for approximately $59 million of trade receivables, respectively, which exceeded 10% of the Company's total trade accounts receivable.

Inventories

Inventories consist of raw materials, work in process and finished goods. Raw materials include various commodity costs for the Company's ingredients and materials sourced from various providers. The costs of finished goods inventories manufactured by the Company include raw materials, direct labor and indirect production and overhead costs. Finished goods also include the purchases of brewing systems from third-party manufacturers and beverages from allied brands. Inventories are stated at the lower of cost or net realizable value. Cost is measured using standard cost method which approximates first-in, first-out ("FIFO"). The Company regularly reviews whether the net realizable value of its inventory is lower than its carrying value. If the valuation shows that the net realizable value is lower than the carrying value, the Company takes a charge to cost of sales and directly reduces the carrying value of the inventory.

The Company estimates any required write downs for inventory obsolescence by examining its inventories on a quarterly basis to determine if there are indicators that the carrying values exceed net realizable value. Indicators that could result in additional inventory write downs include age of inventory, damaged inventory, slow moving products and products at the end of their life cycles. While management believes that inventory is appropriately stated at the lower of cost or market, judgment is involved in determining the net realizable value of inventory. Adjustments for excess and obsolete inventories are based on an assessment of slow-moving and obsolete inventories, determined by historical usage and demand.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Property, Plant and Equipment, Net

Property, plant and equipment is stated at cost plus capitalized interest on borrowings during the actual construction period of major capital projects, net of accumulated depreciation. Significant improvements which substantially extend the useful lives of assets are capitalized and expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred. The Company capitalizes certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use, which are included in property, plant and equipment. When property, plant and equipment is sold or retired, the costs and the related accumulated depreciation are removed from the accounts, and any net gain or loss is recorded in Other operating (income) expense, net in the Consolidated Statements of Income. Refer to Note 14 for additional information. As a result of the DPS Merger, the Company has conformed its fixed asset classification to Land, Buildings and Improvements, Machinery and Equipment, Cold Drink Equipment and Computer Software.

For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful asset lives as follows:



Type of Asset	Useful Life
Buildings and improvements	1	to	41 years
Machinery and equipment	1	to	24 years
Cold drink equipment	1	to	7 years
Computer software	1	to	8 years

Leasehold improvements, which are primarily considered building improvements, are depreciated over the shorter of the estimated useful life of the assets or the lease term. Estimated useful lives are periodically reviewed and, when warranted, are updated.

The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In order to assess recoverability, the Company compares the estimated undiscounted future pre-tax cash flows from the use of the group of assets, as defined, to the carrying amount of such assets. Measurement of an impairment loss is based on the excess of the carrying amount of the group of assets over the long-lived asset's fair value.

Leases and Financing Obligations

Leases that qualify as capital leases are recorded at the lower of the fair value of the asset or the present value of the future minimum lease payments over the lease term generally using the Company's incremental borrowing rate. Assets leased under capital leases are included in fixed assets and generally are depreciated over the lease term. Lease payments under capital leases are recognized as a reduction of the capital lease obligation and interest expense.

All other leases are considered operating leases. Assets subject to an operating lease are not recorded on the Consolidated Balance Sheets. Lease payments are recognized on a straight-line basis as rent expense over the expected lease term.

Occasionally, the Company is involved in the construction of leased properties. Due to the extent and nature of that involvement, the Company may be deemed the owner during the construction period and is required to capitalize the construction costs on the Consolidated Balance Sheets along with a corresponding financing obligation for the project costs that are incurred by the lessor. Upon completion of the project, a sale-leaseback analysis is performed to determine if the Company can record a sale to remove the assets and related obligation and record the lease as either an operating or capital lease obligation. If the Company is precluded from derecognizing the assets when construction is complete due to continuing involvement beyond a normal leaseback, the lease is accounted for as a financing transaction and the recorded asset and related financing obligation remain on the Consolidated Balance Sheets. Accordingly, the asset is depreciated over its estimated useful life in accordance with the Company's policy. If the Company is not considered the owner of the land, a portion of the lease payments is allocated to ground rent and treated as an operating lease. The portion of the lease payment allocated to ground rental expense is based on the fair value of the land at the commencement of construction. Lease payments allocated to the buildings are recognized as reductions to the financing obligation and interest expense.

Refer to Note 13 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Investments

Deferred Compensation Plan

The Company has a U.S. non-qualified defined contribution plan. Employee and employer matching contributions under the non-qualified defined contribution plan are maintained in a rabbi trust and are not readily available to us. The rabbi trust consists of readily marketable equity securities, which are included in Other non-current assets in the Consolidated Balance Sheets. Gains or losses from such investments are classified as trading and are charged to Other (income) expense, net in the Consolidated Statements of Income.

The corresponding deferred compensation liability is included in Other non-current liabilities in the Consolidated Balance Sheets, with changes in this obligation recognized as adjustments to compensation expense and recorded in SG&A expenses. Refer to Note 7 for additional information.

Investments in Other Equity Securities

The Company also holds non-controlling investments in certain privately held entities which are accounted for as equity method investments or equity securities without readily determinable value.

The companies over which we exert significant influence, but do not control the financial and operating decisions, are accounted for as equity method investments. The Company's equity method investments are reported at cost and adjusted each period for the Company’s share of the investee’s net income (loss) and dividends paid, if any. The Company's proportionate share of the net income (loss) resulting from these investments is recorded in Other (income) expense, net in the Consolidated Statements of Income. Any gains and losses resulting from the sale of these investments are also recorded in Other (income) expense, net. The carrying value of the Company's equity method investments is reported in Investments in unconsolidated subsidiaries in the Company's Consolidated Balance Sheets. The Company classifies distributions received from equity-method investments using the cumulative earnings approach on the Consolidated Statements of Cash Flows. Refer to Note 3 for additional information.

Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for as equity securities without readily determinable value at cost and reported in Other non-current assets in the Company's Consolidated Balance Sheets. Any gains or losses resulting from the sales of these investments are recorded in Other operating (income) expense, net in the Consolidated Statements of Income. Refer to Note 15 for additional information.

The Company's non-controlling investments in certain privately held entities do not have readily determinable fair values and are periodically evaluated for impairment. An impairment loss would be recorded whenever a decline in value of an investment below its carrying amount is determined to be other than temporary.

Goodwill and Other Intangible Assets

The Company classifies other intangible assets into two categories: (1) intangible assets with definite lives subject to amortization and (2) intangible assets with indefinite lives not subject to amortization. The majority of the Company's intangible asset balance is made up of brands which the Company has determined to have indefinite useful lives. In arriving at the conclusion that a brand has an indefinite useful life, management reviews factors such as size, diversification and market share of each brand. Management expects to acquire, hold and support brands for an indefinite period through consumer marketing and promotional support. The Company also considers factors such as its ability to continue to protect the legal rights that arise from these intangible assets indefinitely or the absence of any regulatory, economic or competitive factors that could truncate the life of these intangible assets. If the criteria are not met to assign an indefinite life, the brand is amortized over its expected useful life.

Identifiable intangible assets deemed by the Company to have determinable finite useful lives are amortized on a straight-line basis over the period of which the expected economic benefit is derived. The estimated useful lives of the Company's intangible assets with definite lives are as follows:



	Useful Life
Acquired technology			20 years
Customer relationships	8	to	40 years
Trade names			10 years
Favorable lease	5	to	12 years
Brands			5 years
Contractual arrangements	10	to	12 years

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

For intangible assets with definite lives, tests for impairment are performed if conditions exist that indicate the carrying value may not be recoverable. For goodwill and indefinite-lived intangible assets, the Company conducts tests for impairment annually or more frequently if events or circumstances indicate the carrying amount may not be recoverable. Prior to Fiscal 2017, the annual impairment test took place on the last date of the fiscal year. Effective Fiscal 2017, the Company changed its annual impairment test date to the first day of the fourth quarter.

The tests for impairment include significant judgment in estimating the fair value of reporting units and intangible assets primarily by analyzing forecasts of future revenues and profit performance. Fair value is based on what the reporting units and intangible assets would be worth to a third party market participant. Management's estimates of fair value, which fall under Level 3 and are non-recurring, are based on historical and projected operating performance and discount rates. Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums.

Goodwill is assigned to reporting units for purposes of impairment testing. A reporting unit is the same as an operating segment or one level below an operating segment. The Company has adopted Accounting Standards Update ("ASU") 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Under the new standard, if the carrying value of the reporting unit exceeds its fair value, an impairment charge will be recorded in current earnings for the difference up to the carrying value of the goodwill recorded.

Capitalized Customer Incentive Programs

The Company provides support to certain customers to cover various programs and initiatives to increase net sales, including contributions to customers or vendors for cold drink equipment used to market and sell the Company's products. These programs and initiatives generally directly benefit the Company over a period of time. Accordingly, costs of these programs and initiatives are recorded in prepaid expenses and other current assets and other non-current assets in the Consolidated Balance Sheets. The costs for these programs are amortized over the period to be directly benefited based upon a methodology consistent with the Company's contractual rights under these arrangements.

Structured Payables

The Company entered into an agreement with a supply chain payment processing intermediary, for the intermediary to act as a virtual credit card sponsor, whereby the card sponsor will pay amounts on behalf of the Company and sell the amounts due from the Company to a participating financial institution. The card sponsor will then bill the Company the original payment amount, plus interest for a term not to exceed one year. The agreement permits the Company to utilize the third party and participating financial institutions to make a broad range of payments, including commercial payables to suppliers, business acquisitions, purchases of property, plant and equipment, and employee-related payments. Structured payables have equal priority with accounts payable and are treated as non-recourse obligations. The Company records interest for the period the structured payables obligation is outstanding and reflects the proceeds and payments related to these transactions as a financing activity on the Consolidated Statements of Cash Flows.

Pension and Post-retirement Benefits

The Company has U.S. and foreign pension and post-retirement benefit ("PRMB") plans which provide benefits to a defined group of employees who satisfy age and length of service requirements at the discretion of the Company. As of December 31, 2018, the Company has several stand-alone non-contributory defined benefit plans and PRMB plans. Depending on the plan, pension and PRMB benefits are based on a combination of factors, which may include salary, age and years of service.

Employee pension and PRMB plan obligations and the associated expense included in the consolidated financial statements are determined from actuarial analyses based on plan assumptions, employee demographic data, years of service, compensation, benefits and claims paid and employer contributions. Non-cash settlement charges occur when the total amount of lump sum payments made to participants of various U.S. defined pension plans exceed the estimated annual interest and service costs.

The components of net periodic benefit cost other than the service cost component are included in Other (income) expense, net, in the Company's Consolidated Statements of Income. The service cost component is included in either cost of sales or SG&A expenses, depending on the classification of the employee's other compensation costs.

The Company's objective with respect to the funding of its pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, the Company will fund the pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant.

The Company participates in three multi-employer pension plans and makes contributions to those plans, which are recorded in either cost of sales or SG&A expenses, depending on the classification of the employee's other compensation costs.

Refer to Note 7 for additional information regarding the Company's pension and PRMB plans.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Voluntary Prepayment of Term Loans

The Company has the ability to voluntarily prepay the senior unsecured term loan facility ("KDP Term Loan") in whole or in part with prior notice to JP Morgan Chase Bank, N/A ("JP Morgan"). The prepayment of the KDP Term Loan does not result in any additional fees or penalties, just the payment of daily accrued interest at the agreed upon rate. As the Company periodically prepays the KDP Term Loan, the Company has elected to treat these voluntary prepayments as a loss on extinguishment of debt and expense the proportionate amount of unamortized deferred financing costs, as the loan has been partially settled. Refer to Note 8 for additional information regarding the KDP Term Loan.

Risk Management Programs

The Company retains selected levels of property, casualty, workers' compensation, health and other business risks. Many of these risks are covered under conventional insurance programs with high deductibles or self-insured retentions. Accrued liabilities related to the retained casualty and health risks are calculated based on loss experience and development factors, which contemplate a number of variables including claim history and expected trends.

Income Taxes

Income taxes are accounted for using the asset and liability approach, which involves determining the temporary differences between assets and liabilities recognized for financial reporting and the corresponding amounts recognized for tax purposes and computing the tax-related carryforwards at the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. The resulting amounts are deferred tax assets or liabilities. The total of taxes currently payable per the tax return, the deferred tax expense or benefit and the impact of uncertain tax positions represents the income tax expense or benefit for the year for financial reporting purposes.

The Company periodically assesses the likelihood of realizing its deferred tax assets based on the amount that the Company believes is more likely than not to be realized. The Company bases its judgment of the recoverability of its deferred tax assets primarily on historical earnings, its estimate of current and expected future earnings and prudent and feasible tax planning strategies. Refer to Note 6 for additional information.

The Company establishes income tax liabilities to remove some or all of the income tax benefit of any of the Company's income tax positions at the time the Company determines that the positions become uncertain 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. The Company's evaluation of whether or not a tax position is uncertain is based on the following: (1) the Company presumes the tax position will be examined by the relevant taxing authority such as the Internal Revenue Service ("IRS") that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other tax positions taken. The Company adjusts these income tax liabilities when the Company's judgment changes as a result of new information. Any change will impact income tax expense in the period in which such determination is made.

KDP's effective tax rate may fluctuate on a quarterly and/or annual basis due to various factors, including, but not limited to, total earnings and the mix of earnings by jurisdiction, the timing of changes in tax laws and the amount of tax provided for uncertain tax positions.

Derivative Instruments

KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and foreign exchange ("FX") rates.

KDP manages these risks through a variety of strategies, including the use of interest rate, FX and commodity derivative contracts and supplier pricing agreements. KDP does not designate these derivative contracts as hedges for accounting purposes, and KDP does not hold or issue derivative financial instruments for trading or speculative purposes.

A portion of the Company's derivative instruments are subject to master netting arrangements under which either party may offset amounts if the payment amounts are for the same transaction and in the same currency. By election, parties may agree to net other transactions. In addition, the arrangements provide for the net settlement of all contracts through a single payment in a single currency in the event of default or termination of the contract. The Company records all derivative instruments on a gross basis, including those subject to master netting arrangements.

Refer to Note 9 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Revenue Recognition

The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include carbonated soft drinks ("CSDs"), non-carbonated beverages ("NCBs"), pods, appliances and other, occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. These incentives and discounts include cash discounts, price allowances, volume-based rebates, product placement fees and other financial support for items such as trade promotions, displays, new products, consumer incentives and advertising assistance. Accruals are established for the expected payout based on contractual terms, volume-based metrics and/or historical trends and require management judgment with respect to estimating customer participation and performance levels. Sales taxes and other similar taxes are excluded from revenue. Costs associated with shipping and handling activities, such as merchandising, are included in SG&A expenses as revenue is recognized. Refer to Note 4 for additional information.

The adoption of Topic 606 resulted in an immaterial impact to the individual financial statement line items of the Company's Consolidated Statements of Income for 2018.

Cost of Sales

Cost of goods sold includes all costs to acquire and manufacture the Company's products including raw materials, direct and indirect labor, manufacturing overhead, including depreciation expense, and all other costs incurred to bring the product to salable condition. All other costs incurred after this condition is met are considered selling costs and included in SG&A expenses.

Transportation and Warehousing Costs

Transportation and warehousing costs, which primarily relate to shipping and handling costs, are recorded in SG&A expenses in the Consolidated Statements of Income.

Product Warranties

The Company provides for the estimated cost of product warranties associated with its brewers in cost of sales, at the time product revenue is recognized. Warranty costs are estimated primarily using historical warranty information in conjunction with current engineering assessments applied to the Company's expected repair or replacement costs. The estimate for warranties requires assumptions relating to expected warranty claims which are based on the Company's historical claims and known current year factors. Refer to Note 19 for additional information

Advertising and Marketing Expense

Advertising and marketing production costs related to television, print, radio and other marketing investments are expensed as of the first date the advertisement takes place. All other advertising and marketing costs are expensed as incurred. Advertising and marketing expenses are recorded in SG&A expenses in the Consolidated Statements of Income. Prepaid advertising and marketing costs are recorded as other current and non-current assets in the Consolidated Balance Sheets.

Research and Development Costs

Research and development costs are recorded in SG&A expenses in the Consolidated Statements of Income.

Stock-Based Compensation Expense

The Company recognizes compensation expense in the Consolidated Statements of Income related to the fair value of employee stock-based awards. Compensation cost is based on the grant-date fair value. The fair value of restricted stock units ("RSUs") is determined based on the number of units granted and the grant date price of common stock. Stock-based compensation expense is recognized ratably over the vesting period in the Consolidated Statements of Income.

Refer to Note 10 for additional information .

Foreign Currency Translation and Transaction

The Company translates assets and liabilities of our foreign subsidiaries from their respective functional currencies to U.S. dollars at the appropriate spot rates as of the balance sheet date. The functional currency of the Company's operations outside the U.S. is generally the local currency of the country where the operations are located. The results of operations are translated into U.S. dollars at a monthly average rate, calculated using daily exchange rates.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Differences arising from the translation of opening balance sheets of these entities to the rate ruling at the end of the financial year are recognized in Accumulated Other Comprehensive (Loss) Income ("AOCI"). The differences arising from the translation of foreign results at the average rate are also recognized in AOCI. Such translation differences are recognized as income or expense in the period in which the Company disposes of the operations.

Transactions in foreign currencies are recorded at the approximate rate of exchange at the transaction date. Assets and liabilities resulting from these transactions are translated at the rate of exchange in effect at the balance sheet date. All such differences are recorded in Other (income) expense, net in the Consolidated Statements of Income.

Financial Statement Information Presented

The financial statement information on the Consolidated Balance Sheets as of December 31, 2018 and 2017 for significant accounting policies previously discussed is presented as follows:



	Financial Statement Caption		December 31,
(in millions)		2018			2017
Inventories
Excess and obsolete inventory	Inventories		$	13		$	10
Capitalized Customer Incentive Programs
Capitalized customer incentive programs asset, net of amortization	Prepaid expenses and other current assets and Non-current assets		46			4
Risk Management Programs
Risk management program retained risk accrued expenses	Accrued expenses and Other long term liabilities		94			8
Risk management program insurance recovery receivables	Prepaid expenses and other current assets and Non-current assets		10			—
Advertising and Marketing Expense
Prepaid advertising and marketing programs	Prepaid expenses and other current assets and non-current assets		32			7

The financial statement information on the Consolidated Statements of Income for the Periods for significant accounting policies previously discussed is presented as follows:



		Successor								Predecessor
(in millions)	Financial Statement Caption	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Capitalized Customer Incentive Programs
Amortization expense	Net Sales	$	79	$	—	$	1	$	—	$	—
Amortization expense	SG&A Expenses	1		—		—		—		—
Property, Plant and Equipment, Net
Impairment loss	Other (income) expense, net	—		—		—		—		—
Goodwill and Other Intangible Assets
Impairment loss	Other (income) expense, net	—		—		—		—		—
Transportation and Warehousing Costs	SG&A Expenses	695		79		261		135		129
Advertising and Marketing Expense	SG&A Expenses	411		58		140		67		62
Research and Development Costs	SG&A Expenses	64		16		56		30		31

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

RECENTLY ISSUED ACCOUNTING STANDARDS

Effective in 2019

In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02"). The ASU replaces the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures.

ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. The standard requires a modified retrospective approach, which includes several optional practical expedients. The Company will adopt the standard during the quarter ending March 31, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings. The Company has assembled a cross functional project management team, selected a software provider and is in the midst of the implementation of the software and concluding on several practical expedients. As a result of the DPS Merger, which also accelerated Maple's adoption of ASU 2016-02 by one year, the implementation of the software will be completed during the first quarter of 2019. The Company anticipates that the impact from the adoption of ASU 2016-02 will result in the increase of approximately 0.75% to 0.90% of total assets and approximately 1.35% to 1.65% of total liabilities to its Consolidated Balance Sheet, as a result of the recognition of right of use assets and liabilities for operating lease commitments. We do not believe the standard will materially affect our consolidated net income.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). The objective of the ASU is to improve the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact of ASU 2017-12 on the Company's consolidated financial statements.

Effective in 2020

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The standard provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company is currently evaluating the impact of ASU 2016-13 on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements ("ASU 2018-13"). The objective of the ASU is to improve the disclosures related to fair value measurement by removing, modifying, or adding disclosure requirements related to recurring and non-recurring fair value measurements. ASU 2018-13 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company is currently assessing the changes in disclosure requirements and does not believe there will be a material impact to KDP's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. ASU 2018-15 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company will early adopt ASU 2018-15 during the quarter ended March 31, 2019 on a prospective basis.

RECENTLY ADOPTED PROVISIONS OF U.S. GAAP

As of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) ("Topic 606"). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

As a result of the adoption of Topic 606, the Company recognizes revenue from contracts with customers when control is transferred, generally upon delivery to the customers facility. The Company adopted the standard using the modified retrospective method and recognized the cumulative effect of initially applying the standard, which was primarily driven by the acceleration of certain customer incentives, as a $4 million decrease to the opening balance of retained earnings. The Company expects that the impact to net income of the new standard will be immaterial on an ongoing annual basis. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The amount of revenue recognized by the Company is net of costs associated with customer marketing programs and incentives, as well as sales taxes and other similar taxes. Refer to Note 4 for information regarding the Company's adoption of Topic 606.

As of January 1, 2018, the Company adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"), which requires employers who offer defined benefit pension plans or other post-retirement benefit plans to report the service cost component within the same income statement caption as other compensation costs arising from services rendered by employees during the period. The ASU also requires the other components of net periodic benefit cost to be presented separately from the service cost component, in a caption outside of a subtotal of income from operations. Additionally, the ASU provides that only the service cost component is eligible for capitalization. The adoption of ASU 2017-07 had no impact to the Company's consolidated financial statements for Transition 2017, Fiscal 2017, Successor 2016 and Predecessor 2016.

As of January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which makes several targeted improvements to U.S. GAAP. Among other things, ASU 2016-01 eliminates the cost method of accounting and investments in equity securities which were previously accounted for under the cost method must now be measured at fair value, with changes in fair value recognized in net income, under guidance in the newly added Topic 321, Investments - Equity Securities, to the Accounting Standards Codification. Equity instruments that do not have readily determinable fair values may be measured at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company also adopted ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which provides clarification on certain guidance issued under ASU 2016-01. The Company held one investment in equity securities which was accounted for under the cost method of accounting prior to January 1, 2018, which did not have readily determinable fair values. The adoption of these standards did not have a material impact on such investments or the Company's consolidated financial statements.

Acquisitions and Investments in Unconsolidated Subsidiaries

2018 ACQUISITIONS

Acquisition of Dr Pepper Snapple Group, Inc.

Overview and Total Consideration Exchanged

As discussed in Note 1, Business and Basis of Presentation, Maple merged with DPS on July 9, 2018. DPS is a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the U.S., Canada and Mexico with a diverse portfolio of flavored (non-cola) CSDs and NCBs, including ready-to-drink teas, juices, juice drinks, water and mixers.

The DPS Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations. Maple was considered to be the accounting acquirer, and DPS was considered the legal acquirer. Under the acquisition method of accounting, total consideration exchanged was:



(in millions)
Aggregate fair value of DPS common stock	$	3,611
$103.75 per share special cash dividend(1)	18,818
Fair value of replacement equity awards(2)	53
Total consideration exchanged	$	22,482


(1)	As a result of the DPS Merger, all DPS unvested stock option awards, RSUs and preferred share units ("PSUs") (the "Legacy Stock Awards") vested immediately as a result of the Change in Control (as defined in the terms of each individual award agreement). All Legacy Stock Awards, except for the stock option awards and certain RSUs not yet released to the employee, received the special cash dividend of $103.75 per share, subject to any withholding of taxes required by law. These amounts were included within the special cash dividend.

(1)

As a result of the DPS Merger, all DPS unvested stock option awards, RSUs and preferred share units ("PSUs") (the "Legacy Stock Awards") vested immediately as a result of the Change in Control (as defined in the terms of each individual award agreement). All Legacy Stock Awards, except for the stock option awards and certain RSUs not yet released to the employee, received the special cash dividend of $103.75 per share, subject to any withholding of taxes required by law. These amounts were included within the special cash dividend.


(2)	The fair value of replacement equity awards includes the Company issued replacement stock option awards for DPS stock option awards that were fully vested as of July 9, 2018 but not yet exercised by the employee, the DPS stock option awards that were fully vested as of July 9, 2018 and converted to cash by the employee and certain RSUs not yet released to the employee as a result of certain Internal Revenue Code requirements.

(2)

The fair value of replacement equity awards includes the Company issued replacement stock option awards for DPS stock option awards that were fully vested as of July 9, 2018 but not yet exercised by the employee, the DPS stock option awards that were fully vested as of July 9, 2018 and converted to cash by the employee and certain RSUs not yet released to the employee as a result of certain Internal Revenue Code requirements.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The total consideration exchanged in the DPS Merger was funded by the following sources of funds:


•	A $9,000 million equity investment from JAB.


•	The issuance by the Company of $8,000 million of senior unsecured notes under a private offering Rule 144A. Refer to Note 8 for additional information.


•	Proceeds of $2,700 million borrowed under the term loan agreement and proceeds of $1,900 million borrowed under the revolving credit facility. Refer to Note 8 for additional information.


•	Proceeds of $124 million from the Company's structured payables.


•	The remainder of the total consideration exchanged in the DPS Merger was funded by cash on hand.

Allocation of Consideration Exchanged

The Company's preliminary allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the DPS Merger is based on estimated fair values as of the Merger Date.

The following is a summary of the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the DPS Merger as of December 31, 2018:



(in millions)	Initial Allocation of Consideration			Measurement Period Adjustments			December 31, 2018
Cash and cash equivalents	$	147		$	—		$	147
Investments in unconsolidated subsidiaries(1)	90			—			90
Property, plant and equipment(2)	1,549			(39		)	1,510
Other intangible assets	20,404			(536		)	19,868
Long-term obligations(3)	(4,049		)	—			(4,049		)
Capital lease and financing obligations	(214		)	9			(205		)
Acquired assets, net of assumed liabilities(4)	107			(25		)	82
Deferred tax liabilities, net of deferred tax assets(5)	(4,959		)	(18		)	(4,977		)
Goodwill	9,407			609			10,016
Total consideration exchanged	22,482			—			22,482
Fair value of stock and replacement equity awards not converted to cash(6)	3,643			—			3,643
Acquisition of business	$	18,839		$	—		$	18,839


(1)	The Company preliminarily valued investments in unconsolidated subsidiaries using a market approach, specifically the guideline public company method.


(2)	The Company preliminarily valued personal property using a combination of the market approach and the cost approach, which is based upon current replacement or reproduction cost of the asset as newly adjusted for any depreciation attributable to physical, functional and economic factors. The Company assigned personal property a useful life ranging from 1 year to 24 years. We preliminarily valued real property using the cost approach and land using the sales comparison approach. The Company assigned real property a useful life between 1 year and 41 years.

(2)

The Company preliminarily valued personal property using a combination of the market approach and the cost approach, which is based upon current replacement or reproduction cost of the asset as newly adjusted for any depreciation attributable to physical, functional and economic factors. The Company assigned personal property a useful life ranging from 1 year to 24 years. We preliminarily valued real property using the cost approach and land using the sales comparison approach. The Company assigned real property a useful life between 1 year and 41 years.


(3)	The fair value amounts of long-term obligations (current and long-term) were based on current market rates available to the Company.


(4)	The Company used existing carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as the Company determined that they represented the fair value of those items as of the Merger Date. The Company preliminarily valued work-in-process ("WIP") and finished goods inventory using a net realizable value approach resulting in a step-up of $131 million which was recognized in the cost of goods sold in 2018, as the related inventory was sold during the year. Raw materials were carried at net book value.

(4)

The Company used existing carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as the Company determined that they represented the fair value of those items as of the Merger Date. The Company preliminarily valued work-in-process ("WIP") and finished goods inventory using a net realizable value approach resulting in a step-up of $131 million which was recognized in the cost of goods sold in 2018, as the related inventory was sold during the year. Raw materials were carried at net book value.


(5)	Net deferred tax liabilities represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases. The Company used a preliminary consolidated tax rate to determine the net deferred tax liabilities. The Company will record measurement period adjustments as the Company applies the appropriate tax rate for each legal entity within DPS.

(5)

Net deferred tax liabilities represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases. The Company used a preliminary consolidated tax rate to determine the net deferred tax liabilities. The Company will record measurement period adjustments as the Company applies the appropriate tax rate for each legal entity within DPS.


(6)	A portion of DPS' vested options were treated as replacement equity awards for purposes of valuation but were converted to cash as of the Merger Date. As a result, in order to determine the cash paid for the DPS Merger, the Company reduced the fair value of the related replacement equity awards originally presented in the total consideration exchanged table above by $21 million.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The DPS Merger preliminarily resulted in $10,016 million of goodwill. The preliminary goodwill recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, direct procurement savings on overlapping materials, purchasing scale on indirect spend categories and optimization of duplicate positions and processes. The Company may also recognize revenue synergies, driven by a strong portfolio of brands with exposure to higher growth segments and the ability to leverage the Company's collective distribution strength. The goodwill created in the DPS Merger is not deductible for tax purposes.

The preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:



(in millions)	Fair Value		Estimated Life (in years)
Brands(1)	$	19,357	n/a
Contractual arrangements(2)	120		n/a
Customer relationships(3)	386		10-40
Favorable leases(4)	5		5-12
Total other intangible assets	$	19,868


(1)	The Company preliminarily valued the brand portfolio primarily utilizing the multi-period excess earnings method, a form of the income approach.


(2)	The Company preliminarily valued contractual arrangements with bottlers and distributors utilizing the distributor method, a form of the income approach.


(3)	The Company identified two types of customer relationships, retail and food service. We preliminarily valued retail and food service customer relationships utilizing the distributor method, a form of the income approach.


(4)	The Company preliminarily valued favorable leases utilizing the income approach.

Pro Forma Information

Assuming DPS had been acquired as of December 31, 2016, and the results of DPS had been included in operations beginning on January 1, 2017, the following tables provide estimated unaudited pro forma results of operations for the years ended December 31, 2018 and 2017 under U.S. GAAP and reflect the change in fiscal year-end described in Note 1.

The estimated pro forma net income includes the alignment of accounting policies, the effect of fair value adjustments related to the DPS Merger, the associated tax effects and the impact of the additional debt to finance the DPS Merger.



	For the Year Ended December 31,
(Unaudited, in millions)	2018		2017
Net sales	$	11,020	$	10,775
Net income	1,108		1,447

Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the DPS Merger been completed on the date indicated or the future operating results.

Actual Results of DPS

For the periods subsequent to the Merger Date that are included in 2018, DPS had net sales of $3,328 million and net income of $198 million.

Acquisition of Big Red

Overview and Purchase Price

On July 9, 2018, KDP entered into an Agreement and Plan of Merger (the "Big Red Acquisition Agreement") with Big Red Group Holdings, LLC ("Big Red"), pursuant to which we agreed to acquire Big Red for a cash purchase price of $300 million, subject to certain adjustments outlined in the Big Red Acquisition Agreement (the "Big Red Acquisition"). Big Red is a brand owner with a portfolio of CSDs and NCBs.

On August 31, 2018 (the "Big Red Acquisition Date"), the Company funded the Big Red Acquisition with proceeds from structured payables. In order to complete the Big Red Acquisition, the Company paid $282 million, net of the Company's previous ownership interest, in exchange for the remaining ownership interests and seller transaction costs. Additionally, $15 million was held back and placed in escrow.

As a result of the Big Red Acquisition, the Company's existing 14.36% equity interest in Big Red, which was previously earned based on the Company's distribution of Big Red's products and preliminarily valued at $16 million during the DPS Merger purchase

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

price allocation, was remeasured to fair value of $22 million. The gain of $6 million was recorded in Other operating (income) expense, net during 2018.

Allocation of Consideration Exchanged

The Company's preliminary allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the Big Red Acquisition is based on estimated fair values as of the Big Red Acquisition Date.

The following is a summary of the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the Big Red Acquisition as of December 31, 2018:



(in millions)	Initial Allocation of Consideration			Measurement Period Adjustments		December 31, 2018
Cash and cash equivalents	$	3		$	—	$	3
Other intangible assets	240			—		240
Assumed liabilities, net of acquired assets(1)	(28		)	2		(26		)
Goodwill	89			—		89
Total consideration exchanged(2)	304			2		306
Less: Company's previous ownership interest	22			—		22
Less: Holdback placed in Escrow	15			—		15
Acquisition of business	$	267		$	2	$	269


(1)	The Company preliminarily valued WIP and finished goods inventory using a net realizable value approach resulting in a step-up of $2 million which was recognized in the cost of goods sold for the year ended December 31, 2018 as the related inventory was sold during that period. Raw materials were carried at net book value.


(2)	The Company paid $2 million in additional consideration during the fourth quarter of 2018 as a result of working capital adjustments determined pursuant to the terms of the Big Red Acquisition Agreement.

The Big Red Acquisition preliminarily resulted in $89 million of goodwill. The preliminary goodwill to be recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, purchasing scale on various spend categories and optimization of duplicate positions and processes. The goodwill created in the Big Red Acquisition is not deductible for tax purposes.

The preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:



(in millions)	Fair Value		Estimated Life (in years)
Brands(1)	$	220	n/a
Brands(1)	9		5
Customer relationships(2)	4		8-40
Contractual arrangements(3)	7		12
Total other intangible assets	$	240


(1)	The Company preliminarily valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.


(2)	The Company have identified two types of customer relationships, retail and industrial. We preliminarily valued retail and industrial customer relationships utilizing the distributor method, a form of the income approach.


(3)	The Company preliminarily valued contractual arrangements with bottlers and distributors utilizing the distributor method, a form of the income approach.

Pro Forma Information and Actual Results of Big Red

The Company has not presented estimated unaudited pro forma results of operations for the Big Red Acquisition or the actual results of Big Red because it is not material to the Company's consolidated financial statements for 2018.

Acquisition of Core Nutrition, LLC

Overview and Purchase Price

On September 27, 2018, KDP entered into a definitive agreement (the "Core Acquisition Agreement") with Core Nutrition, LLC ("Core"), pursuant to which we agreed to acquire Core for merger consideration, which represented an enterprise value of $525 million (subject to customary post-closing working capital and other adjustments), comprised substantially of shares of common

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

stock of KDP, subject to certain adjustments paid in cash (the "Core Acquisition"). Core is a brand owner with a portfolio of NCBs in the water category.

On November 30, 2018 (the "Core Acquisition Date"), the Company funded the Core Acquisition with the issuance of KDP shares from the open market and approximately $6 million in cash. Approximately $27 million of cash was held back and placed in escrow. The number of shares of KDP common stock issued was based on the final merger consideration and the volume weighted average of the closing prices of KDP common stock for the five consecutive trading days ending on, and including, the second trading day prior to the closing.

As a result of the Core Acquisition, the Company's 5.1% equity interest of Core's common units was remeasured to fair value of $26 million. The gain of approximately $12 million was recorded in Other (income) expense, net during 2018.

Additionally, the Core Acquisition Agreement settled a pre-existing relationship with KDP related to its distribution agreement with Core, where KDP purchased finished goods from Core. As a result, on September 27, 2018, Core awarded an additional 0.9% equity interest of Core's common units, which was recognized as a $5 million reduction of cost of sales during 2018.

Allocation of Consideration Exchanged

The Company's preliminary allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the Core Acquisition is based on estimated fair values as of the Core Acquisition Date. As a result of the short period of time between the Core Acquisition Date and December 31, 2018, the allocation of consideration exchanged, as set forth in the table below, reflects various preliminary fair value estimates and analyses, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary allocation of consideration exchanged that are not yet finalized relate to the fair values of certain tangible assets, the valuation of intangible assets acquired, assumed liabilities and residual goodwill.

The following is a summary of the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the Core Acquisition as of December 31, 2018:



(in millions)	Fair Value
Cash and cash equivalents	$	10
Other intangible assets	273
Assumed liabilities, net of acquired assets(1)	(12		)
Goodwill	236
Total consideration exchanged	507
Company's previous ownership interest	31
Less: Holdback placed in Escrow	27
Acquisition of business	$	449


(1)	The Company preliminarily valued WIP and finished goods inventory using a net realizable value approach resulting in a step-up of $4 million, of which $1 million was recognized in cost of goods sold in 2018, as the related inventory was sold during the year. Raw materials were carried at net book value.

The Core Acquisition preliminarily resulted in $236 million of goodwill. The preliminary goodwill to be recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, purchasing scale on various spend categories and optimization of duplicate positions and processes. The goodwill created in the Core Acquisition is expected to be deductible for tax purposes.

The preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:



(in millions)	Fair Value		Estimated Life (in years)
Brands(1)	$	254	n/a
Contractual arrangements(2)	19		10
Total other intangible assets	$	273


(1)	The Company preliminarily valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.


(2)	The Company preliminarily valued contractual arrangements utilizing the distributor method, a form of the income approach.

Pro Forma Information and Actual Results of Core

The Company has not presented estimated unaudited pro forma results of operations for the Core Acquisition or the actual results of Core because it is not material to the Company's consolidated financial statements for 2018.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

2016 ACQUISITION

Acquisition by JAB Holding Company

On March 3, 2016, Maple indirectly acquired all of the outstanding equity of Keurig for $13,925 million (the "Keurig Acquisition"). As a result of the transaction, Keurig became an indirect wholly-owned subsidiary of Maple.

Keurig entered into a definitive merger agreement under which a JAB-led investor group would acquire Keurig for $92.00 per share in cash, representing a total equity value of $13,925 million. On February 24, 2016, the transaction was approved by Keurig's stockholders. As a result of the completion of the acquisition, Keurig's common stock ceased trading on the NASDAQ Global Select Market before the opening of market on March 3, 2016. Under the terms of the transaction, Keurig stockholders received $92.00 per share in cash for each share they owned.

Allocation of Consideration Exchanged

The following is a summary of the allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the Keurig Acquisition:



(in millions)	Fair Value
Cash and cash equivalents	$	215
Plant, property and equipment(1)	991
Other intangible assets	4,102
Goodwill	9,946
Deferred tax liabilities	(1,555		)
Assets acquired, net of liabilities assumed	226
Acquisition of business	$	13,925

(1)

The Company primarily valued personal property using the cost approach and applying the reproduction or replacement cost method. The Company assigned personal property a useful life ranging from 3 years to 11 years. The Company primarily valued real property using the cost approach, which was supported by the market approach or income approach as appropriate. The Company assigned real property a useful life between 3 years and 48 years.

The Keurig Acquisition resulted in $9,946 million of goodwill. The goodwill to be recognized is attributable to consisted largely of Keurig's commercial potential and the value of Keurig's assembled workforce. The goodwill created in the Keurig Acquisition is not deductible for tax purposes.

The allocation of consideration exchanged to other intangible assets acquired is as follows:



(in millions)	Fair Value		Estimated Life (in years)
Acquired technology(1)	$	1,246	20
Customer relationships(2)	243		10-12
Favorable leases(3)	8		5-10
Trade names (definite-lived)(4)	126		10
Trade names (indefinite-lived)(4)	2,479		n/a
Total other intangible assets	$	4,102


(1)	The Company valued acquired technology using the relief-from-royalty method, a form of the income approach.


(2)	The Company valued retail relationships using the distributor method, a form of the income approach. The Company valued digital and other customer relationships using the excess earnings method, a form of the income approach.


(3)	The Company valued leases using the discounted cash flow method, a form of the income approach.


(4)	The Company valued definite-lived and indefinite-lived trade names using the relief-from-royalty method, a form of the income approach.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

TRANSACTION EXPENSES

The following table provides information about the Company's transaction expenses incurred during the Periods:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
DPS Merger	$	158	$	—	$	—	$	—	$	—
Keurig Acquisition	—		—		—		102		187
Other transaction expenses	4		—		—		—		—
Total transaction expenses incurred	$	162	$	—	$	—	$	102	$	187

INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

The following table summarizes the equity method investments held by the Company as of December 31, 2018 and 2017:



			December 31,
(in millions)	Ownership Interest		2018		2017
BA Sports Nutrition, LLC ("BODYARMOR")(1)(2)	15.5	%	$	62	$	—
Bedford Systems, LLC ("Bedford")(3)	30.0	%	79		95
Dyla LLC	12.6	%	15		—
Force Holdings LLC	33.3	%	6		—
LifeFuels, Inc.	26.7	%	19		—
Other	(various)		5		2
Investments in unconsolidated subsidiaries			$	186	$	97


(1)	The investment in BODYARMOR was acquired as part of the DPS Merger on July 9, 2018. Refer to the purchase price allocation above.

(2)

On August 14, 2018, it was announced that The Coca-Cola Company ("Coca-Cola") took a minority interest in BODYARMOR and would obtain the Company's current distribution rights. On August 19, 2018, the Company received a distribution from BODYARMOR of approximately $35 million. This distribution reduced the Company's investment by approximately $11 million and resulted in a gain of approximately $24 million, which was recorded to Other (income) expense, net in the Consolidated Statements of Income. The Company continues to account for its interest in BODYARMOR as an equity method investment at the ownership level prior to the Coca-Cola announcement as an updated ownership interest percentage has not yet been provided to the Company.

(3)

The investment in Bedford represents a joint venture formed with Anheuser-Busch InBev ("ABI") on March 3, 2017 to develop and launch an in-home alcoholic beverage system. Under the terms of the transaction agreement, the Company contributed its existing Kold assets and liabilities along with all outstanding shares of MDS Holdings p.l.c. (Bevyz) with a net book value of $357 million to Bedford in exchange for a 30% interest. ABI contributed $250 million to the investment, which was immediately distributed to Maple, in exchange for a 70% interest.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Revenue Recognition

The following table disaggregates the Company's revenue by portfolio for the Periods presented:



(in millions)	Beverage Concentrates		Packaged Beverages		Latin America Beverages		Coffee Systems		Total
2018:
CSD(1)	$	656	$	1,084	$	174	$	—	$	1,914
NCB(1)	6		1,153		69		—		1,228
Pods(2)	—		—		—		3,249		3,249
Appliances	—		—		—		643		643
Other	7		178		1		222		408
Net sales	$	669	$	2,415	$	244	$	4,114	$	7,442

Transition 2017(3):
CSD(1)	$	—	$	—	$	—	$	—	$	—
NCB(1)	—		—		—		—		—
Pods(2)	—		—		—		856		856
Appliances	—		—		—		257		257
Other	—		—		—		57		57
Net sales	$	—	$	—	$	—	$	1,170	$	1,170

Fiscal 2017(3):
CSD(1)	$	—	$	—	$	—	$	—	$	—
NCB(1)	—		—		—		—		—
Pods(2)	—		—		—		3,415		3,415
Appliances	—		—		—		646		646
Other	—		—		—		208		208
Net sales	$	—	$	—	$	—	$	4,269	$	4,269

Successor 2016(3):
CSD(1)	$	—	$	—	$	—	$	—	$	—
NCB(1)	—		—		—		—		—
Pods(2)	—		—		—		1,822		1,822
Appliances	—		—		—		359		359
Other	—		—		—		112		112
Net sales	$	—	$	—	$	—	$	2,293	$	2,293

Predecessor 2016(3):
CSD(1)	$	—	$	—	$	—	$	—	$	—
NCB(1)	—		—		—		—		—
Pods(2)	—		—		—		1,696		1,696
Appliances	—		—		—		225		225
Other	—		—		—		104		104
Net sales	$	—	$	—	$	—	$	2,025	$	2,025


(1)	Represents net sales of owned and partner brands within the Company's portfolio.


(2)	Represents net sales from owned brands, partner brands and private label owners. Net sales for partner brands and private label owners are contractual and long term in nature.


(3)	Prior period amounts were not adjusted for the adoption of revenue recognition under ASC 606.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Goodwill and Other Intangible Assets

GOODWILL

Changes in the carrying amount of goodwill by reportable segment during 2018, Transition 2017 and Fiscal 2017 are as follows:



	Beverage Concentrates			Packaged Beverages			Latin America Beverages			Coffee Systems			Corporate Unallocated		Total
Balance as of September 24, 2016	$	—		$	—		$	—		$	10,012		$	—	$	10,012
Foreign currency translation	—			—			—			64			—		64
Adjustments(1)	—			—			—			(45		)	—		(45		)
Disposals(2)	—			—			—			(202		)	—		(202		)
Balance as of September 30, 2017	—			—			—			9,829			—		9,829
Foreign currency translation	—			—			—			(10		)	—		(10		)
Balance as of December 31, 2017	—			—			—			9,819			—		9,819
Foreign currency translation	(13		)	(26		)	(18		)	(94		)	—		(151		)
Acquisitions(3)	4,278			4,904			636			—			525		10,343
Balance as of December 31, 2018	$	4,265		$	4,878		$	618		$	9,725		$	525	$	20,011


(1)	Represents measurement period adjustments recorded in the year following the acquisition of Keurig by Maple.


(2)	Represents the write-off of goodwill associated with the sale of Kold assets.


(3)	Represents the goodwill recorded as a result of the DPS Merger, the Big Red Acquisition, and the Core Acquisition. Refer to Note 3 for additional information

INTANGIBLE ASSETS OTHER THAN GOODWILL

The net carrying amounts of intangible assets other than goodwill with indefinite lives are as follows:



	December 31, 2018		December 31, 2017
Brands(1)	$	19,712	$	—
Contractual arrangements(2)	119		—
Trade names	2,479		2,479
Total	$	22,310	$	2,479


(1)	The Company recorded $19,357 million, $220 million and $254 million of indefinite-lived brand assets as a result of the DPS Merger, the Big Red Acquisition and the Core Acquisition, respectively. Refer to Note 3 for additional information. The remaining change during the period was due to foreign currency translation.


(2)	The Company recorded $120 million of indefinite-lived contractual arrangements with certain bottlers and distributors as a result of the DPS Merger. Refer to Note 3 for additional information. The remaining change during the period was due to foreign currency translation.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The net carrying amounts of intangible assets other than goodwill with definite lives are as follows:



	December 31, 2018							December 31, 2017
(in millions)	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Acquired technology	$	1,146	$	(182	)	$	964	$	1,146	$	(109	)	$	1,037
Customer relationships(1)(2)	629		(67		)	562		247		(41		)	206
Trade names	127		(40		)	87		129		(24		)	105
Favorable leases(1)	13		(3		)	10		8		(2		)	6
Brands(2)	9		—			9		—		—			—
Contractual arrangements(2)(3)	26		(1		)	25		—		—			—
Other	—		—			—		1		—			1
Total	$	1,950	$	(293	)	$	1,657	$	1,531	$	(176	)	$	1,355


(1)	As a result of the DPS Merger, the Company recorded definite-lived customer relationships of $386 million and definite-lived net favorable leases of $5 million. Refer to Note 3 for additional information.


(2)	As a result of the Big Red Acquisition, the Company recorded definite-lived brands of $9 million, definite-lived customer relationships of $4 million and definite-lived contractual arrangements of $7 million. Refer to Note 3 for additional information.


(3)	As a result of the Core Acquisition, the Company recorded definite-lived contractual arrangements of $19 million. Refer to Note 3 for additional information.

Amortization expense for intangible assets with definite lives was as follows:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Amortization expense for intangible assets with definite lives	$	121	$	29	$	96	$	55	$	21

Amortization expense of these intangible assets is expected to be as follows:



	For the Years Ending December 31,
(in millions)	2019		2020		2021		2022		2023
Expected amortization expense for intangible assets with definite lives	$	130	$	130	$	130	$	129	$	124

Income Taxes

Income before provision for income taxes was as follows:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
U.S.	$	635	$	110	$	392	$	73	$	89
International	156		72		175		91		50
Total	$	791	$	182	$	567	$	164	$	139

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The provision for income taxes has the following components:



	Successor												Predecessor
(in millions)	2018			Transition 2017			Fiscal 2017			Successor 2016			Predecessor 2016
Current:
Federal	$	183		$	32		$	87		$	50		$	30
State	62			6			15			7			(7		)
International	38			13			67			22			17
Total current provision	$	283		$	51		$	169		$	79		$	40

Deferred:
Federal	$	(24	)	$	(488	)	$	17		$	(21	)	$	(1	)
State	(50		)	1			(3		)	(3		)	3
International	(7		)	(1		)	1			—			(3		)
Total deferred provision	$	(81	)	$	(488	)	$	15		$	(24	)	$	(1	)
Total provision for income taxes	$	202		$	(437	)	$	184		$	55		$	39

The following is a reconciliation of the provision for income taxes computed at the U.S. federal statutory tax rate to the provision for income taxes reported in the Consolidated Statements of Income:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Statutory federal income tax rate	21.0	%	24.5	%	35.0	%	35.0	%	35.0	%
State income taxes, net	5.4	%	4.7	%	3.7	%	3.3	%	3.2	%
U.S. federal domestic manufacturing benefit	(1.5	)%	(2.3	)%	(3.7	)%	(2.8	)%	(2.3	)%
Impact of non-US Operations	0.1	%	(0.4	)%	(0.5	)%	(6.0	)%	(2.6	)%
Tax credits	(0.9	)%	(0.2	)%	(35.5	)%	(2.0	)%	(3.6	)%
Valuation allowance for deferred tax assets	2.0	%	—	%	3.7	%	—	%	—	%
U.S. taxation of foreign earnings	1.8	%	—	%	30.3	%	0.8	%	0.2	%
Deferred rate change	(4.9	)%	—	%	(1.2	)%	(3.4	)%	1.1	%
State refund	(0.4	)%	—	%	(0.2	)%	—	%	(14.8	)%
Uncertain tax positions	0.6	%	0.3	%	2.7	%	11.6	%	7.4	%
U.S. Federal Provision to Return	(0.3	)%	—	%	(2.7	)%	—	%	(2.3	)%
Transaction Costs	1.4	%	—	%	—	%	(4.1	)%	4.6	%
Impact of the TCJA	0.5	%	(265.2	)%	—	%	—	%	—	%
Other	0.7	%	(1.5	)%	0.9	%	1.1	%	2.2	%
Total provision for income taxes	25.5	%	(240.1	)%	32.5	%	33.5	%	28.1	%

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The legislation commonly referred to as The Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017. Effective January 1, 2018 the TCJA provided for the following:


–	A reduction of the U.S. federal statutory tax rate from 35% to 21%;


–	Required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries,


–	Created new taxes on certain foreign sourced earnings,


–	Repealed the domestic manufacturing deduction; however, under the transition rules the Company was able to continue to benefit from the domestic manufacturing deduction during the first nine months of 2018, and


–	allowed for full expensing of certain capital purchases from September 28, 2017 through December 31, 2022.

In 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin ("SAB") 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which provides guidance on accounting for the impact of the TCJA, in effect allowing an entity to use a methodology similar to the measurement period in a business combination. At December 31, 2018, we have now completed our accounting for all of the enactment-date income tax effects of the Act. The Company recorded an income tax expense of $5 million and benefit of $484 million as a result of the TCJA as of December 31, 2018 and 2017, respectively, which was comprised of the following:


•	An income tax expense of $2 million and benefit of $493 million primarily due to reducing its net U.S. deferred tax liabilities for the 14% decrease in the U.S. federal statutory tax rate as of December 31, 2018 and 2017, respectively.


•	Income tax benefit of $7 million and expense of $9 million due to the one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred from U.S. federal income taxation as of December 31, 2018 and 2017, respectively.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Deferred tax assets and liabilities in the Consolidated Balance Sheets were comprised of the following:



	December 31,
(in millions)	2018			2017
Deferred tax assets:
Equity method investments	$	—		$	48
Net operating loss	53			53
Tax credit carryforwards	58			30
Accrued expenses	96			14
Share-based compensation	21			14
Multi-year upfront payments	21			—
Other	39			12
Total deferred tax assets	288			171
Valuation allowances	(79		)	(44		)
Total deferred tax assets, net of valuation allowances	$	209		$	127
Deferred tax liabilities:
Brands, Trademarks and other intangible assets	$	(5,757	)	$	(1,008	)
Property, plant and equipment	(277		)	(88		)
Derivative instruments	(56		)	(30		)
Equity method investments	(8		)	—
Other	(8		)	(5		)
Total deferred tax liabilities	(6,106		)	(1,131		)
Net deferred tax liabilities	$	(5,897	)	$	(1,004	)

As of December 31, 2018, the Company had $53 million in tax effected Luxembourg net operating loss carry forwards. Of this amount, $51 million will not expire and $2 million will begin to expire in the year 2034. The Company currently has a valuation allowance of $27 million on the Luxembourg net operating loss carryforwards. The Company has $53 million U.S. foreign tax credit carryforwards and $5 million of other carryforwards, primarily related to U.S. state income tax. Of the $53 million of U.S. foreign tax credit carryforwards, $52 million have a valuation allowance. Foreign tax credits of $17 million, $35 million and $1 million will expire in 2024, 2025 and 2028, respectively. Foreign tax credit carryforwards in the amount of $22 million originally scheduled to expire in 2020 expired as of December 31, 2018 as a result of three short tax periods related to the DPS Merger.

The Company previously recorded no deferred income taxes on undistributed earnings from non-U.S. subsidiaries because the earnings were considered to be indefinitely reinvested or because the Company’s outside tax basis exceeded book basis. Due to the DPS Merger, the Company’s outside tax basis no longer exceeds book basis; however, the international tax rules of the TCJA resulted in the recognition of all previously unrecognized and current year earnings and profits ("E&P") determined under U.S. income tax principles of $235 million as of December 31, 2017 for DPS and $27 million as of September 30, 2018 for Maple. For the calendar year ended December 31, 2018, the majority of additional current year E&P are subject to inclusion through new tax rules effective for the December 31, 2018 under the TCJA. Under these new rules, any remaining untaxed E&P is considered not significant and would only be subject to withholding tax. The Company had undistributed U.S. GAAP earnings in non-U.S. subsidiaries of approximately $259 million and $287 million for December 31, 2018 and 2017, respectively. The difference is due primarily to the enactment of the TCJA.

An actual repatriation of earnings from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes. The Company has analyzed Its global working capital and cash requirements and continues to be indefinitely reinvested in its undistributed earnings except for amounts in excess of its working capital and cash requirements. The Company has recorded potential withholding tax liabilities attributable to future repatriation.

The Company files income tax returns for U.S. federal purposes and in various state jurisdictions. The Company also files income tax returns in various foreign jurisdictions, principally Canada and Mexico. The U.S. and most state income tax returns for years prior to 2014 are closed to examination by applicable tax authorities. Keurig is currently under audit by the Internal Revenue Service for the 2015 tax year. Mexican income tax returns are generally open for tax years 2008 and forward and Canadian income tax returns are open for audit for tax years 2011 and forward.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits:



(in millions)	2018			Transition 2017		Fiscal 2017
Balance, beginning of the period	$	35		$	33	$	21
Increases related to tax positions taken during the current year	1			—		18
Increases (decreases) related to tax positions taken during the prior year	12			2		(6		)
Increases related to tax positions from acquisitions	13			—		—
Decreases related to settlements with taxing authorities	(8		)	—		—
Decreases related to lapse of applicable statute of limitations	(3		)	—		—
Balance, end of the period	$	50		$	35	$	33

The total amount of unrecognized tax benefits that, if recognized, would reduce the effective tax rate, is $42 million after considering the federal impact of state income taxes. During the next twelve months, KDP does not expect a significant change to its unrecognized tax benefits.

KDP accrues interest and penalties on its uncertain tax positions as a component of its provision for income taxes. The Company recognized expense of $1 million related to interest and penalties for uncertain tax positions for each of the Periods presented. The Company had a total of $10 million and $6 million accrued for interest and penalties for its uncertain tax positions reported as part of other non-current liabilities as of December 31, 2018 and 2017, respectively.

Employee Benefit Plans

DEFINED BENEFIT PENSION PLANS

Overview

As a result of the DPS Merger, the Company assumed U.S. and foreign defined benefit pension plans during 2018, which provide benefits to a defined group of DPS employees. Prior to the consummation of the DPS Merger, the Company did not have any defined benefit plans. As such, the Company has only presented information regarding the defined benefit plans for the current period presented.

The Company has several non-contributory defined benefit plans, each having a measurement date of December 31. To participate in the defined benefit plans, eligible employees must have been employed by the Company for at least one year. Employee benefit plan obligations and expenses included in the Company's consolidated financial statements are determined using actuarial analyses based on plan assumptions including employee demographic data such as years of service and compensation, benefits and claims paid and employer contributions, among others. The Company also participates in various multi-employer defined benefit plans.

The Company's largest U.S. defined benefit pension plan, which is a cash balance plan, was suspended and the accrued benefit was frozen effective December 31, 2008. Participants in this plan no longer earn additional benefits for future services or salary increases. The cash balance plans maintain individual record-keeping accounts for each participant, which are annually credited with interest credits equal to the 12-month average of one-year U.S. Treasury Bill rates, plus 1%, with a required minimum rate of 5%.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Financial Statement Impact

The following tables set forth amounts recognized in the Company's financial statements and the pension plans' funded status as of December 31, 2018:



(in millions)	2018
Projected Benefit Obligations
Beginning balance	$	—
Additions as a result of the DPS Merger	222
Service cost	1
Interest cost	5
Actuarial (gains) losses, net	(7		)
Benefits paid	(1		)
Impact of changes in FX rates	(1		)
Settlements	(13		)
Ending balance	$	206

Fair Value of Plan Assets
Beginning balance	$	—
Additions as a result of the DPS Merger	200
Actual return on plan assets	(8		)
Employer contributions	1
Benefits paid	(1		)
Impact of changes in FX rates	(1		)
Settlements	(13		)
Ending balance	$	178

Net liability recognized	$	(28	)
Current liability	$	(1	)
Non-current liability	(27		)

The accumulated benefit obligations for the defined benefit pension plans were $204 million as of December 31, 2018. The pension plan assets and the projected benefit obligations of KDP's U.S. pension plans represent approximately 92% of the total plan assets and 91% of the total projected benefit obligation of all plans combined as of December 31, 2018.

The following table summarizes key pension plan information regarding plans whose accumulated benefit obligations exceed the fair value of their respective plan assets:



	As of December 31,
(in millions)	2018
Aggregate projected benefit obligation	$	203
Aggregate accumulated benefit obligation	201
Aggregate fair value of plan assets	175

The following table summarizes the components of the Company's net periodic benefit cost for 2018:



(in millions)	2018
Service cost	1
Interest cost	5
Expected return on assets	(5		)
Total net periodic benefit costs	$	1

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The Company uses the corridor approach for amortization of actuarial gains or losses. The corridor is calculated as 10% of the greater of the plans’ projected benefit obligation or assets. The amortization period for plans with active participants is the average future service of covered active employees, and the amortization period for plans with no active participants is the average future lifetime of plan participants. There will be no estimated service cost or net actuarial loss for the defined benefit pension plans amortized from AOCL into periodic benefit cost in 2019.

The following table summarizes amounts included in accumulated other comprehensive income for the plans as of December 31, 2018:



(in millions)	As of December 31, 2018
Net actuarial loss	5
Prior service cost	—
Total	$	5

Contributions and Expected Benefit Payments

The Company's contributions to its pension plans for 2018, and its projected contributions for the year ended December 31, 2019, are insignificant. The following table summarizes the estimated future benefit payments for the Company's defined benefit plans:



	2019	2020	2021	2022	2023	2024-2028
Estimated future benefit payments	11	11	12	12	13	63

Actuarial Assumptions

The Company's pension expense was calculated based upon a number of actuarial assumptions including discount rates, retirement age, mortality rates, compensation rate increases and expected long-term rate of return on plan assets for pension benefits.

The discount rate that was utilized for determining the Company’s projected benefit obligations as of December 31, 2018, as well as projected 2019 net periodic benefit cost, for U.S. plans was selected based upon an interest rate yield curve. The yield curve is constructed based on the yields of a large number of U.S. Aa rated bonds as of December 31, 2018. The population of bonds utilized to calculate the discount rate includes those having an average yield between the 10th and 90th percentiles. Projected cash flows from the U.S. plans are then matched to spot rates along that yield curve in order to determine their present value and a single equivalent discount rate is calculated that produces the same present value as the spot rates.

For 2018, the expected long-term rate of return on U.S. pension fund assets held by the Company's pension trusts was determined based on several factors, including the impact of active portfolio management and projected long-term returns of broad equity and bond indices. The plans' historical returns were also considered. The expected long-term rate of return on the assets in the plans was based on an asset allocation assumption for fixed income and equity as follows:



	2018
Fixed income securities:
Asset allocation assumption	80	%
Expected long-term rate of return	4.6	%

Equity securities:
Asset allocation assumption	20	%
Expected long-term rate of return	7.6	%

Expected mortality is a key assumption in the measurement for pension benefit obligations. During 2018, the Company used the RP-2014 mortality tables and the Mortality Improvement Scale MP-2018 published by the Society of Actuaries’ Retirement Plans Experience Committee for the Company's U.S. plans.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The following table summarizes the weighted-average assumptions used to determine benefit obligations at the plan measurement dates for U.S. plans for 2018:



	U.S. Pension Plans
	2018
Weighted average discount rate	4.25	%
Rate of increase in compensation levels	3.00	%

The following table summarizes the weighted average actuarial assumptions used to determine the net periodic benefit costs for U.S. plans for 2018:



	U.S. Pension Plans
	2018
Weighted average discount rate	4.25	%
Rate of increase in compensation levels	3.00	%
Expected long-term rate of return	5.25	%

Investment Policy and Strategy

The Company has established formal investment policies for the assets associated with defined benefit pension plans. The Company's investment policy and strategy are mandated by the Company's Investment Committee. The overriding investment objective is to provide for the availability of funds for pension obligations as they become due, to maintain an overall level of financial asset adequacy and to maximize long-term investment return consistent with a reasonable level of risk. The Company's pension plan investment strategy includes the use of actively-managed securities. Investment performance both by investment manager and asset class is periodically reviewed, as well as overall market conditions with consideration of the long-term investment objectives. None of the plan assets are invested directly in equity or debt instruments issued by the Company. It is possible that insignificant indirect investments exist through its equity holdings. The equity and fixed income investments under the Company's sponsored pension plan assets are currently well diversified. The plans' asset allocation policy is reviewed at least annually. Factors considered when determining the appropriate asset allocation include changes in plan liabilities, an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. As of December 31, 2018, the Company was in compliance with the investment policy for the U.S. defined benefit pension plans, which contains allowable ranges in asset mix of 5-15% for U.S. equity securities, 5-15% for international equity securities, and 70-90% for fixed income securities.

POST-RETIREMENT MEDICAL PLANS

As a result of the DPS Merger, the Company acquired several non-contributory defined benefit PRMB plans during 2018, each having a measurement date of December 31. The majority of these PRMB plans have been frozen. To participate in the defined benefit plans, eligible employees must have been employed by the Company for at least one year. The PRMB plans are limited to qualified expenses and are subject to deductibles, co-payment provisions and other provisions. The Company's PRMB plans are not significant to the Company's consolidated financial statements.

FAIR VALUE OF THE PENSION AND POST-RETIREMENT PLAN ASSETS

The fair value hierarchy is not only applicable to assets and liabilities that are included in the Company's Consolidated Balance Sheets, but is also applied to certain other assets that indirectly impact the Company's consolidated financial statements. Assets contributed by the Company to pension or other PRMB plans become the property of the individual plans. Even though the Company no longer has control over these assets, we are indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts the Company's future net periodic benefit cost, as well as amounts recognized in the Company's Consolidated Balance Sheets. As such, the Company uses the fair value hierarchy to measure the fair value of assets held by the Company's various pension and PRMB plans.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The following tables present the major categories of plan assets and the respective fair value hierarchy for the pension and PRMB plan assets as of December 31, 2018:



(in millions)	Fair Value Hierarchy Level	Pension Assets		PRMB Assets
As of December 31, 2018
Cash and cash equivalents	Level 1	$	3	$	—
U.S. equity securities(1)(2)	Level 2	16		1
International equity securities(1)(2)	Level 2	13		—
International fixed income securities(2)	Level 2	14		—
Fixed income securities(3)	Level 2	132		5
Total		178		6


(1)	Equity securities are comprised of actively managed U.S. index funds and Europe, Australia, Far East index funds.


(2)	The NAV is based on the fair value of the underlying assets owned by the equity index fund or fixed income investment vehicle per share, multiplied by the number of units held as of the measurement date.


(3)	Fixed income securities are comprised of a diversified portfolio of investment-grade corporate and government securities. Investments are provided by the investment managers using a unit price or NAV based on the fair value of the underlying investments.

MULTI-EMPLOYER PLANS

As a result of the DPS Merger, the Company assumed multi-employer plans during 2018, which are three trustee-managed multi-employer defined benefit pension plans for union-represented employees under certain collective bargaining agreements. Prior to the consummation of the DPS Merger the Company did not have any Multi-employer Plans, as such the Company has only presented information regarding the Multi-employer Plans for the current period presented.

The risks of participating in these multi-employer plans are different from single-employer plans, as assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. Additionally, if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

Contributions paid into the multi-employer plans are expensed as incurred. Multi-employer plan expense was as follows for 2018:



(in millions)	2018
Contributions to individually significant multi-employer plan	1
Contributions to all other multi-employer plans	1
Total	$	2

Individually Significant Multi-Employer Plan

The Company participates in one multi-employer plan, the Central States, Southeast and Southwest Areas Pension Fund ("Central States"), which is considered to be individually significant. The following table presents information about the Central States plan as of December 31, 2018:



Plan's employer identification number	36-6044243
Plan number	001
Expiration dates of collective bargaining agreements(1)	March 2, 2019 through March 3, 2021
FIP/RP status pending/implemented(2)	Implemented
Pension Protection Act ("PPA") zone status	Red
Surcharge imposed	Yes


(1)	Central States includes seven collective bargaining agreements. The largest agreement, which is set to expire February 29, 2020, covers approximately 56% of the employees included in Central States. Two of the collective bargaining agreements are set to expire during 2019, covering approximately 16% of the employees included in Central States.


(2)	Indicates a plan for which a financial improvement plan ("FIP") or rehabilitation plan ("RP") is either pending or implemented.

The most recent PPA zone status available as of December 31, 2018 is for the plan's year-end as of December 31, 2017. The plan has not utilized any extended amortization provisions that affect the calculation of the zone status.

The Company's contributions to Central States did not exceed 5% of the total contributions made to Central States during 2018.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Future estimated contributions to Central States based on the number of covered employees and the terms of the collective bargaining agreements are as follows:



	2019		2020		2021		2022		2023
Future estimated contributions to Central States	$	1	$	2	$	2	$	2	$	2

DEFINED CONTRIBUTION PLANS

The Company sponsors various qualified defined contribution plans that cover U.S. and foreign based employees who meet certain eligibility requirements. The U.S. plans permit both pre-tax and after-tax contributions, which are subject to limitations imposed by Internal Revenue Code (the "Code") regulations. The Company also sponsors a non-qualified defined contribution plan for employees which is maintained in a rabbi trust and are not readily available to the Company. Although participants direct the investment of these funds, the investments are classified as trading securities and are included in other non-current assets. As such, the Company uses the fair value hierarchy to measure the fair value of these trading securities as follows:



(in millions)	Fair Value Hierarchy	As of December 31, 2018
Marketable securities - trading	Level 1	$	44

The corresponding liability related to the deferred compensation plan is recorded in other non-current liabilities. Gains and losses in connection with these trading securities are recorded in Other (income) expense, net with an offset for the same amount recorded in SG&A expenses. There were $5 million in losses associated with these trading securities during 2018. As the non-qualified defined contribution plan trading securities were assumed as part of the DPS Merger, there was no historical income statement activity related to the plan.

The Company makes matching contributions and discretionary profit sharing contributions to each of the respective plans. The Company incurred contribution expense of $36 million, $3 million, $11 million, $6 million and $5 million to the plans for 2018, Transition 2017, Fiscal 2017, Successor 2016 and Predecessor 2016, respectively.

Long-term Obligations and Borrowing Arrangements

The following table summarizes the Company's long-term obligations:



	December 31,
(in millions)	2018			2017
Senior unsecured notes	$	12,019		$	—
Revolving credit facilities	—			—
Term loans	2,561			3,283
Term loans - related party	—			1,815
Subtotal	14,580			5,098
Less - current portion	(379		)	(219		)
Long-term obligations	$	14,201		$	4,879

The following table summarizes the Company's short-term borrowings and current portion of long-term obligations:



			December 31,
	Fair Value Hierarchy Level		2018						2017
(in millions)		Carrying Value			Fair Value			Carrying Value			Fair Value
Commercial paper	2		$	1,079		$	1,079		$	—		$	—
Current portion of long-term obligations:
Senior unsecured notes	2		250			250			—			—
Term loans	2		129			129			219			219
Short-term borrowings and current portion of long-term obligations			$	1,458		$	1,458		$	219		$	219

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

SENIOR UNSECURED NOTES

The Company's senior unsecured notes (collectively, the "Notes") consisted of the following carrying values and estimated fair values that are not required to be measured at fair value in the Consolidated Balance Sheets are as follows:



					December 31,
(in millions)			Fair Value Hierarchy Level		2018							2017
Issuance	Maturity Date	Rate		Carrying Value				Fair Value			Carrying Value			Fair Value
2019 Notes(1)	January 15, 2019	2.600%	2		$	250			$	250		$	—		$	—
2020 Notes(1)	January 15, 2020	2.000%	2		250				245			—			—
2021-A Notes(1)	November 15, 2021	3.200%	2		250				244			—			—
2021-B Notes(1)	November 15, 2021	2.530%	2		250				240			—			—
2022 Notes(1)	November 15, 2022	2.700%	2		250				237			—			—
2023 Notes(1)	December 15, 2023	3.130%	2		500				474			—			—
2025 Notes(1)	November 15, 2025	3.400%	2		500				467			—			—
2026 Notes(1)	September 15, 2026	2.550%	2		400				346			—			—
2027 Notes(1)	June 15, 2027	3.430%	2		500				458			—			—
2038 Notes(1)	May 1, 2038	7.450%	2		125				151			—			—
2045 Notes(1)	November 15, 2045	4.500%	2		550				478			—			—
2046 Notes(1)	December 15, 2046	4.420%	2		400				342			—			—
2021 Merger Notes(2)	May 25, 2021	3.551%	2		1,750				1,742			—			—
2023 Merger Notes(2)	May 25, 2023	4.057%	2		2,000				1,988			—			—
2025 Merger Notes(2)	May 25, 2025	4.417%	2		1,000				999			—			—
2028 Merger Notes(2)	May 25, 2028	4.597%	2		2,000				1,981			—			—
2038 Merger Notes(2)	May 25, 2038	4.985%	2		500				483			—			—
2048 Merger Notes(2)	May 25, 2048	5.085%	2		750				716			—			—
Principal amount					$	12,225			$	11,841		$	—		$	—
Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger					(206		)					—
Carrying amount					$	12,019						$	—


(1)	As a result of the DPS Merger, the Company assumed the liabilities of DPS existing senior unsecured notes.


(2)	On May 25, 2018, the Company issued $8,000 million of senior unsecured notes, consisting of six different tranches (the "DPS Merger Notes") in a private offering under Rule 144A under the Securities Act of 1933, as amended. The DPS Merger Notes were issued at par and had debt issuance costs related to the issuance of approximately $46 million.

The indentures governing the Notes, among other things, contain customary default provisions and limit the Company's ability to incur indebtedness secured by principal properties, to enter into certain sale and leaseback transactions and to enter into certain mergers or transfers of substantially all of the Company's assets. The Notes are fully and unconditionally guaranteed by certain direct and indirect subsidiaries of the Company. Refer to Note 22 for additional information. As of December 31, 2018, the Company was in compliance with all financial covenant requirements of the Notes.

The fair value amounts of long term debt were based on current market rates available to the Company. The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all debt and related unamortized costs to be incurred at such date. The carrying amount includes the debt issuance costs and the fair value adjustment for Notes assumed in the DPS Merger.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

BORROWING ARRANGEMENTS

The Company's revolving credit facilities and term loans consisted of the following carrying values and estimated fair values that are not required to be measured at fair value in the Consolidated Balance Sheets are as follows:



				December 31,
(in millions)		Fair Value Hierarchy Level		2018							2017
Issuance	Maturity Date		Carrying Value				Fair Value			Carrying Value				Fair Value
KDP Term Loan(1)	February 2023	2		$	2,583			$	2,583		$	—			$	—
KDP Revolver	February 2023	2		—				—			—				—
Term Loan A		2		—				—			3,329				3,329
Principal amount				$	2,583			$	2,583		$	3,329			$	3,329
Unamortized debt issuance costs				(22		)					(46		)
Carrying amount				$	2,561						$	3,283


(1)	On December 31, 2018 the Company made a $50 million voluntary prepayment on the KDP Term Loan, which resulted in an insignificant loss on early extinguishment of debt.

Commercial Paper Program

DPS initially executed its commercial paper program on December 10, 2010. On July 9, 2018, the Company amended its commercial paper program, under which the Company may issue unsecured commercial paper notes (the "Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of $2,400 million. The maturities of the Commercial Paper will vary, but may not exceed 397 days from the date of issuance. The Company's intent is to classify the Commercial Paper on a short term basis, as maturities are not expected to exceed 90 days. The Company issues Commercial Paper as needed for general corporate purposes. Outstanding Commercial Paper ranks equally with all of the Company's existing and future unsecured borrowings. Under this program, the Company had weighted average Commercial Paper borrowings of $1,309 million for the last six months of 2018, since the Company assumed the commercial paper program, with maturities of 90 days or less, and no outstanding Commercial Paper for the Transition 2017, Fiscal 2017, Successor 2016 and Predecessor 2016, respectively. These Commercial Paper borrowings had a weighted average interest rate of 2.53% for the last six months of 2018. The Company had $1,079 million of outstanding Commercial Paper as of December 31, 2018, and none outstanding as of December 31, 2017.

KDP Revolving Credit Facilities and Term Loan

On February 28, 2018, in connection with the DPS Merger, Maple entered into the following, which the Company assumed upon the closing of the DPS Merger:

•

A new term loan agreement among the Company, the lenders party thereto (the "Term Lenders"), the other financial institutions party thereto and JP Morgan, as administrative agent (the "KDP Term Loan Agreement"), pursuant to which the Term Lenders have committed to provide $2,700 million of the KDP Term Loan for the purposes of funding the DPS Merger and fees and expenses related to the DPS Merger; and

•

A new credit agreement among the Company, the lenders party thereto (the "Revolving Lenders"), the other financial institutions party thereto and JP Morgan, as administrative agent (the "KDP Credit Agreement” and, together with the KDP Term Loan Agreement, the “KDP Credit Agreements”), pursuant to which the Revolving Lenders have committed to provide $2,400 million of a revolving credit facility (the "KDP Revolver"), for the purpose of funding (i) the DPS Merger, (ii) fees and expenses related to the DPS Merger, (iii) repayment of the Company's previous revolving credit facility (as discussed below) and (iv) general corporate needs.

The interest rate applicable to any borrowings under the KDP Credit Agreements ranges from a rate equal to LIBOR plus a margin of 0.875% to 1.50% or a base rate plus a margin of 0.00% to 0.50%, depending on the rating of certain indexed debt of KDP.

Under the KDP Credit Agreements, KDP will pay to the Revolving Lenders an unused commitment fee calculated at a rate per annum equal to an amount between 0.07% and 0.20%, depending on the rating of certain index debt of KDP. Under the KDP Term Loan, KDP must repay the unpaid principal amount of the KDP Term Loan quarterly commencing on December 31, 2018 in an amount equal to 1.25% of the aggregate principal amount of the loans made at the Effective Time. The KDP Credit Agreements will both mature on February 28, 2023.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The following table provides amounts utilized and available under the revolving credit facilities as of December 31, 2018:



(in millions)	Amount Utilized		Balances Available
KDP Revolver(1)	$	—	$	2,400
Letters of credit	—		200


(1)	In order to fund the DPS Merger, the Company drew down $1,900 million of the KDP Revolver on July 9, 2018. Subsequent to the DPS Merger, the Company repaid the revolver through issuance of $1,660 million of Commercial Paper through the commercial paper program and with $240 million in cash on hand.

The KDP Credit Agreements contain customary representations and warranties for investment grade financings. The KDP Credit Agreements also contain (i) certain customary affirmative covenants, including those that impose certain reporting and/or performance obligations on KDP and its subsidiaries, (ii) certain customary negative covenants that generally limit, subject to various exceptions, KDP and its subsidiaries from taking certain actions, including, without limitation, incurring liens, consummating certain fundamental changes and entering into transactions with affiliates, (iii) a financial covenant in the form of a total net leverage ratio and (iv) customary events of default (including a change of control) for financings of this type. As of December 31, 2018, the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements.

Letters of Credit Facilities

In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has incremental letters of credit facilities. Under these facilities, $100 million is available for the issuance of letters of credit, $48 million of which was utilized as of December 31, 2018 and $52 million of which remains available for use.

Previous Revolving Credit Facilities and Term Loan A

On March 3, 2016, Keurig entered into a credit agreement with JP Morgan, as administrative agent and as collateral agent, and the lenders party thereto from time to time (the “Previous Credit Agreement”). In connection with the DPS Merger, on July 9, 2018, KDP repaid all of the outstanding obligations in respect of principal, interest and fees under the Previous Credit Agreement, and terminated all commitments thereunder. The Company recorded the following as loss on extinguishment of debt in the Consolidated Statements of Income as a result of the termination of the Previous Credit Agreement and historical repayments of the Previous Credit Agreement:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Loss on early extinguishment of debt	$	13	$	5	$	85	$	5	$	6

Bridge Financing for DPS Merger

On January 29, 2018, the Company entered into a commitment letter for a 364-day bridge loan facility (the "Bridge Facility") in an aggregate principal amount of up to $13,100 million, in order to ensure that financing would be available for the DPS Merger. On July 9, 2018, in accordance with its terms, the commitment under the Bridge Facility was automatically terminated upon the Company's funding of the DPS Merger.

LONG-TERM OBLIGATIONS - RELATED PARTIES

The Company's long-term obligations to related parties are as follows:



					December 31,
(in millions)			Fair Value Hierarchy Level		2018						2017
Issuance	Maturity Date	Rate		Carrying Value			Fair Value			Carrying Value			Fair Value(2)
Term Loan Maple B.V.(1)	February 27, 2023	5.50%	2		$	—		$	—		$	1,375		$	1,375
Term Loan Mondelez(1)	February 27, 2023	5.50%	2		—			—			440			440
Principal amount					$	—		$	—		$	1,815		$	1,815


(1)	As a result of the DPS Merger, the Company converted certain related party term loans into equity, as shown in the Consolidated Statement of Changes in Stockholders' Equity.


(2)	The term loans with related parties occurred as an arms length transaction and reflected an interest rate consistent with the current industry and market. As such, the carrying value approximates fair value as of December 31, 2017.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Derivatives

INTEREST RATES

The Company is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate swaps to provide predictability in the Company's overall cost structure, including both receive-fixed, pay-variable and receive-variable, pay-fixed swaps. A natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in interest expense in the Consolidated Statements of Income. These interest rate swap contracts have maturities between one month and 20 years as of December 31, 2018.

FOREIGN EXCHANGE

The Company's Canadian and Mexican businesses purchase certain inventory through transactions denominated and settled in U.S. dollars, a currency different from the functional currency of those businesses. The Company additionally has a subsidiary in Canada with intercompany notes denominated and settled in U.S. dollars, a currency different from the functional currency of the Canadian business. These inventory purchases and intercompany notes are subject to exposure from movements in exchange rates. The Company enters into FX forward contracts to economically manage the exposures resulting from changes in these foreign currency exchange rates. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in Other (income) expense, net in the Consolidated Statements of Income. These FX contracts have maturities between one month and 6 years as of December 31, 2018.

COMMODITIES

KDP manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. The intent of these contracts is to provide a certain level of predictability in the Company's overall cost structure. The Company enters into forward, future, swap and option contracts that economically manage the exposure to these price risks. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same line item of the Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations. These commodity contracts have maturities between one month and 6 years as of December 31, 2018.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS

The following table presents the notional amounts of the Company's outstanding derivative instruments by type:



	December 31,
(in millions)	2018		2017
Interest rate contracts
Receive-fixed, pay-variable interest rate swaps	$	1,070	$	—
Receive-variable, pay-fixed interest rate swaps(1)	2,125		2,850
FX forward contracts	348		410
Commodity contracts	296		273


(1)	During the year ended December 31, 2018, the Company elected to terminate $575 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $21 million.

FAIR VALUE OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

The following table summarizes the fair value hierarchy and the location of the fair value of the Company's derivative instruments not designated as hedging instruments within the Consolidated Balance Sheets:



			December 31,
(in millions)	Fair Value Hierarchy	Balance Sheet Location	2018		2017
Assets:
Interest rate contracts	2	Prepaid expenses and other current assets	$	2	$	—
FX forward contracts	2	Prepaid expenses and other current assets	4		—
Commodity contracts	2	Prepaid expenses and other current assets	3		—
Interest rate contracts	2	Other non-current assets	77		87
FX forward contracts	2	Other non-current assets	15		—
Commodity contracts	2	Other non-current assets	3		—

Liabilities:
Interest rate contracts	2	Other current liabilities	$	7	$	—
FX forward contracts	2	Other current liabilities	—		5
Commodity contracts	2	Other current liabilities	27		1
Interest rate contracts	2	Other non-current liabilities	6		—
Commodity contracts	2	Other non-current liabilities	10		—

The fair values of commodity contracts, interest rate contracts and FX forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the reporting date. Interest rate contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the Company's contracts and credit risk of the counterparties. FX forward contracts are valued using quoted FX forward rates at the reporting date. Therefore, the Company has categorized these contracts as Level 2.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

IMPACT OF ECONOMIC HEDGES

The following table presents the impact of derivative instruments not designated as hedging instruments under U.S. GAAP to the Consolidated Statements of Income. Amounts include both realized and unrealized gains and losses.



		Successor												Predecessor
(in millions)	Location of (Gains) Losses in the Consolidated Statements of Income	2018			Transition 2017			Fiscal 2017			Successor 2016			Predecessor 2016
Commodity contracts	Cost of sales	$	42		$	1		$	7		$	—		$	—
Commodity contracts	SG&A expenses	20			—			—			—			—
Interest rate contracts	Interest expense	6			(19		)	(74		)	6			—
FX forward contracts	Other (income) expense, net	(27		)	(2		)	6			(16		)	—
Cross currency swaps	Other (income) expense, net	—			—			47			24			(1		)
Total		$	41		$	(20	)	$	(14	)	$	14		$	(1	)

The Company has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically, the Company has not experienced credit losses as a result of counterparty nonperformance. The Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty and monitors the market position of the programs upon execution of a hedging transaction and at least on a quarterly basis.

Stock-Based Compensation

Stock-based compensation expense is primarily recorded in SG&A expenses in the Consolidated Statements of Income. The components of stock-based compensation expense are presented below:



	Successor											Predecessor
(in millions)	2018			Transition 2017			Fiscal 2017			Successor 2016		Predecessor 2016
Total stock-based compensation expense	$	35		$	15		$	58		$	6	$	140
Income tax benefit recognized in the Statements of Income	(7		)	(3		)	(16		)	—		(55		)
Stock-based compensation expense, net of tax	$	28		$	12		$	42		$	6	$	85

DESCRIPTION OF STOCK-BASED COMPENSATION PLANS

Prior to the DPS Merger, Maple had two share-based compensation programs. The Keurig Green Mountain, Inc. Executive Ownership Plan (the "EOP") allowed certain designated employees the right to acquire an ownership interest in Maple Parent Corporation, which was a wholly-owned subsidiary of Maple. Eligible employees who made a pre-established minimum investment under the EOP were eligible to receive a matching award grant of RSUs. Under the Keurig Green Mountain, Inc. Long Term Incentive Plan (the "LTIP"), certain designated employees were granted awards in the form of RSUs in Maple Parent Corporation. Prior to the DPS Merger, RSUs vested at the end of a 4 year, 6 months period, and compensation expense was recognized ratably over the term of the grant. Upon consummation of the DPS Merger, RSUs granted under these programs were converted at the exchange ratio established in the DPS Merger into RSUs that will be settled into shares of the Company's common stock.

The Company previously adopted the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (formerly known as the Dr Pepper Snapple Group, Inc. Omnibus Stock Incentive Plan of 2009, the "KDP Incentive Plan") under which employees and non-employee directors may be granted stock options, stock appreciation rights, stock awards, RSUs and PSUs, and all grants subsequent to the Merger Date are granted under the KDP Incentive Plan. All RSUs granted after consummation of the DPS Merger vest at the end of a five year period and compensation expense is recognized ratably over the term of the grant.

The KDP Incentive Plan, the EOP and the LTIP (collectively, the "Plans") provide for the issuance of up to 25,074,892 shares of the Company's common stock in stock-based compensation awards.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

RESTRICTED STOCK UNITS

The table below summarizes RSU activity for 2018. The fair value of RSUs is determined based on the the number of units granted, adjusted for the exchange ratio for RSUs granted prior to July 9, 2018, and the grant date price of common stock.



	RSUs(1)		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Balance as of January 1, 2018	15,462,778		$	11.51	2.77	$	342
Granted	6,934,249		23.81
Vested and released	(968,715	)	10.42			23
Forfeited	(2,802,414	)	14.55
Balance as of December 31, 2018	18,625,898		15.68		3.54	478


(1)	RSUs have been converted from Maple RSUs to Company RSUs using the exchange ratio established as part of the DPS Merger.

As of December 31, 2018, there was $216 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.84 years.

STOCK OPTIONS

Upon the consummation of the DPS Merger, the Company issued replacement stock option awards for DPS stock option awards that were fully vested as of July 9, 2018 but not yet exercised by the employee. The fair value of these replacement stock option awards was considered as consideration exchanged in the DPS Merger as a result of the Change in Control (as defined in the terms of each individual award agreement).

The table below summarizes stock option activity for 2018:



	Stock Options		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Balance as of January 1, 2018	—		$	—	—	$	—
Granted	1,319,014		11.92
Exercised	(235,339	)	11.70			3
Outstanding as of December 31, 2018	1,083,675		11.97		6.55	15
Exercisable as of December 31, 2018	1,083,675		11.97		6.55	15

PREDECESSOR STOCK-BASED COMPENSATION PLANS

Prior to the Keurig Acquisition, Keurig had two stock-based compensation plans (the "Keurig Incentive Plans"), under which employees and non-employee directors could be granted stock options, stock appreciation rights, restricted stock, RSUs, or performance stock units ("PSUs").

Options

Options granted under the Keurig Incentive Plans became exercisable over periods generally ranging between three and four years. The Keurig Incentive Plans required the exercise price to be no less than 100% of fair market value per share of common stock on the date of the grant, with certain provisions increasing the exercise price of an incentive stock option to 110% of the fair market value of the common stock on the date of the grant if the grantee owned in excess of 10% of Keurig's common stock on the date of the grant. Compensation expense was recognized only for those options expected to vest, with forfeitures estimated based on Keurig's historical employee turnover experience and future expectations. The grant-date fair value of employee share options and similar instruments was estimated using the Black-Scholes option-pricing model. Keurig used a blend of recent and historical volatility to estimate expected volatility at the measurement date. The expected life of options was estimated based on options vesting periods, contractual lives and an analysis of Keurig's historical experience. Keurig based the risk-free interest rate on the U.S. Treasury rate over the expected life of the option. All outstanding options under the Keurig Incentive Plans became fully vested in connection with the Keurig Acquisition and were settled for cash as part of the acquisition consideration.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Restricted Stock Units and Other Awards

Keurig awarded RSUs to eligible employees and non-employee directors and PSUs to eligible employees which entitled such grantee to receive shares of Keurig's common stock upon vesting. The fair value of the RSUs and PSUs were based on the closing price of Keurig's common stock on the grant date. Compensation expense for RSUs was recognized ratably over a grantee's service period. Compensation expense for PSUs was also recognized over the employee's service period, but only if and when Keurig concluded that it was probable the performance condition(s) would be achieved. The assessment of probability of achievement was performed quarterly, and if the estimated grant-date fair value changed as a result of that assessment, the cumulative effect of the change on current and prior periods was recognized in the period of change. These awards vested over periods generally ranging between three and four years for RSUs and three years for PSUs, other than RSUs granted to non-employee directors which vested immediately. All of the RSUs and PSUs (at target) under the Keurig Incentive Plans became fully vested in connection with the Keurig Acquisition and were settled for cash as part of the Keurig Acquisition consideration.

Earnings Per Share

Basic earnings per share ("EPS") is computed by dividing net income attributable to KDP by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities.

As a result of the DPS Merger, as discussed in Note 1, Business and Basis of Presentation, all historical per share data and number of shares and numbers of equity awards for Successor periods were retroactively adjusted. The following table presents the Company's basic and diluted EPS and shares outstanding:



	Successor								Predecessor
(in millions, except per share data)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Basic EPS:
Net income attributable to KDP	$	586	$	612	$	378	$	109	$	100
Weighted average common shares outstanding	1,086.3		790.5		790.5		590.3		150.5
Earnings per common share — basic	$	0.54	$	0.77	$	0.48	$	0.19	$	0.66
Diluted EPS:
Net income attributable to KDP	$	586	$	612	$	378	$	109	$	100
Less: Impact of dilutive securities in Maple Parent Corporation	—		7		3		1		—
Total	$	586	$	605	$	375	$	108	$	100
Weighted average common shares outstanding	1,086.3		790.5		790.5		590.3		150.5
Effect of dilutive securities:
Stock options	0.9		—		—		—		0.7
RSUs	10.4		—		—		—		—
Weighted average common shares outstanding and common stock equivalents	1,097.6		790.5		790.5		590.3		151.2
Earnings per common share — diluted	$	0.53	$	0.77	$	0.47	$	0.18	$	0.66

Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation	1.2		—		—		—		—

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Accumulated Other Comprehensive (Loss) Income

The following table provides a summary of changes in AOCI, net of taxes, in the Successor periods:



(in millions)	Foreign Currency Translation Adjustments			Net Change in Pension and PRMB Liability			Accumulated Other Comprehensive (Loss) Income
Balance as of March 3, 2016	$	—		$	—		$	—
OCI before reclassifications	26			—			26
Amounts reclassified from accumulated other comprehensive income	—			—			—
Net current period other comprehensive income	26			—			26
Balance as of September 24, 2016	26			—			26
OCI before reclassifications	80			—			80
Amounts reclassified from accumulated other comprehensive income	—			—			—
Net current period other comprehensive income	80			—			80
Balance as of September 30, 2017	106			—			106
OCI before reclassifications	(7		)	—			(7		)
Amounts reclassified from accumulated other comprehensive income	—			—			—
Net current period other comprehensive loss	(7		)	—			(7		)
Balance as of December 31, 2017	99			—			99
OCI before reclassifications	(225		)	(4		)	(229		)
Amounts reclassified from accumulated other comprehensive income	—			—			—
Net current period other comprehensive loss(1)	(225		)	(4		)	(229		)
Balance as of December 31, 2018	$	(126	)	$	(4	)	$	(130	)


(1)	The net current period other comprehensive loss attributable to foreign currency translation adjustments during the year ended December 31, 2018 includes the impact of foreign currency as a result of the DPS Merger.

The following table provides a summary of changes in Accumulated Other Comprehensive (Loss) Income, net of taxes, for the Predecessor period, all of which is related to foreign currency translation:



(in millions)	Accumulated Other Comprehensive (Loss) Income
Balance as of September 26, 2015	$	(199	)
OCI before reclassifications	(9		)
Amounts reclassified from accumulated other comprehensive income	—
Net current period other comprehensive income	(9		)
Balance as of March 2, 2016	$	(208	)

Leases and Financing Obligations

LEASES

The Company has leases for certain facilities, fleet and equipment which expire at various dates through 2044. Some lease agreements contain standard renewal provisions that allow us to renew the lease at rates equivalent to fair market value at the end of the lease term. Under lease agreements that contain escalating rent provisions or rent holidays, operating lease expense is recorded on a straight-line basis over the lease term, including the period covered by the rent holiday.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Operating lease expense was the following for the Periods presented:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Operating lease expense	$	48	$	7	$	23	$	13	$	16

FINANCING OBLIGATIONS

In June 2012, Keurig entered into an arrangement to lease approximately 425,000 square feet located in Burlington, Massachusetts. Due to the Company's involvement in the Burlington, Massachusetts construction project, including its obligations to fund certain costs of construction exceeding amounts incurred by the lessor, the Company was deemed to be the owner of the project, which includes a pre-existing structure on the site, even though the Company is not the legal owner. Accordingly, total project costs incurred during construction were capitalized along with a corresponding financing obligation for the project costs that were incurred by the lessor. In addition, the Company capitalized the estimated fair value of the pre-existing structure of $4 million at the date construction commenced as construction-in-progress with a corresponding financing obligation. Upon completion of the project, the Company has continued involvement beyond a normal leaseback, and therefore, has not recorded a sale or derecognized the assets. As a result, the lease is accounted for as a financing transaction and the recorded asset and related financing obligation remains on the Consolidated Balance Sheets. Additionally, the Company has similar arrangements related to two properties in South Burlington, Vermont and has recorded the assets and a related financing obligation in a similar manner. The financing obligations will expire at various dates through 2029.

SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS

Future minimum lease payments under operating leases with initial or remaining noncancellable lease terms in excess of one year, capital leases and financing obligations as of December 31, 2018 are as follows:



(in millions)	Operating Leases		Capital Leases			Financing Obligations
2019	$	58	$	35		$	10
2020	53		34			10
2021	44		33			10
2022	34		33			10
2023	25		30			10
Thereafter	98		189			62
Total minimum lease payments	$	312	$	354		$	112
Less imputed interest			(98		)	(37		)
Present value of minimum lease payments			$	256		$	75

Property, Plant and Equipment

Net property, plant and equipment consisted of the following as of December 31, 2018 and 2017:



	December 31,
(in millions)	2018			2017
Land	$	138		$	10
Buildings and improvements	723			307
Machinery and equipment	1,412			508
Cold drink equipment	276			—
Software	231			156
Construction-in-progress	206			62
Gross property, plant and equipment	2,986			1,043
Less: accumulated depreciation and amortization	(676		)	(253		)
Net property, plant and equipment	$	2,310		$	790

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

On July 9, 2018, the Company consummated the DPS Merger and preliminary recorded $1,510 million of property, plant and equipment in the allocation of consideration. Refer to Note 3 for additional information.

The following table summarizes the location of depreciation expense within the Consolidated Statements of Income for the Periods presented:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Cost of sales	$	123	$	19	$	88	$	49	$	80
SG&A expenses	110		14		54		21		23
	$	233	$	33	$	142	$	70	$	103

The depreciation expense above also includes the charge to income resulting from the depreciation of the assets recorded under capital leases.

ASSETS UNDER CAPITAL LEASES AND FINANCING OBLIGATIONS

Net property, plant and equipment in the above table includes the following assets under capital lease and financing obligations as of December 31, 2018 and 2017:



	December 31,
(in millions)	2018			2017
Buildings and improvements	$	162		$	124
Machinery and equipment	152			—
Gross property, plant and equipment under capital lease and financing obligations	314			124
Less: accumulated depreciation and amortization	(38		)	(17		)
Net property, plant and equipment under capital lease and financing obligations	$	276		$	107

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Other Financial Information

The table below provides information on selected asset information from the Consolidated Balance Sheets:



	December 31,
(in millions)	2018		2017
Inventories:
Raw materials	$	204	$	121
Work in process	7		1
Finished goods	415		262
Total inventories	$	626	$	384
Prepaid expenses and other current assets:
Other receivables	$	51	$	7
Customer incentive programs	12		2
Derivative instruments	9		—
Prepaid marketing	29		7
Spare parts	43		10
Assets held for sale	8		—
Income tax receivable	22		45
Other	80		23
Total prepaid expenses and other current assets	$	254	$	94
Other non-current assets:
Customer incentive programs	$	34	$	—
Marketable securities - trading	44		—
Derivative instruments	95		87
Equity securities without readily determinable fair values	1		6
Non-current restricted cash and restricted cash equivalents	10		—
Related party notes receivable(1)	17		6
Other	58		22
Total other non-current assets	$	259	$	121


(1)	Refer to Note 20 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The table below provides information on selected liability information from the Consolidated Balance Sheets:



	December 31,
(in millions)	2018		2017
Accrued expenses:
Customer rebates & incentives	$	342	$	8
Accrued compensation	214		46
Insurance reserve	37		8
Interest accrual	77		3
Accrued professional fees	113		19
Other accrued expenses	229		117
Total accrued expenses	$	1,012	$	201
Other current liabilities:
Dividends payable	$	209	$	—
Income taxes payable	60		3
Derivative instruments	34		6
Holdback liability(1)	44		—
Other	33		3
Total other current liabilities	$	380	$	12
Other non-current liabilities:
Long-term pension and postretirement liability	$	30	$	—
Insurance reserves	57		—
Derivative instruments	16		—
Deferred compensation liability	44		—
Other	107		56
Total other non-current liabilities	$	254	$	56


(1)	This represents the holdback liability recorded for the Big Red Acquisition and Core Acquisition related to the respective liability to the shareholders. Refer to Note 3 for additional information.

ACCOUNTS PAYABLE

KDP entered into an agreement with a third party to allow participating suppliers to track payment obligations from KDP, and if elected, sell payment obligations from KDP to financial institutions. Suppliers can sell one or more of KDP's payment obligations at their sole discretion and the rights and obligations of KDP to its suppliers are not impacted. KDP has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. KDP'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 KDP's outstanding payment obligations are payable to suppliers who utilize these third party services.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Supplemental Cash Flow Information

The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the Consolidated Balance Sheets to the total of the same amounts shown in the Consolidated Statements of Cash Flows:



	Fair Value Hierarchy Level		December 31, 2018						December 31, 2017
(in millions)		Carrying Value			Fair Value			Carrying Value			Fair Value
Cash and cash equivalents	1		$	83		$	83		$	90		$	90
Restricted cash and restricted cash equivalents(1)	1		46			46			5			5
Non-current restricted cash and restricted cash equivalents included in Other non-current assets	1		10			10			—			—
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the Consolidated Statement of Cash Flows			$	139		$	139		$	95		$	95


(1)	Restricted cash and cash equivalents represent amounts held in escrow in connection with the Big Red Acquisition and the Core Acquisition. Refer to Note 3 for additional information.

The following table details supplemental cash flow disclosures of non-cash investing and financing activities:



	Successor									Predecessor
(in millions)	2018			Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Supplemental cash flow disclosures of non-cash investing and financing activities:
Capitalization of related party debt into additional paid-in-capital	$	(1,815	)	$	—	$	—	$	—	$	—
Fair value of stock and replacement equity awards not converted to cash	(3,643		)	—		—		—		—
Issuance of common stock for acquisition of business	(441		)	—		—		—		—
Dividends declared but not yet paid	211			—		—		—		—
Capital expenditures included in accounts payable and accrued expenses	102			19		6		18		12
Holdback liability for acquisition of business(1)	54			—		—		—		—
Capital lease additions	40			—		—		—		—
Supplemental cash flow disclosures:
Cash paid for interest	180			25		167		156		5
Cash paid for related party interest	51			25		125		34		—
Cash paid for income taxes	210			26		159		92		17


(1)	The holdback liability has a current and non-current liability component. Refer to Note 15 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Integration and Restructuring Costs

The Company implements restructuring programs from time to time and incurs costs that are designed to improve operating effectiveness and lower costs. When the Company implements these programs, the Company incurs expenses, such as employee separations, lease terminations and other direct exit costs, that qualify as exit and disposal costs under U.S. GAAP.

The Company also incurs expenses that are an integral component of, and directly attributable to, the Company's restructuring activities, which do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments, implementation costs and other incremental costs. The Company has recorded these costs within SG&A expenses on the Consolidated Statements of Income, and these costs are held within unallocated corporate costs.

Restructuring and integration charges incurred during the Periods presented are as follows:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Castroville closure	$	—	$	—	$	22	$	—	$	—
Business realignment	2		—		12		—		—
Keurig 2.0 exit	12		6		10		—		—
Integration program	155		—		—		—		—
Other restructuring programs	1		—		—		4		3
Total restructuring and integration charges	$	170	$	6	$	44	$	4	$	3

Restructuring liabilities that qualify as exit and disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the consolidated financial statements. Activity in the restructuring liabilities during 2018, Transition 2017 and Fiscal 2017 was as follows:



(in millions)	Workforce Reduction Costs			Other(1)			Total
Balance as of September 25, 2016	$	2		$	2		$	4
Charges to expense	16			29			45
Cash payments	(11		)	(5		)	(16		)
Non-cash adjustment items	—			(21		)	(21		)
Balance as of September 30, 2017	7			5			12
Charges to expense	—			6			6
Cash payments	(6		)	(1		)	(7		)
Non-cash adjustment items	—			(7		)	(7		)
Balance as of December 31, 2017	1			3			4
Charges to expense	64			—			64
Cash payments	(34		)	(1		)	(35		)
Non-cash adjustment items	(3		)	(1		)	(4		)
Balance as of December 31, 2018	$	28		$	1		$	29


(1)	Primarily reflects activities associated with the closure of certain facilities, excluding contract termination costs, which include any associated asset write-downs and accelerated depreciation.

RESTRUCTURING PROGRAMS

Integration Program

As part of the DPS Merger, the Company established an transformation management office to enable integration and maximize value capture. The Company developed a program to deliver $600 million in synergies over a three year period through supply chain optimization, reduction of indirect spend through new economies of scale, elimination of duplicative support functions and advertising and promotion optimization. The Company expects to incur total cash expenditures of $750 million, comprised of both capital expenditures and expense, and expects to complete the program by 2021. The restructuring program resulted in cumulative pre-tax charges of approximately $155 million, primarily related to professional fees and costs associated with severance and employee terminations through December 31, 2018.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Castroville Closure

In May 2017, the Company looked at its capacity across the manufacturing network and determined that, geographically, it could improve matching capacity to its customer base. As a result, in May 2017, the Company announced it was closing the Castroville, California manufacturing site on May 18, 2017. As a result of the decision, the Company had a reduction in workforce of 183 employees. This restructuring program resulted in cumulative pre-tax restructuring charges of approximately $22 million, primarily related to costs associated with employee terminations and asset related costs through December 31, 2017. The Company does not expect to incur any additional restructuring charges related to this program as it was completed in 2017.

Business Realignment

In June 2017, the Company determined that its strategic priorities had shifted and as a result has redesigned its organizational structure. Approximately 500 employees were affected by changing roles, responsibilities or reporting lines, and 140 of those employees were notified that their roles were being eliminated. This restructuring program resulted in cumulative pre-tax restructuring charges of approximately $12 million, primarily related to costs associated with severance and employee terminations through December 31, 2017. The Company does not expect to incur any additional restructuring charges related to this program as it was completed in 2017.

In 2018, the Company approved additional realignment to the organization impacting various employees in the U.S., Canada and UK. The restructuring resulted in cumulative pre-tax restructuring charges of approximately $2 million, primarily related to costs associated with severance and employee terminations through December 31, 2018. The Company does not expect to incur additional restructuring charges related to this realignment.

Keurig K2.0 Exit

In August 2017, the Company determined due to shifting demand and strategic priorities that it would stop producing and selling its Keurig K2.0 brewer models. This restructuring program resulted in cumulative pre-tax restructuring charges of approximately $28 million, primarily related to costs associated with accelerated depreciation on all K2.0 molds and tooling equipment as well as costs associated with obsolete inventory on hand through December 31, 2018.

Non-controlling Interest

In August 2016, Keurig introduced the EOP, under which certain employees could invest in shares of Keurig’s immediate parent, Maple Parent Corporation, a wholly owned subsidiary of Maple. The EOP also provided the non-controlling interest shareholders with the right to put their shares back to the Company at fair value during certain periods. These put rights terminated upon an initial public offering or merger into a public company, when employees were then able to sell shares on the open market. Since redemption of these shares was, subject to certain conditions, at the option of the holder, the fair value of the redeemable non-controlling interest and equity awards were classified within the “mezzanine equity” section of the Consolidated Balance Sheets.

As a result of the DPS Merger, outstanding shares held at Maple Parent Corporation converted into KDP shares in accordance with the Merger Agreement, and the put rights expired. As such, as of the Merger Date, the redeemable non-controlling interest at Maple Parent Corporation was eliminated and reclassified into Stockholders' Equity in the Consolidated Balance Sheets.

The employee non-controlling interest represented the redemption value of shares purchased with cash. The mezzanine equity awards, which were recorded at fair value, included shares purchased with loans and the portion of restricted stock units for which compensation expense had been recognized.

Shares financed through loans are treated as options, and accordingly neither the shares nor the notes were recorded on the Consolidated Balance Sheets. Prior to the DPS Merger, the fair value of the options were recorded within the mezzanine equity section of the Consolidated Balance Sheets and as stock-based compensation expense within SG&A expenses in the Consolidated Statements of Income.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The following table is a rollforward of the EOP for the Periods presented since the introduction of the EOP:



(in millions)	2018			Transition 2017			Fiscal 2017			Successor 2016
Beginning balance	$	265		$	219		$	66		$	—
Net income attributable to non-controlling interests	3			7			5			—
Stock based compensation	24			15			58			6
Proceeds from (cash distributions to) redeemable NCI shareholders	18			—			5			60
Adjustment of non-controlling interests to redemption value	16			25			86			—
Dividends paid to NCI shareholders, currency translation adjustment, and other	—			(1		)	(1		)	—
Impact of the DPS Merger	(326		)	—			—			—
Ending balance	$	—		$	265		$	219		$	66

Commitments and Contingencies

LEGAL MATTERS

The Company is involved from time to time in various claims, proceedings, and litigation, including those described below. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made.

Antitrust Litigation

On February 11, 2014, TreeHouse Foods, Inc., Bay Valley Foods, LLC, and Sturm Foods, Inc. filed suit against Keurig Green Mountain, Inc. (f/k/a Green Mountain Coffee Roasters, Inc. and Keurig, Inc.) in the U.S. District Court for the Southern District of New York (TreeHouse Foods, Inc. et al. v. Green Mountain Coffee Roasters, Inc. et al., No. 1:14-cv-00905-VSB). The TreeHouse complaint asserted claims under the federal antitrust laws and various state laws, contending that Keurig had monopolized alleged markets for single serve coffee brewers and single serve coffee pods. The TreeHouse complaint sought monetary damages, declaratory relief, injunctive relief, and attorneys’ fees.

On March 13, 2014, JBR, Inc. (d/b/a Rogers Family Company) filed suit against Keurig Green Mountain, Inc. in the U.S. District Court for the Eastern District of California (JBR, Inc. v. Keurig Green Mountain, Inc., No. 2:14-cv-00677-KJM-CKD). The claims asserted and relief sought in the JBR complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint.

Additionally, beginning on March 10, 2014, twenty-seven putative class actions asserting similar claims and seeking similar relief were filed on behalf of purported direct and indirect purchasers of Keurig’s products in various federal district courts. On June 3, 2014, the Judicial Panel on Multidistrict Litigation (the “JPML”) granted a motion to transfer these various actions, including the TreeHouse and JBR actions, to a single judicial district for coordinated or consolidated pre-trial proceedings. An additional class action on behalf of indirect purchasers, originally filed in the Circuit Court of Faulkner County, Arkansas (Julie Rainwater et al. v. Keurig Green Mountain, Inc., No. 23CV-15-818), was similarly transferred on November 10, 2015. The actions are now pending before Judge Vernon S. Broderick in the Southern District of New York (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation, No. 1:14-md-02542-VSB) (the “Multidistrict Antitrust Litigation”). Discovery in the Multidistrict Antitrust Litigation has commenced.

Consolidated putative class action complaints by direct purchaser and indirect purchaser plaintiffs were filed on July 24, 2014.

On September 30, 2014, a statement of claim was filed against Keurig and Keurig Canada Inc. in Ontario, Canada by Club Coffee L.P. ("Club Coffee"), a Canadian manufacturer of single serve beverage pods, claiming damages of CDN $600 million and asserting a breach of competition law and false and misleading statements by Keurig.

On January 11, 2019 McLane Company, Inc. (“McLane”) filed suit against Keurig Green Mountain, Inc. (McLane Company, Inc. v. Keurig Green Mountain, Inc., No. 1:19-cv-00325) in the United States District Court Southern District of New York asserting claims and seeking relief substantially similar to the claims asserted and relief sought in the Multidistrist Antitrust Litigation.

KDP intends to vigorously defend all of the pending lawsuits. At this time, the Company is unable to predict the outcome of these lawsuits, the potential loss or range of loss, if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Proposition 65 Litigation

On May 9, 2011, an organization named Council for Education and Research on Toxics ("CERT") filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against Keurig. The lawsuit is Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182. CERT alleges that Keurig, in addition to nearly one hundred other defendants who manufacture, package, distribute, or sell coffee, failed to warn persons in California that Keurig's coffee products (the "Products") expose persons to the chemical acrylamide in violation of California's Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code section 25249.5, et seq. ("Proposition 65"). CERT seeks equitable relief, including providing warnings to consumers, as well as civil penalties in the amount of the statutory maximum of $2,500 per day per violation of Proposition 65. CERT asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65.

Keurig, as part of a joint defense group organized to defend against the lawsuit, disputes the claims of the Plaintiff. Acrylamide is not added to coffee, but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. Keurig has asserted multiple affirmative defenses. The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees beginning on October 15, 2018, however on October 12, 2018, the California Court of Appeal granted the defendants request for a stay of the third phase trial.

Potentially relevant to the lawsuit, on June 15, 2018, California’s Office of Environmental Health Hazard Assessment (“OEHHA”) proposed a new regulation clarifying that cancer warnings are not required for coffee under Proposition 65. Defendants anticipate that the proposed regulation, if finalized, could be effective as early as April 2019.

At this stage of the proceedings, prior to a trial on remedies issues, Keurig is unable to reasonably estimate the potential loss or effect on Keurig or its operations that could be associated with the lawsuit. The trial court has discretion to impose zero penalties against Keurig or to impose significant statutory penalties. Significant labeling or warning requirements that could potentially be imposed by the trial court may increase Keurig's costs and adversely affect sales of coffee products. We can provide no assurances as to the outcome of any litigation.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

The Company operates many manufacturing, bottling and distribution facilities. In these and other aspects of the Company's business, it is subject to a variety of federal, state and local environmental, health and safety laws and regulations. The Company maintains environmental, health and safety policies and a quality, environmental, health and safety program designed to ensure compliance with applicable laws and regulations. However, the nature of the Company's business exposes it to the risk of claims with respect to environmental, health and safety matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims.

The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as the Superfund law, as well as similar state laws, generally impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. The Company was notified by the Environmental Protection Agency that it is a potentially responsible party for study and cleanup costs at a Superfund site in New Jersey. Investigation and remediation costs are yet to be determined, therefore no reasonable estimate exists on which to base a loss accrual. The Company participates in a study for this site with other potentially responsible parties.

PRODUCT WARRANTIES

KDP offers a 1 year warranty on all Keurig brewing systems it sells. KDP provides for the estimated cost of product warranties, primarily using historical information and current repair or replacement costs, at the time product revenue is recognized. Product warranties are included in accrued expenses in the accompanying Consolidated Balance Sheets.



(in millions)	Accrued Product Warranties
Balance as of September 24, 2016	$	16
Accruals for warranties issued	14
Settlements	(20		)
Balance as of September 30, 2017	$	10
Accruals for warranties issued	7
Settlements	(4		)
Balance as of December 31, 2017	$	13
Accruals for warranties issued	10
Settlements	(15		)
Balance as of December 31, 2018	$	8

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Related Parties

IDENTIFICATION OF RELATED PARTIES

The Company is controlled by a single stockholder, JAB, a privately held investor group. JAB has ownership control over certain investments that create the following related party transaction types:

•

Coffee Transactions include transactions with Peet's Coffee ("Peet's"), Caribou Coffee ("Caribou"), Panera Bread ("Panera"), Einstein Bros Bagels ("Einstein Bros") and Krispy Kreme Doughnuts ("Krispy Kreme"). The Company manufactures portion packs containing a selection of coffee and tea varieties under Peet’s brands for sale in the U.S. and Canada. As part of this agreement, Peet’s issues purchase orders to the Company for portion packs to be supplied to Peet’s and sold in select channels. In turn, the Company places purchase orders for Peet’s raw materials to manufacture portion packs for sale by the Company in select channels. The Company licenses the Caribou and Krispy Kreme trademarks for use in the Keurig system in the Company owned channels.


•	Restaurant Transactions include transactions with Caribou, Panera, Einstein Bros and Krispy Kreme. The Company sells various beverage concentrates and packaged beverages to these companies.

The Company also has rights in certain territories to bottle and/or distribute various brands that the Company does not own. The Company holds investments in these brand ownership companies. Refer to Note 3 for additional information about the Company's investments in unconsolidated subsidiaries. The Company purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S. Additionally, any transactions with significant partners in these investments, such as ABI, are also included in this line. ABI purchases Clamato from the Company and pays the Company a royalty for use of the brand name.

RECEIPT AND PAYMENT TRANSACTIONS WITH RELATED PARTIES

As of December 31, 2018, there were $13 million of trade accounts receivables, net from related parties and none as of December 31, 2017, respectively, on the Company's Consolidated Balance Sheets, primarily related to product sales and royalty revenues. As of December 31, 2018 and 2017, there were $3 million and $2 million of accounts payables to related parties, respectively, on the Company's Consolidated Balance Sheets, primarily related to purchases of finished goods inventory for distribution. Receipts to and payments generated from these related parties for the Periods presented are as follows:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Receipts from related parties	$	214	$	12	$	59	$	36	$	15
Payments to related parties	150		10		31		32		18

LINE OF CREDIT WITH BEDFORD

The Company and ABI executed a line of credit agreement with Bedford on March 3, 2017, in conjunction with the creation of the Joint Venture ("Bedford Credit Agreement"), which was amended on December 7, 2018 to increase the line of credit. The Company has committed to provide up to $51 million capacity with a fixed interest rate of 8.1% per annum. The Bedford Credit Agreement matures on March 3, 2024. The Company has outstanding receivable balances on the Bedford Credit Agreement of $17 million and $6 million as of December 31, 2018 and 2017, respectively.

LIABILITY TO MONDELĒZ

In association with DPS’ separation from Mondelēz, the carrying amount of certain Canadian assets were stepped up for income tax purposes. DPS’ cash tax benefit due to the amortization of the stepped up assets are remitted to Mondelēz pursuant to the Tax Sharing and Indemnification Agreement. The final amount due to Mondelēz of $15 million is recorded in other current liabilities as of December 31, 2018, and is due in 2019.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Segments

Following the DPS Merger as described in Note 3, the Company revised its segment structure consisting of the following four reportable segments as of December 31, 2018 and for 2018, and recasted as of December 31, 2017 and for Transition 2017, Fiscal 2017, Successor 2016 and Predecessor 2016:


•	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 carbonated soft drink brands.


•	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 both the Direct Store Delivery system and the Warehouse Direct system.


•	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 coffee systems, pods and brewers.

Segment results are based on management reports. Net sales and income from operations are the significant financial measures used to assess the operating performance of the Company's operating segments. Intersegment sales are recorded at cost and are eliminated in the Consolidated Statements of Income. “Unallocated corporate costs” are excluded from the Company's measurement of segment performance and include unrealized commodity derivative gains and losses, and certain general corporate expenses.

Information about the Company's operations by reportable segment is as follows:



	Successor									Predecessor
(in millions)	2018			Transition 2017		Fiscal 2017		Successor 2016(1)		Predecessor 2016(1)
Net sales
Beverage Concentrates	$	669		$	—	$	—	$	—	$	—
Packaged Beverages	2,415			—		—		—		—
Latin America Beverages	244			—		—		—		—
Coffee Systems	4,114			1,170		4,269		2,293		2,025
Total net sales	$	7,442		$	1,170	$	4,269	$	2,293	$	2,025

Income from operations
Beverage Concentrates	$	430		$	—	$	—	$	—	$	—
Packaged Beverages	257			—		—		—		—
Latin America Beverages	29			—		—		—		—
Coffee Systems	1,163			261		1,087		393		147
Total income from operations - segments	1,879			261		1,087		393		147
Unallocated corporate costs	642			32		190		—		—
Income from operations	1,237			229		897		393		147
Interest expense	401			10		101		163		3
Interest expense - related party	51			25		100		60		—
Loss on early extinguishment of debt	13			5		85		5		6
Other (income) expense, net	(19		)	7		44		1		(1		)
Income before provision (benefit) for income taxes	$	791		$	182	$	567	$	164	$	139


(1)	As a result of the DPS Merger, the Company now reports on a segment level and unallocated corporate costs. The Company has reflected its results through Fiscal 2017; however, the Company has concluded it is impracticable to separately report the Coffee Systems segment from unallocated corporate costs for the Successor 2016 and Predecessor 2016 periods.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)



	December 31,
(in millions)	2018		2017
Identifiable operating assets
Beverage Concentrates	$	19,916	$	—
Packaged Beverages	10,791		—
Latin America Beverages	1,820		—
Coffee Systems	15,117		15,294
Segment total	47,644		15,294
Unallocated corporate assets	1,088		353
Total identifiable operating assets	48,732		15,647
Investments in unconsolidated subsidiaries	186		97
Total assets	$	48,918	$	15,744

GEOGRAPHIC DATA

The Company utilizes separate legal entities for transactions with customers outside of the United States. Information about the Company's operations by geographic region for the Periods below:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Net sales
U.S.	$	6,608	$	1,034	$	3,802	$	2,039	$	1,811
International	834		136		467		254		214
Net sales	$	7,442	$	1,170	$	4,269	$	2,293	$	2,025



	December 31,
(in millions)	2018		2017
Property, plant and equipment, net
U.S.	$	2,073	$	707
International	237		83
Total property, plant and equipment, net	$	2,310	$	790

MAJOR CUSTOMERS

Walmart and Costco represent two of the Company's major customers and accounted for more than 10% of total net sales for the Periods. The following table details the Net sales for Walmart and Costco for the Periods that they represent a major customer:



	Successor								Predecessor
(in millions)	2018		Transition 2017		Fiscal 2017		Successor 2016		Predecessor 2016
Net sales
Walmart Inc.	$	1,053	$	178	$	625	$	499	$	347
Costco Wholesale Corporation(1)	—		147		544		414		232

(1) Costco is not a major customer for 2018, as it did not account for 10% of total net sales.

Additionally, customers in the Company's Beverage Concentrates segment buy concentrate from the Company, which is used in finished goods sold by the Company's third party bottlers to Walmart. These indirect sales further increase the concentration of risk associated with the Company's consolidated net sales as it relates to Walmart.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Guarantor and Non-Guarantor Financial Information

The Notes are fully and unconditionally guaranteed by certain direct and indirect subsidiaries of the Company (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by the Company and jointly and severally guarantee, subject to the release provisions described below, the Company's obligations under the Notes. None of the Company's subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries of Maple prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of other indebtedness of the Company, the Company's exercise of its legal defeasance option with respect to the Notes and the discharge of the Company's obligations under the applicable indenture. The DPS Merger was accounted for under the acquisition method of accounting, using pushdown accounting for the purposes of presenting the following guarantor and non-guarantor financial information.

All Periods prior to the year ended December 31, 2018 are not presented herein, as amounts reported prior to the DPS Merger are that of Maple, and would therefore be entirely reported within the Non-Guarantors column. Refer to the Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets and Statements of Cash Flows for the amounts which would be presented as Non-Guarantors for these historical periods.

The following schedules present the financial information for Keurig Dr Pepper Inc. (the "Parent"), Guarantors and Non-Guarantors. The consolidating schedules are provided in accordance with the reporting requirements of Rule 3-10 under SEC Regulation S-X for guarantor subsidiaries.



	Condensed Consolidating Statements of Income
	For the Year Ended December 31, 2018
(in millions)	Parent			Guarantors			Non-Guarantors		Eliminations			Total
Net sales	$	—		$	3,053		$	4,449	$	(60	)	$	7,442
Cost of sales	—			1,367			2,253		(60		)	3,560
Gross profit	—			1,686			2,196		—			3,882
Selling, general and administrative expenses	(5		)	1,200			1,440		—			2,635
Other operating (income) expense, net	(6		)	1			15		—			10
Income from operations	11			485			741		—			1,237
Interest expense	439			63			128		(229		)	401
Interest expense - related party	—			—			51		—			51
Loss on early extinguishment of debt	—			—			13		—			13
Other (income) expense, net	(86		)	(166		)	4		229			(19		)
Income before provision (benefit) for income taxes	(342		)	588			545		—			791
Provision (benefit) for income taxes	(45		)	112			135		—			202
Income before equity in earnings of consolidated subsidiaries	(297		)	476			410		—			589
Equity in earnings of consolidated subsidiaries	883			19			—		(902		)	—
Net income	586			495			410		(902		)	589
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—			—			3		—			3
Net income attributable to KDP	$	586		$	495		$	407	$	(902	)	$	586

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)



	Condensed Consolidating Statements of Comprehensive Income
	For the Year Ended December 31, 2018
(in millions)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net income	$	586		$	495		$	410		$	(902	)	$	589
Other comprehensive income (loss), net of tax:
Other comprehensive income impact from consolidated subsidiaries	(229		)	(153		)	—			382			—
Foreign currency translation adjustments	—			—			(225		)	—			(225		)
Net change in pension and post-retirement liability, net of tax of $1	—			(4		)	—			—			(4		)
Other comprehensive income (loss), net of tax	(229		)	(157		)	(225		)	382			(229		)
Total comprehensive income (loss)	357			338			185			(520		)	360
Less: comprehensive income (loss) attributable to non-controlling interest	—			—			3			—			3
Comprehensive income (loss) attributable to KDP	$	357		$	338		$	182		$	(520	)	$	357

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)



	Condensed Consolidating Balance Sheets
	As of December 31, 2018
(in millions)	Parent		Guarantors		Non-Guarantors		Eliminations			Total
Current assets:
Cash and cash equivalents	$	—	$	18	$	65	$	—		$	83
Restricted cash and restricted cash equivalents	42		3		1		—			46
Trade accounts receivable, net	—		596		554		—			1,150
Related party receivable	189		71		76		(336		)	—
Inventories	—		226		400		—			626
Prepaid expenses and other current assets	569		110		132		(557		)	254
Total current assets	800		1,024		1,228		(893		)	2,159
Property, plant and equipment, net	—		1,351		959		—			2,310
Investments in consolidated subsidiaries	40,119		4,882		—		(45,001		)	—
Investments in unconsolidated subsidiaries	—		63		123		—			186
Goodwill	50		8,371		11,590		—			20,011
Other intangible assets, net	—		16,583		7,384		—			23,967
Long-term receivable, related parties	5,503		7,827		—		(13,330		)	—
Other non-current assets	64		41		154		—			259
Deferred tax assets	—		—		26		—			26
Total assets	$	46,536	$	40,142	$	21,464	$	(59,224	)	$	48,918

Current liabilities:
Accounts payable	$	—	$	497	$	1,803	$	—		$	2,300
Accrued expenses	78		610		324		—			1,012
Structured payable	—		47		479		—			526
Related party payable	65		106		165		(336		)	—
Short-term borrowings and current portion of long-term obligations	1,458		—		—		—			1,458
Current portion of capital lease and financing obligations	—		18		8		—			26
Other current liabilities	278		608		51		(557		)	380
Total current liabilities	1,879		1,886		2,830		(893		)	5,702
Long-term obligations to third parties	14,201		—		—		—			14,201
Long-term obligations to related parties	7,827		3,369		2,134		(13,330		)	—
Capital lease and financing obligations, less current	—		206		99		—			305
Deferred tax liabilities	46		4,075		1,802		—			5,923
Other non-current liabilities	50		131		73		—			254
Total liabilities	24,003		9,667		6,938		(14,223		)	26,385
Total stockholders' equity	22,533		30,475		14,526		(45,001		)	22,533
Total liabilities and stockholders' equity	$	46,536	$	40,142	$	21,464	$	(59,224	)	$	48,918

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)



	Condensed Consolidating Statements of Cash Flows
	For the Year Ended December 31, 2018
(in millions)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Operating activities:
Net cash (used in) provided by operating activities	$	(181	)	$	938		$	911		$	(55	)	$	1,613
Investing activities:
Acquisitions of businesses	(19,114		)	—			—			—			(19,114		)
Cash acquired in acquisitions	—			125			44			—			169
Issuance of related party note receivable	(2,260		)	(1,045		)	(11		)	3,305			(11		)
Investments in unconsolidated subsidiaries	—			(1		)	(38		)	—			(39		)
Proceeds from capital distributions from investments in unconsolidated and consolidated subsidiaries	—			35			(24		)	24			35
Purchases of property, plant and equipment	—			(62		)	(118		)	—			(180		)
Other, net	6			2			1			—			9
Net cash provided by (used in) investing activities	$	(21,368	)	$	(946	)	$	(146	)	$	3,329		$	(19,131	)
Financing activities:
Proceeds from related party long-term debt	1,045			—			2,260			(3,305		)	—
Proceeds from issuance of common stock private placement	—			—			9,000			—			9,000
Intercompany contributions	17,162			—			(17,116		)	(46		)	—
Proceeds from unsecured credit facility	1,900			—			—			—			1,900
Proceeds from senior unsecured notes	—			—			8,000			—			8,000
Proceeds from term loan	2,700			—			—			—			2,700
Net Issuance of Commercial Paper	1,080			—			—			—			1,080
Proceeds from structured payables	—			48			478			—			526
Repayment of unsecured credit facility	(1,900		)	—			—			—			(1,900		)
Repayment of term loan	(118		)	—			(3,329		)	—			(3,447		)
Payments on capital leases	—			(9		)	(8		)	—			(17		)
Deferred financing charges paid	(55		)	—			(46		)	46			(55		)
Proceeds from stock options exercised	3			—			—			—			3
Cash contributions from redeemable NCI shareholders	—			—			18			—			18
Cash dividends paid	(208		)	—			(55		)	31			(232		)
Other, net	(1		)	—			2			—			1
Net cash provided by (used in) financing activities	$	21,608		$	39		$	(796	)	$	(3,274	)	$	17,577
Cash and cash equivalents — net change from:
Operating, investing and financing activities	59			31			(31		)	—			59
Effect of exchange rate changes on cash and cash equivalents	(17		)	—			2			—			(15		)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	—			—			95			—			95
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	42		$	31		$	66		$	—		$	139

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Unaudited Quarterly Financial Information

Through the integration process following the DPS Merger, the Company has enhanced the reclassifications made within the historical 2017 and 2018 quarterly financial statements which were previously presented on the Company's Periodic Report on Form 8-K filed on November 6, 2018, and the Company's Quarterly Report on Form 10-Q filed on November 8, 2018. The adjusted reclassified quarterly financial information is set forth below.

The following table presents unaudited quarterly financial information for the calendar year 2018:



	Three Months Ended
(unaudited, in millions)	March 31, 2018			June 30, 2018			September 30, 2018			December 31, 2018
Net sales	$	948		$	949		$	2,732		$	2,813
Cost of sales	467			458			1,367			1,268
Gross profit	481			491			1,365			1,545
Selling, general and administrative expenses	300			321			1,028			986
Other operating (income) expense, net	3			3			(8		)	12
Income from operations	178			167			345			547
Interest expense(1)	(2		)	51			172			180
Interest expense - related party	25			26			—			—
Loss on early extinguishment of debt	2			—			11			—
Other (income) expense, net	13			(8		)	(33		)	9
Income before provision for income taxes	140			98			195			358
Provision for income taxes	51			13			46			92
Net income	89			85			149			266
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	1			2			—			—
Net income attributable to KDP	$	88		$	83		$	149		$	266

Earnings per common share:
Basic	$	0.11		$	0.10		$	0.11		$	0.19
Diluted	0.11			0.10			0.11			0.19


(1)	Interest expense includes the mark-to-market impact of interest rate swaps. Refer to Note 9 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The following table presents unaudited quarterly financial information for the calendar year 2017:



	Three Months Ended
(unaudited, in millions)	March 31, 2017			June 24, 2017		September 30, 2017			December 31, 2017
Net sales	$	968		$	948	$	1,140		$	1,170
Cost of sales	479			499		580			643
Gross profit	489			449		560			527
Selling, general and administrative expenses	266			276		323			298
Other operating (income) expense, net	1			—		(1		)	—
Income from operations	222			173		238			229
Interest expense(1)	(11		)	59		28			10
Interest expense - related party	25			25		25			25
Loss on early extinguishment of debt	52			—		2			5
Other (income) expense, net	68			—		20			7
Income before provision (benefit) for income taxes	88			89		163			182
Provision (benefit) for income taxes	28			28		46			(437		)
Net income	60			61		117			619
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	1			1		1			7
Net income attributable to KDP	$	59		$	60	$	116		$	612

Earnings per common share:
Basic	$	0.07		$	0.08	$	0.15		$	0.77
Diluted	0.07			0.07		0.14			0.77


(1)	Interest expense includes the mark-to-market impact of interest rate swaps. Refer to Note 9 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The following table presents unaudited transition period comparative information for the three months ended December 24, 2016:



	Three Months Ended December 24, 2016
(unaudited, in millions)
Net sales	$	1,213
Cost of sales	667
Gross profit	546
Selling, general and administrative expenses	282
Other operating (income) expense, net	—
Income from operations	264
Interest expense	25
Interest expense - related party	25
Loss on early extinguishment of debt	31
Other (income) expense, net	(44		)
Income before provision for income taxes	227
Provision for income taxes	82
Net income	145
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	2
Net income attributable to KDP	$	143

Earnings per common share:
Basic	$	0.18
Diluted	0.18

Subsequent Events

On January 15, 2019, the Company repaid the 2019 Notes at maturity, using Commercial Paper.

During January 2019, the Company borrowed $583 million of Commercial Paper to prepay a portion of its outstanding obligations under the KDP Term Loan, all of which was a voluntary prepayment. As a result of these voluntary prepayments, the Company recorded approximately $5 million of loss on early extinguishment during the first quarter of 2019.

On February 8, 2019, the Company terminated its KDP Term Loan and entered into a new term loan agreement among the Company, the lenders party thereto (the "New Term Lenders"), the other financial institutions party thereto and JP Morgan, as administrative agent (the "2019 Term Loan Agreement"), pursuant to which the New Term Lenders have committed to provide $2 billion of the new term loan for the purposes of refinancing the KDP Term Loan in order to achieve a more favorable interest rate. As a result of the extinguishment of the KDP Term Loan, the Company recorded approximately $3 million of loss on early extinguishment during the first quarter of 2019.

The interest rate applicable to the 2019 Term Loan Agreement ranges from a rate equal to LIBOR plus a margin of 0.75% to 1.25% or a base rate plus a margin of 0.00% to 0.25%, depending on the rating of certain indexed debt of KDP. Under the 2019 Term Loan Agreement, KDP must repay the unpaid principal amount quarterly commencing on March 29, 2019 in an amount equal to 1.25% of the aggregate principal amount made on the effective date of the new term loan. The 2019 Term Loan Agreement matures on February 8, 2023.

On February 15, 2019, the Company entered into a lease agreement for a new office building in Frisco, Texas, that will serve as its Texas headquarters replacing the Plano, Texas facility. The leased building will contain approximately 350,000 rentable square feet and will undergo an approximate two year building project. Following the building project, the scheduled lease term is 16 years and includes a Company option to renew for an additional 10 years.

On February 28, 2019, the Company borrowed $150 million of Commercial Paper to prepay a portion of its outstanding obligations under the 2019 Term Loan Agreement, all of which was a voluntary prepayment. As a result, the Company recorded approximately $1 million of loss on early extinguishment during the first quarter of 2019.

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