Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

		Page Number
Reports of Independent Registered Accounting Firm		50
Consolidated Statements of Income		53
Consolidated Statements of Comprehensive Income		54
Consolidated Balance Sheets		55
Consolidated Statements of Cash Flows		56
Consolidated Statements of Changes in Stockholders' Equity		58
Notes to Audited Consolidated Financial Statements		59
1. Business and Basis of Presentation		59
2. Significant Accounting Policies		60
3. Acquisitions and Investments in Unconsolidated Subsidiaries		69
4. Leases		74
5. Goodwill and Other Intangible Assets		76
6. Integration and Restructuring Costs		77
7. Income Taxes		79
8. Employee Benefit Plans		81
9. Long-Term Obligations and Borrowing Arrangements		87
10. Derivatives		90
11. Earnings per Share		93
12. Stock-Based Compensation		93
13. Accumulated Other Comprehensive (Loss) Income		95
14. Property, Plant and Equipment		95
15. Other Financial Information		96
16. Non-controlling Interest		97
17. Commitments and Contingencies		98
18. Related Parties		100
19. Segments		101
20. Revenue Recognition		103
21. Guarantor and Non-Guarantor Financial Information		103
22. Unaudited Quarterly Financial Information		111
23. Subsequent Events		112

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, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, the three months ended December 31, 2017, and the fiscal year ended September 30, 2017, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, the three months ended December 31, 2017, and the fiscal year ended September 30, 2017, 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, 2019, 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 27, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, effective January 1, 2019, the Company adopted the Financial Accounting Standards Board’s new standard related to leases using the modified retrospective approach.

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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Indefinite-Lived Intangible Assets Valuation - Refer to Notes 2, 3 and 5 to the financial statements.

Critical Audit Matter Description

As discussed in Note 3, the Company completed the Keurig Dr Pepper (KDP) merger of Maple and Dr Pepper Snapple Group, Inc. (DPS) on July 9, 2018. The purchase price ($22,482 million) was allocated to the assets acquired and liabilities assumed of DPS based on their respective fair values, including indefinite-lived brand intangible assets of $19,556 million. We identified the Company’s impairment evaluations for DPS indefinite-lived brand intangible assets as a critical audit matter because of the recent acquisition and valuation of these assets. The Company’s impairment consideration of indefinite-lived brand intangible assets involves the comparison of the asset’s fair value to its carrying value. The fair value determination of these assets requires management to make significant estimates and assumptions related to revenue growth projections, discount rates, and operating margins. Each of these assumptions is sensitive to future market or industry conditions, as well as company-specific conditions. A high degree of auditor judgment and an increased extent of effort were required to perform audit procedures that evaluated the reasonableness of management’s estimates and assumptions.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the underlying business and valuation assumptions for indefinite-lived brand intangible assets included the following, among others:

•	We tested the effectiveness of controls over the Company’s indefinite-lived brand intangible asset impairment review process. This included controls over management’s review of the revenue growth rates, operating margins, and discount rates used in the valuation models.

•	We performed risk assessment procedures for indefinite-lived brand intangible assets, and for brands with a higher risk of impairment and certain other brands, we evaluated the reasonableness of management’s ability to forecast revenue growth and operating margins by comparing the forecasts to:

◦	Historical revenue and operating margins for each indefinite-lived brand intangible asset.

◦	Underlying analysis of business strategies and growth plans.

◦	Internal communication to senior management and the Board of Directors.

◦	Forecasted information included in the Company’s original deal model.

◦	Forecasted information included in the Company’s press releases, as well as in analyst and industry reports for the Company and its peer companies.

•	With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology, and the reasonableness of the discount rates used by the Company in their model by developing a range of independent estimates for the discount rates and comparing them to the discount rates selected by management.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 27, 2020

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, 2019, 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, 2019, 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, 2019 of the Company and our report dated February 27, 2020 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of the Financial Accounting Standards Board’s new standard related to leases.

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 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 27, 2020

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,								Three Months Ended December 31,				Fiscal Year Ended September 30,
(in millions, except per share data)	2019				2018				2017				2017
Net sales	$	11,120			$	7,442			$	1,170			$	4,269
Cost of sales	4,778				3,560				643				2,225
Gross profit	6,342				3,882				527				2,044
Selling, general and administrative expenses	3,962				2,635				298				1,147
Other operating expense (income), net	2				10				—				—
Income from operations	2,378				1,237				229				897
Interest expense	654				401				10				101
Interest expense - related party	—				51				25				100
Loss on early extinguishment of debt	11				13				5				85
Other expense (income), net	19				(19		)		7				44
Income before provision (benefit) for income taxes	1,694				791				182				567
Provision (benefit) for income taxes	440				202				(437		)		184
Net income	1,254				589				619				383
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—				3				7				5
Net income attributable to KDP	$	1,254			$	586			$	612			$	378
Earnings per common share:
Basic	$	0.89			$	0.54			$	0.77			$	0.48
Diluted	0.88				0.53				0.77				0.47
Weighted average common shares outstanding:
Basic	1,406.7				1,086.3				790.5				790.5
Diluted	1,419.1				1,097.6				790.5				790.5

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

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Year Ended December 31,								Three Months Ended December 31,				Fiscal Year Ended September 30,
(in millions)	2019				2018				2017				2017
Net income	$	1,254			$	589			$	619			$	383
Other comprehensive income
Foreign currency translation adjustments	230				(225		)		(7		)		81
Net change in pension and post-retirement liability, net of tax of $1, $(1), $0 and $0, respectively	4				(4		)		—				—
Total other comprehensive income (loss)	234				(229		)		(7		)		81
Comprehensive income	1,488				360				612				464
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	$	1,488			$	357			$	605			$	458

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)	2019				2018
Assets
Current assets:
Cash and cash equivalents	$	75			$	83
Restricted cash and restricted cash equivalents	26				46
Trade accounts receivable, net	1,115				1,150
Inventories	654				626
Prepaid expenses and other current assets	403				254
Total current assets	2,273				2,159
Property, plant and equipment, net	2,028				2,310
Investments in unconsolidated affiliates	151				186
Goodwill	20,172				20,011
Other intangible assets, net	24,117				23,967
Other non-current assets	748				259
Deferred tax assets	29				26
Total assets	$	49,518			$	48,918
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	3,176			$	2,300
Accrued expenses	939				1,012
Structured payables	321				526
Short-term borrowings and current portion of long-term obligations	1,593				1,458
Other current liabilities	445				406
Total current liabilities	6,474				5,702
Long-term obligations	12,827				14,201
Deferred tax liabilities	6,030				5,923
Other non-current liabilities	930				559
Total liabilities	26,261				26,385
Commitments and contingencies
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 shares authorized, 1,406,852,305 and 1,405,944,922 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively	14				14
Additional paid-in capital	21,557				21,471
Retained earnings	1,582				1,178
Accumulated other comprehensive income (loss)	104				(130		)
Total stockholders' equity	23,257				22,533
Total liabilities and stockholders' equity	$	49,518			$	48,918

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

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,								Three Months Ended December 31,				Fiscal Year Ended September 30,
(in millions)	2019				2018				2017				2017
Operating activities:
Net income	$	1,254			$	589			$	619			$	383
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	358				233				33				142
Amortization of intangibles	126				121				29				96
Other amortization expense	214				108				4				18
Provision for sales returns	43				54				19				65
Deferred income taxes	(23		)		(81		)		(484		)		16
Employee stock based compensation expense	64				35				15				58
Loss on early extinguishment of debt	11				13				5				85
Gain on step acquisition of unconsolidated subsidiaries	—				(18		)		—				—
Unrealized (gain) or loss on foreign currency	(24		)		28				4				(41		)
Unrealized (gain) or loss on derivatives	36				49				(19		)		4
Equity in losses of unconsolidated affiliates	51				17				4				9
Other, net	(2		)		8				9				18
Changes in assets and liabilities, net of effects of acquisition:
Trade accounts receivable	(7		)		82				(55		)		(54		)
Inventories	(24		)		185				89				108
Income taxes receivable, prepaid and payables, net	36				71				20				(16		)
Other current and non current assets	(324		)		(49		)		(5		)		(9		)
Accounts payable and accrued expenses	583				206				98				861
Other current and non current liabilities	102				(38		)		—				6
Net change in operating assets and liabilities	366				457				147				896
Net cash provided by operating activities	2,474				1,613				385				1,749
Investing activities:
Acquisitions of businesses	(8		)		(19,114		)		—				—
Cash acquired in acquisitions	—				169				—				—
Issuance of related party note receivable	(32		)		(11		)		—				(6		)
Investments in unconsolidated affiliates	(16		)		(39		)		—				250
Proceeds from capital distributions from investments in unconsolidated affiliates	—				35				—				—
Purchases of property, plant and equipment	(330		)		(180		)		(11		)		(66		)
Proceeds from sales of property, plant and equipment	247				3				—				2
Purchases of intangibles	(35		)		—				—				—
Other, net	24				6				(7		)		—
Net cash (used in) provided by investing activities	$	(150	)		$	(19,131	)		$	(18	)		$	180

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

	Year Ended December 31,								Three Months Ended December 31,				Fiscal Year Ended September 30,
(in millions)	2019				2018				2017				2017
Financing activities:
Proceeds from issuance of common stock	$	—			$	9,000			$	—			$	—
Proceeds from unsecured credit facility	—				1,900				—				100
Proceeds from senior unsecured notes	—				8,000				—				—
Proceeds from term loan	2,000				2,700				—				1,200
Net issuance of commercial paper notes	167				1,080				—				—
Proceeds from structured payables	330				526				—				—
Payments on structured payables	(531		)		—				—				—
Repayment of senior unsecured notes	(250		)		—				—				—
Repayment of unsecured credit facility	—				(1,900		)		(100		)		—
Repayment of term loan	(3,203		)		(3,447		)		(505		)		(3,168		)
Payments on finance leases	(38		)		(17		)		(4		)		(15		)
Deferred financing charges paid	—				(55		)		—				(5		)
Cash contributions from redeemable NCI shareholders	—				18				—				4
Cash dividends paid	(844		)		(232		)		(11		)		(55		)
Cross currency swap	—				—				—				(87		)
Other, net	5				4				—				—
Net cash (used in) provided by financing activities	(2,364		)		17,577				(620		)		(2,026		)
Net change from:
Operating, investing and financing activities	(40		)		59				(253		)		(97		)
Effect of exchange rate changes	12				(15		)		(1		)		8
Beginning of period	139				95				349				438
End of period	$	111			$	139			$	95			$	349
Non-cash investing activities:
Issuance of common stock for acquisition of business	$	—			$	(441	)		$	—			$	—
Fair value of stock and replacement equity awards not converted to cash	—				(3,643		)		—				—
Measurement period adjustment of Core purchase price	(11		)		—				—				—
Capital expenditures included in accounts payable and accrued expenses	163				102				19				6
Holdback liability for acquisition of business	—				54				—				—
Purchases of intangibles	2				—				—				—
Non-cash financing activities:
Finance lease additions	69				40				—				—
Dividends declared but not yet paid	211				211				—				—
Capitalization of related party debt into additional paid-in-capital	—				(1,815		)		—				—
Supplemental cash flow disclosures:
Cash paid for interest	521				180				25				167
Cash paid for related party interest	—				51				25				125
Cash paid for income taxes	433				210				26				159

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

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

	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 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 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 DPS	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	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
Adoption of new accounting standards	—			—				—				(5		)		—				(5		)
Net income attributable to KDP	—			—				—				1,254				—				1,254
Other comprehensive income	—			—				—				—				234				234
Dividends declared, $0.60 per share	—			—				—				(845		)		—				(845		)
Measurement period adjustment for acquisition of Core	—			—				11				—				—				11
Shares issued under employee stock-based compensation plans and other	0.9			—				—				—				—				—
Stock-based compensation	—			—				75				—				—				75
Balance as of December 31, 2019	1,406.8			$	14			$	21,557			$	1,582			$	104			$	23,257

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

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1**.** Business and Basis of Presentation

NATURE OF OPERATIONS

Keurig Dr Pepper Inc. is a leading coffee and beverage company in North America with a diverse portfolio of flavored (non-cola) CSDs, specialty coffee, and NCBs, and is a leader in single serve coffee brewing systems in the U.S. and Canada.

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. Definitions of terms used in this Annual Report on Form 10-K are included within the Master Glossary.

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.

ORGANIZATION

On January 29, 2018, DPS entered into the DPS Merger Agreement by and among DPS, Maple, and Merger Sub. The DPS Merger was consummated on July 9, 2018, at which time DPS changed its name to "Keurig Dr Pepper Inc.". Refer to Note 3 for additional information.

BASIS OF PRESENTATION

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, 2019 and 2018 and for the years ended December 31, 2019 and 2018, Transition 2017 and Fiscal 2017 reflect the results of operations and financial position of Maple for the periods presented and includes the results of operations of DPS subsequent to the DPS Merger, which was completed on July 9, 2018.

The accompanying consolidated financial statements have been prepared in accordance with 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 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.

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. KDP eliminates from its financial results all intercompany transactions between entities included in the consolidated financial statements.

RECLASSIFICATIONS

In 2019, the Company made certain reclassifications in the prior period presentations of the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows to conform to the current year presentation.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Consolidated Balance Sheets

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

(in millions)		Prior Presentation		Revised Presentation		December 31, 2018
Capital lease and financing obligations		Current portion of capital lease and financing obligations		Other current liabilities		$	26
Capital lease and financing obligations		Capital lease and financing obligations, less current		Other non-current liabilities		305

Consolidated Statements of Cash Flows

The following table presents the reclassifications made to the Consolidated Statements of Cash Flows:

(in millions)		Prior Presentation		Revised Presentation		For the Year Ended December 31, 2018				Transition 2017				Fiscal 2017
Net cash provided by operating activities:
Amortization of intangibles		Amortization Expense		Amortization of intangibles		$	121			$	29			$	96
Other amortization expense		Amortization Expense		Other amortization expense		108				4				18
Equity in loss of unconsolidated affiliates		Other, net		Equity in loss of unconsolidated affiliates		17				4				9
Net cash provided by (used in) investing activities:
Proceeds from sales of property, plant and equipment		Other, net		Proceeds from sales of property, plant and equipment		3				—				2
Net cash provided by (used in) financing activities:
Proceeds from stock options exercised		Proceeds from stock options exercised		Other, net		3				—				—

2**.** 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 table at the end of the footnote, unless otherwise noted within the respective policy section.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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, 2019 and 2018 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, 2019 and 2018, 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 8, 9 and 10 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.

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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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

	For the Year Ended December 31,
(in millions)	2019				2018				Transition 2017				Fiscal 2017
Balance, beginning of the period	$	8			$	2			$	2			$	2
Charges to bad debt expense	2				5				—				—
Write-offs and adjustments	(1		)		1				—				—
Balance, end of the period	$	9			$	8			$	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. Walmart is a major customer as of December 31, 2019 and 2018 as described in Note 19, Segments. As of December 31, 2019 and 2018, Walmart accounted for approximately $152 million and $188 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. 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.

Refer to Note 15 for additional information.

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.

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		3	to	39 years
Machinery and equipment		2	to	21 years
Cold drink equipment		2	to	7 years
Computer software		2	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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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

The Company leases certain facilities and machinery and equipment, including fleet. These leases 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. Our lease agreements do not contain any material residual value guarantees or restrictive covenants, except for three manufacturing properties that contain a residual value guarantee at the end of the term.

Operating leases are included within other non-current assets, other current liabilities, and other non-current liabilities within our Consolidated Balance Sheets. Finance leases are included within Property, Plant and Equipment, Net, other current liabilities, and other non-current liabilities. Refer to Note 15 for further information. Leases with an initial term of 12 months or less are not recognized on the balance sheet.

Right of use assets and lease liabilities are recognized in the Consolidated Balance Sheets at the present value of future minimum lease payments over the lease term on the commencement date. When the rate implicit in the lease is not provided to the Company, KDP will use its incremental borrowing rate based on information available at the commencement date to determine the present value of future minimum lease payments. KDP's incremental borrowing rate is determined using a portfolio of secured borrowing rates commensurate with the term of the lease and is reassessed on a quarterly basis.

KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

Sale-and-leaseback transactions occur when the Company sells assets to a third-party and subsequently leases them back. The resulting leases that qualify for sale-and-leaseback accounting are evaluated and accounted for as an operating lease. A transaction that does not qualify for sale-and-leaseback accounting as a result of finance lease classification or the failure to meet certain revenue recognition criteria is accounted for as a financing transaction. For a financing transaction, the Company will retain the assets sold within property, plant and equipment and record a financing obligation equal to the amount of cash proceeds received. Rental payments under such transactions are recognized as a reduction of the financing obligation and as interest expense using an effective interest method.

Refer to Note 4 for additional information.

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 expense (income), 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 8 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 expense (income), net in the Consolidated Statements of Income. Any gains and losses resulting from the sale of these investments are recorded in Other expense (income), 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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:

Type of Asset		Useful Life
Acquired technology				20 years
Customer relationships		8	to	40 years
Trade names				10 years
Distribution rights		4	to	10 years
Brands				5 years
Contractual arrangements		10	to	12 years

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 on the first day of the fourth quarter, or more frequently if events or circumstances indicate the carrying amount may not be recoverable.

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. 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 (refer to Note 15). 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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 Medical Benefits

The Company has U.S. and foreign pension and 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, 2019, 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 expense (income), 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 8 for additional information regarding the Company's pension and PRMB plans.

Voluntary Prepayment of Term Loans

The Company has the ability to voluntarily prepay its senior unsecured term loan facilities in whole or in part with prior notice to JPMorgan. The prepayment of the senior unsecured term loan facilities 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 its senior unsecured term loan facilities, the Company has presented these voluntary prepayments as an early extinguishment of debt and expense the proportionate amount of unamortized deferred financing costs, as the loan has been partially settled. Refer to Note 9 for additional information regarding the Company's senior unsecured term loan facilities.

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 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, and are recorded in other current and other non-current liabilities in the Consolidated Balance Sheets.

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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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 7 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 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.

Derivative Instruments

KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and 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 10 for additional information.

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 CSDs, 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 20 for additional information.

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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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 17 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. Refer to Note 15 for additional information.

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 RSUs is determined based on the number of units granted and the grant date price of common stock. Forfeitures are recognized as incurred. Stock-based compensation expense is recognized ratably over the vesting period in the Consolidated Statements of Income. Refer to Note 12 for additional information .

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.

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.

Differences arising from the translation of opening balance sheets of these entities to the rate at the end of the financial year are recognized in 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 expense (income), net in the Consolidated Statements of Income.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Earnings per Share

Basic 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.

Financial Statement Information

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

			For the Year Ended December 31,
(in millions)	Financial Statement Caption		2019				2018				Transition 2017				Fiscal 2017
Property, Plant and Equipment, Net
Impairment loss	Other operating expense (income), net		$	24			$	—			$	—			$	—
Goodwill and Other Intangible Assets
Impairment loss	Other operating expense (income), net		—				—				—				—
Transportation and Warehousing Costs	SG&A Expenses		1,181				695				79				261
Advertising and Marketing Expense	SG&A Expenses		670				411				58				140
Research and Development Costs	SG&A Expenses		81				64				16				56

RECENTLY ISSUED ACCOUNTING STANDARDS

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. 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 this ASU 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. 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. The standard 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.

RECENTLY ADOPTED PROVISIONS OF U.S. GAAP

Leases

As of January 1, 2019, the Company adopted ASC 842. ASC 842 replaced 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.

The Company elected to apply the optional transition method provided by ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which allows companies to adopt the standard on a modified retrospective basis and to apply the new leases standard as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, amounts reported in the consolidated financial statements for all periods prior to January 1, 2019 have not been recast under ASC 842 and continue to be reported in accordance with ASC 840. The Company elected the package of practical expedients which allows the Company to carry forward its historical assessments of whether contracts contain leases, lease classification, and initial direct costs, for leases in existence prior to January 1, 2019.

The adoption of ASC 842 resulted in an increase to KDP's total assets of approximately $314 million, an increase to KDP's total liabilities of approximately $319 million, and an impact to KDP's retained earnings of approximately $5 million, as of January 1, 2019. Refer to Note 4 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Other Accounting Standards

As of January 1, 2019, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities on a prospective basis. 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. The adoption of ASU 2017-12 did not have a material impact on the Company's consolidated financial statements.

As of January 1, 2019, the Company early adopted 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. 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. The ASU was adopted on a prospective basis and did not have a material impact on the Company's consolidated financial statements.

3**.** Acquisitions and Investments in Unconsolidated Affiliates

2019 ACQUISITIONS

The Company spent an aggregate of $8 million in connection with immaterial acquisitions during the year ended December 31, 2019, which resulted in the recognition of fixed assets, intangible assets and goodwill. Pro forma financial information has not been presented for these acquisitions as the impact to our consolidated financial statements was not material.

2018 ACQUISITIONS

Acquisition of DPS

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 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.

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. Refer to Note 9 for additional information.

•	Proceeds of $2,700 million borrowed under the 2018 KDP Term Loan and proceeds of $1,900 million borrowed under the KDP Revolver. Refer to Note 9 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Allocation of Consideration Exchanged

The Company's 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 DPS Merger Date, and was finalized on July 9, 2019.

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

(in millions)	Initial Allocation of Consideration				Measurement Period Adjustments				Final Allocation of Consideration
Cash and cash equivalents	$	147			$	—			$	147
Investments in unconsolidated subsidiaries	90				—				90
Property, plant and equipment(1)	1,549				(74		)		1,475
Other intangible assets	20,404				(326		)		20,078
Long-term obligations	(4,049		)		—				(4,049		)
Capital lease and financing obligations	(214		)		9				(205		)
Acquired assets, net of assumed liabilities(2)	107				(26		)		81
Deferred tax liabilities, net of deferred tax assets(3)	(4,959		)		(82		)		(5,041		)
Goodwill	9,407				499				9,906
Total consideration exchanged	22,482				—				22,482
Fair value of stock and replacement equity awards not converted to cash	3,643				—				3,643
Acquisition of business	$	18,839			$	—			$	18,839

(1)

The Company 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 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 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 DPS Merger Date. The Company valued 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 for the third quarter of 2018 as the related inventory was sold during that period. Raw materials were carried at net book value.

(3)	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 DPS Merger resulted in $9,906 million of goodwill. The 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 allocation of consideration exchanged to other intangible assets acquired is as follows:

(in millions)	Fair Value				Estimated Life (in years)
Brands(1)	$	19,556			n/a
Contractual arrangements(2)	127				n/a
Customer relationships(3)	390				10-40
Favorable leases(4)	5				5-12
Total other intangible assets	$	20,078

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

(2)	The Company 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 valued retail and food service customer relationships utilizing the distributor method, a form of the income approach.

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

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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	1,099				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 DPS Merger Date that were 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 the Big Red Acquisition Agreement to acquire Big Red for a cash purchase price of $300 million, subject to certain adjustments. Big Red is a brand owner with a portfolio of CSDs and NCBs.

On August 31, 2018, 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 valued at $16 million during the DPS Merger purchase price allocation, was remeasured to fair value of $22 million. The gain of $6 million was recorded in Other operating expense (income), net during 2018.

Allocation of Consideration Exchanged

The Company's 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 August 31, 2018 and was finalized on August 31, 2019.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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

(in millions)	Initial Allocation of Consideration				Measurement Period Adjustments				Final Allocation of Consideration
Cash and cash equivalents	$	3			—				$	3
Other intangible assets	240				(2		)		238
Assumed liabilities, net of acquired assets(1)	(28		)		(20		)		(48		)
Goodwill	89				24				113
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 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 resulted in $113 million of goodwill. The goodwill 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 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)		11				5
Contractual arrangements(2)		6				12
Customer relationships(3)		1				8-40
Total other intangible assets		$	238

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

(2)	The Company 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 industrial, both of which were valued 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.

Acquisition of Core Nutrition, LLC

Overview and Purchase Price

On September 27, 2018, KDP entered into the Core Acquisition Agreement with 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 stock of KDP, subject to certain adjustments paid in cash. Core is a brand owner with a portfolio of NCBs in the water category.

On November 30, 2018, 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 expense (income), net during 2018.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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 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 November 30, 2018, and was finalized on November 30, 2019.

The following is a summary of the allocation of purchase price to the estimated fair values of assets acquired and liabilities assumed in the Core Acquisition:

(in millions)	Initial Allocation of Consideration				Measurement Period Adjustments				Final Allocation of Consideration
Cash and cash equivalents	$	10			$	—			$	10
Other intangible assets	273				(114		)		159
Assumed liabilities, net of acquired assets(1)	(12		)		(5		)		(17		)
Goodwill	236				126				362
Total purchase price	$	507			$	7			$	514
Company's previous ownership interest	31				—				31
Less: Holdback placed in Escrow	27				(4		)		23
Acquisition of business	$	449			$	11			$	460

(1)	The Company valued WIP and finished goods inventory using a net realizable value approach resulting in a step-up of $4 million, of which $1 million and $3 million was recognized in cost of goods sold in 2018 and 2019, respectively, due to the timing of the sale of the related inventory. Raw materials were carried at net book value.

The Core Acquisition resulted in $362 million of goodwill. The goodwill 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 allocation of consideration exchanged to other intangible assets acquired is as follows:

(in millions)		Fair Value				Estimated Life (in years)
Brands(1)		$	142			n/a
Contractual arrangements(2)		17				10
Total other intangible assets		$	159

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

(2)	The Company 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.

TRANSACTION EXPENSES

The following table provides information about the Company's transaction expenses associated with business combinations (completed or abandoned) incurred during the Periods:

		For the Year Ended December 31,
(in millions)		2019				2018				Transition 2017				Fiscal 2017
DPS Merger		$	8			$	158			$	—			$	—
Other transaction expenses		17				4				—				—
Total transaction expenses incurred		$	25			$	162			$	—			$	—

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The following table summarizes the Company's investments in unconsolidated affiliates:

					December 31,
(in millions)		Ownership Interest			2019				2018
BodyArmor		12.5	%		$	52			$	62
Bedford		30.0	%		46				79
Dyla LLC		12.4	%		13				15
Force Holdings LLC		33.3	%		5				6
Beverage startup companies		(various)			30				19
Other		(various)			5				5
Investments in unconsolidated affiliates					$	151			$	186

4**.** Leases

The following table presents the components of lease cost:

(in millions)	For the Year Ended December 31, 2019
Operating lease cost	$	82
Finance lease cost
Amortization of right-of-use assets	48
Interest on lease liabilities	15
Variable lease cost(1)	28
Short-term lease cost	5
Sublease income	(3		)
Total lease cost	$	175

(1)	Variable lease cost primarily consists of common area maintenance costs, property taxes, and adjustments for inflation.

The following table presents supplemental cash flow information about the Company's leases:

(in millions)	For the Year Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	77
Operating cash flows from finance leases	15
Financing cash flows from finance leases	38

The following table presents information about the Company's weighted average discount rate and remaining lease term as of December 31, 2019:

Weighted average discount rate
Operating leases	4.6	%
Finance leases	5.1	%
Weighted average remaining lease term
Operating leases	10 years
Finance leases	12 years

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS

Future minimum lease payments under non-cancellable leases as of December 31, 2019 were as follows:

(in millions)	Operating Leases				Finance Leases
2020	$	77			$	55
2021	74				46
2022	63				41
2023	55				37
2024	52				34
Thereafter	306				192
Total future minimum lease payments	627				405
Less: imputed interest	(131		)		(95		)
Present value of minimum lease payments	$	496			$	310

Future minimum lease payments under non-cancellable leases as of December 31, 2018 under ASC 840 were 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

SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED

As of December 31, 2019, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $730 million. These leases will commence between the first quarter of 2020 and second quarter of 2021, with initial lease terms ranging from 7 years to 20 years.

ASSET SALE-LEASEBACK TRANSACTIONS

On December 23, 2019, the Company closed an asset sale-leaseback transaction for three manufacturing properties as the buyer obtained control. The Company received proceeds of approximately $170 million, net of selling costs for the properties, which had a carrying value of $140 million, and resulted in an approximately $30 million gain on the sale transaction, which was recorded in Other operating expense (income), net. The leaseback is accounted for as an operating lease. The initial term of the leaseback is expected to end during 2035 and has two 10-year renewal options. The renewal options are not reasonably assured as (i) the Company's position that the dynamic environment in which it operates precludes the Company's ability to be reasonably certain of exercising the renewal options in the distant future and (ii) the options are contingent on the Company remaining investment grade and no change-in-control as of the end of the lease term. The leaseback has a residual value guarantee; however, the Company concluded it was not probable that the Company will owe an amount at the end of the lease term and recorded the lease obligation excluding the residual value guarantee.

On December 20, 2019, the Company closed the asset sale-leaseback transaction on the Company's Plano headquarters as the buyer obtained control. The leaseback is accounted for as an operating lease. During the year ended December 31, 2019, the Company transferred the assets from plant, property and equipment to assets held for sale and recognized an impairment of approximately $5 million as a result. The Company received proceeds of approximately $49 million, net of selling costs for the properties, and recognized no additional gain or loss on the sale transaction. The term of the leaseback is expected to end in 2021 upon the Company's relocation to a new facility.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

On December 13, 2019, the Company closed the asset sale-leaseback transaction on certain properties in Waterbury, Vermont as the buyer obtained control. The leaseback is accounted for as an operating lease. During the year ended December 31, 2019, the Company transferred the assets from plant, property and equipment to assets held for sale and recognized an impairment of approximately $12 million as a result. The Company received proceeds of approximately $8 million, net of selling costs for the properties, and recognized no gain or loss on the sale transaction. The term of the leaseback is expected to end in 2020 upon the Company's relocation to a new facility.

5**.** Goodwill and Other Intangible Assets

GOODWILL

Changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2019 and 2018 are as follows:

	Coffee Systems				Packaged Beverages				Beverage Concentrates				Latin America Beverages				Corporate Unallocated				Total
Balance as of December 31, 2017	$	9,819			$	—			$	—			$	—			$	—			$	9,819
Foreign currency translation	(94		)		(26		)		(13		)		(18		)		—				(151		)
Acquisitions(1)	—				4,904				4,278				636				525				10,343
Balance as of December 31, 2018	9,725				4,878				4,265				618				525				20,011
Foreign currency translation	47				32				19				25				—				123
Acquisitions(1)	3				391				242				(73		)		(525		)		38
Balance as of December 31, 2019	$	9,775			$	5,301			$	4,526			$	570			$	—			$	20,172

(1)	Amounts primarily represent the goodwill and measurement period adjustments 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, 2019				December 31, 2018
Brands(1)		$	19,948			$	19,712
Trade names		2,479				2,479
Contractual arrangements		122				119
Distribution rights		16				—
Total		$	22,565			$	22,310

(1)	Approximately $147 million of the increase in brands with indefinite lives was due to foreign currency translation during the period. The remaining change represents measurement period adjustments for the DPS Merger and the Core Acquisition. Refer to Note 3 for additional information.

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, 2019												December 31, 2018
(in millions)	Gross Amount				Accumulated Amortization				Net Amount				Gross Amount				Accumulated Amortization				Net Amount
Acquired technology	$	1,146			$	(255	)		$	891			$	1,146			$	(182	)		$	964
Customer relationships	638				(102		)		536				629				(67		)		562
Trade names	128				(55		)		73				127				(40		)		87
Contractual arrangements	24				(3		)		21				26				(1		)		25
Brands	10				(2		)		8				9				—				9
Distribution rights	24				(1		)		23				—				—				—
Favorable leases(1)	—				—				—				13				(3		)		10
Total	$	1,970			$	(418	)		$	1,552			$	1,950			$	(293	)		$	1,657

(1)	Amounts recorded as favorable lease intangible assets were reclassified to operating lease right-of-use assets in connection with the adoption of ASC 842 as of January 1, 2019. Refer to Notes 2 and 4 for additional information regarding the adoption of ASC 842.

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

	For the Year Ended December 31,
(in millions)	2019				2018				Transition 2017				Fiscal 2017
Amortization expense for intangible assets with definite lives	$	126			$	121			$	29			$	96

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

	For the Years Ending December 31,
(in millions)	2020				2021				2022				2023				2024
Expected amortization expense for intangible assets with definite lives	$	126			$	126			$	126			$	126			$	121

6**.** Restructuring and Integration Costs

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

	For the Year Ended December 31,
(in millions)	2019				2018				Transition 2017				Fiscal 2017
Castroville closure	$	—			$	—			$	—			$	22
Business realignment	—				2				—				12
Keurig K2.0 exit	1				12				6				10
Integration program	232				155				—				—
Other restructuring programs	—				1				—				—
Total restructuring and integration charges	$	233			$	170			$	6			$	44

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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. Restructuring liabilities as of December 31, 2019 and 2018, along with charges to expense, cash payments, and non-cash charges during the periods presented, were as follows:

(in millions)	Workforce Reduction Costs				Other**(1)**				Total
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
Charges to expense	31				—				31
Cash payments	(44		)		—				(44		)
Non-cash adjustment items	—				(1		)		(1		)
Balance as of December 31, 2019	$	15			$	—			$	15

(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 a 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 $387 million, primarily related to professional fees and costs associated with severance and employee terminations through December 31, 2019.

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, 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 Fiscal 2017. The Company does not expect to incur any additional restructuring charges related to this program, as it was completed prior to September 30, 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 fiscal 2017. The Company does not expect to incur any additional restructuring charges related to this program as it was completed prior to September 30, 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 as it was completed in 2018.

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 $29 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, 2019.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

7**.** Income Taxes

Income before provision for income taxes was as follows:

	For the Year Ended December 31,
(in millions)	2019				2018				Transition 2017				Fiscal 2017
U.S.	$	1,389			$	635			$	110			$	392
International	305				156				72				175
Total	$	1,694			$	791			$	182			$	567

The provision for income taxes has the following components:

	For the Year Ended December 31,
(in millions)	2019				2018				Transition 2017				Fiscal 2017
Current:
Federal	$	303			$	183			$	32			$	87
State	98				62				6				15
International	62				38				13				67
Total current provision	$	463			$	283			$	51			$	169
Deferred:
Federal	$	(31	)		$	(24	)		$	(488	)		$	17
State	1				(50		)		1				(3		)
International	7				(7		)		(1		)		1
Total deferred provision	$	(23	)		$	(81	)		$	(488	)		$	15
Total provision for income taxes	$	440			$	202			$	(437	)		$	184

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:

	For the Year Ended December 31,
(in millions)	2019			2018			Transition 2017			Fiscal 2017
Statutory federal income tax rate	21.0	%		21.0	%		24.5	%		35.0	%
State income taxes, net	3.7	%		5.4	%		4.7	%		3.7	%
U.S. federal domestic manufacturing benefit	—	%		(1.5	)%		(2.3	)%		(3.7	)%
Impact of non-U.S. Operations	0.3	%		0.1	%		(0.4	)%		(0.5	)%
Tax credits	(0.9	)%		(0.9	)%		(0.2	)%		(35.5	)%
Valuation allowance for deferred tax assets	—	%		2.0	%		—	%		3.7	%
U.S. taxation of foreign earnings	1.5	%		1.8	%		—	%		30.3	%
Deferred rate change	(0.3	)%		(4.9	)%		—	%		(1.2	)%
State refund	—	%		(0.4	)%		—	%		(0.2	)%
Uncertain tax positions	—	%		0.6	%		0.3	%		2.7	%
U.S. federal provision to return	(0.6	)%		(0.3	)%		—	%		(2.7	)%
Transaction costs	—	%		1.4	%		—	%		—	%
Impact of the TCJA	—	%		0.5	%		(265.2	)%		—	%
Other	1.3	%		0.7	%		(1.5	)%		0.9	%
Total provision for income taxes	26.0	%		25.5	%		(240.1	)%		32.5	%

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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, the Company recorded provisional amounts for certain enactment-date effects of the TCJA because the Company had not yet completed its enactment-date accounting for these effects. In 2018, the Company completed its accounting for all of the enactment-date income tax effects of the TCJA. 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.

Deferred tax assets and liabilities were comprised of the following:

	December 31,
(in millions)	2019				2018
Deferred tax assets:
Operating Lease Liability	$	67			$	—
Net operating losses carryforwards	48				53
Tax credit carryforwards	56				58
Accrued expenses	118				96
Share-based compensation	24				21
Multi-year upfront payments	18				21
Other	36				39
Total deferred tax assets	367				288
Valuation allowances	(71		)		(79		)
Total deferred tax assets, net of valuation allowances	$	296			$	209
Deferred tax liabilities:
Brands, trade names and other intangible assets	$	(5,913	)		$	(5,757	)
Property, plant and equipment	(263		)		(277		)
Derivative instruments	(48		)		(56		)
Right of Use Assets	(64		)		—
Equity method investments	(1		)		(8		)
Other	(8		)		(8		)
Total deferred tax liabilities	(6,297		)		(6,106		)
Net deferred tax liabilities	$	(6,001	)		$	(5,897	)

As of December 31, 2019, the Company had $48 million in tax effected Luxembourg net operating loss carry forwards. Of this amount, $46 million will not expire and $2 million will begin to expire in the year 2034. The Company currently has a valuation allowance of $19 million on the Luxembourg net operating loss carryforwards. The Company has $52 million U.S. foreign tax credit carryforwards and $4 million of other carryforwards, primarily related to U.S. state income tax. Of the $52 million of U.S. foreign tax credit carryforwards, $51 million have a valuation allowance. Foreign tax credits of $17 million and $35 million will expire in 2024 and 2025, respectively.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

An actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes. The Company has analyzed our 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 any potential withholding tax liabilities, if necessary, attributable to repatriation.

For the tax year ended December 31, 2019 and 2018, undistributed earnings in non-U.S. subsidiaries for which no deferred taxes have been provided totaled approximately $88 million and $11 million, respectively. The majority of additional current year earnings and profits are subject to inclusion through new tax rules effective for the December 31, 2018 period and future years under the TCJA. Under these new rules, any remaining tax on E&P would be considered immaterial.

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 2015 are closed to examination by applicable tax authorities. Keurig is currently under audit by the IRS for the 2016 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.

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

	For the Year Ended December 31,
(in millions)	2019				2018
Balance, beginning of the period	$	50			$	35
Increases related to tax positions taken during the current year	2				1
Increases related to tax positions taken during the prior year	3				12
Increases related to tax positions from acquisitions	—				13
Decreases related to settlements with taxing authorities	(8		)		(8		)
Decreases related to lapse of applicable statute of limitations	(4		)		(3		)
Balance, end of the period	$	43			$	50

The total amount of unrecognized tax benefits that, if recognized, would reduce the effective tax rate, is $31 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 $3 million and $1 million related to interest and penalties for uncertain tax positions for December 31, 2019 and 2018, respectively. The Company had a total of $11 million and $10 million accrued for interest and penalties for its uncertain tax positions reported as part of other non-current liabilities as of December 31, 2019 and 2018, respectively.

8**.** 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 the year ended December 31, 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 years ended December 31, 2019 and 2018.

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,
(in millions)	2019				2018
Projected Benefit Obligations
Beginning balance	$	206			$	—
Additions as a result of the DPS Merger	—				222
Service cost	2				1
Interest cost	9				5
Actuarial (gains) losses, net	24				(7		)
Benefits paid	(7		)		(1		)
Impact of changes in FX rates	1				(1		)
Settlements	(9		)		(13		)
Ending balance	$	226			$	206
Fair Value of Plan Assets
Beginning balance	$	178			$	—
Additions as a result of the DPS Merger	—				200
Actual return on plan assets	39				(8		)
Employer contributions	2				1
Benefits paid	(7		)		(1		)
Impact of changes in FX rates	1				(1		)
Settlements	(9		)		(13		)
Ending balance	$	204			$	178
Net liability recognized	$	(22	)		$	(28	)
Non-current assets	$	4			$	—
Current liability	(1		)		(1		)
Non-current liability	(25		)		(27		)

The accumulated benefit obligations for the defined benefit pension plans were $223 million and $204 million as of December 31, 2019 and 2018. The pension plan assets and the projected benefit obligations of KDP's U.S. pension plans represent approximately 93% of the total plan assets and 90% of the total projected benefit obligation of all plans combined as of December 31, 2019.

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)	2019				2018
Aggregate projected benefit obligation	$	97			$	203
Aggregate accumulated benefit obligation	96				201
Aggregate fair value of plan assets	71				175

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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

	For the Year Ended December 31,
(in millions)	2019				2018
Service cost	$	2			$	1
Interest cost	9				5
Expected return on assets	(9		)		(5		)
Settlements	(1		)		—
Total net periodic benefit costs	$	1			$	1

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 AOCI into periodic benefit cost in 2020.

The following table summarizes amounts included in AOCI for the plans:

	As of December 31,
(in millions)	2019				2018
Net actuarial loss	$	—			$	5
Prior service cost	—				—
Total	$	—			$	5

Contributions and Expected Benefit Payments

The Company's contributions to its pension plans for the years ended December 31, 2019 and 2018, and its projected contributions for the year ended December 31, 2020, are insignificant.

The following table summarizes the estimated future benefit payments for the Company's defined benefit plans:

	2020				2021				2022				2023				2024				2025-2029
Estimated future benefit payments	$	12			$	12			$	13			$	13			$	13			$	65

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, 2019 and 2018, as well as projected 2020 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, 2019. 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

For the years ended December 31, 2019 and 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:

	For the Year Ended December 31,
	2019			2018
Fixed income securities:
Asset allocation assumption	80	%		80	%
Expected long-term rate of return	3.1	%		4.6	%
Equity securities:
Asset allocation assumption	20	%		20	%
Expected long-term rate of return	7.5	%		7.6	%

Expected mortality is a key assumption in the measurement for pension benefit obligations. For KDP's U.S. plans, the Company used the Pri-2012 mortality tables and the Mortality Improvement Scale MP-2019 published by the Society of Actuaries’ Retirement Plans Experience Committee for the year ended December 31, 2019, and the RP-2014 mortality tables and the Mortality Improvement Scale MP-2018 for the year ended December 31, 2018.

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

	As of December 31,
	2019			2018
Weighted average discount rate	3.30	%		4.25	%
Rate of increase in compensation levels	3.00	%		3.00	%

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

	For the Year Ended December 31,
	2019			2018
Weighted average discount rate	3.30	%		4.25	%
Rate of increase in compensation levels	3.00	%		3.00	%
Expected long-term rate of return	4.00	%		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, 2019 and 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

PRMB PLANS

As a result of the DPS Merger, the Company acquired several non-contributory defined benefit PRMB plans, 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 as of December 31, 2019 and 2018.

FAIR VALUE OF THE PENSION AND PRMB 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.

The following tables present the major categories of plan assets and the respective fair value hierarchy for the pension and PRMB plan assets:

			Fair Value Measurement as of December 31,
			2019								2018
(in millions)	Fair Value Hierarchy Level		Pension Assets				PRMB Assets				Pension Assets				PRMB Assets
Cash and cash equivalents	Level 1		$	3			$	—			$	3			$	—
U.S. equity securities(1)(2)	Level 2		21				1				16				1
International equity securities(1)(2)	Level 2		10				6				13				—
International fixed income securities(2)	Level 2		15				—				14				—
Fixed income securities(3)	Level 2		155				1				132				5
Total			$	204			$	8			$	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, which are three trustee-managed multi-employer defined benefit pension plans for union-represented employees under certain collective bargaining agreements. 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. As the multi-employer plans were assumed as part of the DPS Merger, there was no income statement activity related to such plans prior to the DPS Merger. Multi-employer plan expenses were $4 million and $2 million for the years ended December 31, 2019 and 2018, respectively.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Individually Significant Multi-Employer Plan

The Company participates in one multi-employer plan, Central States, which is considered to be individually significant. The following table presents information about Central States as of December 31, 2019:

Plan's employer identification number	36-6044243
Plan number	001
Expiration dates of collective bargaining agreements(1)	January 20, 2020 through March 5, 2022
Financial Improvement Plan/Rehabilitation Plan status pending/implemented	Implemented
Pension Protection Act 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 53% of the employees included in Central States. Three of the collective bargaining agreements are set to expire during 2020, covering approximately 79% of the employees included in Central States.

The most recent Pension Protection Act zone status available as of December 31, 2019 is for the plan's year-end as of December 31, 2018. Central States 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 for the years ended December 31, 2019 and 2018.

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

	2020				2021				2022				2023				2024
Future estimated contributions to Central States	$	1			$	—			$	—			$	—			$	—

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 IRC 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:

			As of December 31,
(in millions)	Fair Value Hierarchy		2019				2018
Marketable securities - trading	Level 1		$	40			$	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 expense (income), net with an offset for the same amount recorded in SG&A expenses. There were $8 million in gains and $5 million in losses associated with these trading securities during the years ended December 31, 2019 and 2018, respectively. As the non-qualified defined contribution plan trading securities were assumed as part of the DPS Merger, there was no income statement activity related to the plan prior to the DPS Merger.

The Company makes matching contributions and discretionary profit sharing contributions to each of the respective plans. The Company incurred contribution expense of $66 million, $36 million, $3 million and $11 million to the defined contribution plans for the years ended December 31, 2019 and 2018, Transition 2017 and Fiscal 2017, respectively.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

9**.** Long-term Obligations and Borrowing Arrangements

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

	December 31,
(in millions)	2019				2018
Senior unsecured notes	$	11,802			$	12,019
Term loans	1,372				2,561
Subtotal	13,174				14,580
Less - current portion	(347		)		(379		)
Long-term obligations	$	12,827			$	14,201

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

			December 31,
	Fair Value Hierarchy Level		2019								2018
(in millions)		Carrying Value				Fair Value				Carrying Value				Fair Value
Commercial paper notes	2		$	1,246			$	1,246			$	1,079			$	1,079
Current portion of long-term obligations:
Senior unsecured notes	2		250				250				250				250
Term loans	2		97				97				129				129
Short-term borrowings and current portion of long-term obligations			$	1,593			$	1,593			$	1,458			$	1,458

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

SENIOR UNSECURED NOTES

The Company's 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		2019								2018
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		January 15, 2020		2.000%		2		250				250				250				245
2021 Merger Notes		May 25, 2021		3.551%		2		1,750				1,785				1,750				1,742
2021-A Notes		November 15, 2021		3.200%		2		250				254				250				244
2021-B Notes		November 15, 2021		2.530%		2		250				251				250				240
2022 Notes		November 15, 2022		2.700%		2		250				251				250				237
2023 Merger Notes		May 25, 2023		4.057%		2		2,000				2,110				2,000				1,988
2023 Notes		December 15, 2023		3.130%		2		500				514				500				474
2025 Merger Notes		May 25, 2025		4.417%		2		1,000				1,090				1,000				999
2025 Notes		November 15, 2025		3.400%		2		500				521				500				467
2026 Notes		September 15, 2026		2.550%		2		400				400				400				346
2027 Notes		June 15, 2027		3.430%		2		500				520				500				458
2028 Merger Notes		May 25, 2028		4.597%		2		2,000				2,253				2,000				1,981
2038 Notes		May 1, 2038		7.450%		2		125				167				125				151
2038 Merger Notes		May 25, 2038		4.985%		2		500				587				500				483
2045 Notes		November 15, 2045		4.500%		2		550				605				550				478
2046 Notes		December 15, 2046		4.420%		2		400				435				400				342
2048 Merger Notes		May 25, 2048		5.085%		2		750				905				750				716
Principal amount								$	11,975			$	12,898			$	12,225			$	11,841
Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger								(173		)						(206		)
Carrying amount								$	11,802							$	12,019

(1)	On January 15, 2019, the Company repaid the 2019 Notes at maturity.

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 21 for additional information. As of December 31, 2019, 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.

BORROWING ARRANGEMENTS

Term Loan Agreements

On February 8, 2019, the Company terminated the 2018 KDP Term Loan and refinanced with the 2019 KDP Term Loan, pursuant to which the Term Loan Lenders provided $2 billion, in order to achieve a more favorable interest rate. As a result of the extinguishment of the 2018 KDP Term Loan, the Company recorded approximately $3 million of loss on early extinguishment during the year ended December 31, 2019.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The interest rate applicable to the 2019 KDP 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 KDP Term Loan Agreement, KDP must repay the unpaid principal amount quarterly which commenced on March 29, 2019 in an amount equal to 1.25% of the aggregate principal amount made on the effective date of the 2019 KDP Term Loan, resulting in annual mandatory repayments of $100 million. The 2019 KDP Term Loan Agreement matures on February 8, 2023.

364-Day Credit Agreement

The Company entered into the 364-Day Credit Agreement on May 29, 2019 among the Company, the banks party thereto and JPMorgan as administrative agent, pursuant to which the Company obtained a $750 million commitment. The 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes.

The interest rate applicable to borrowings under the 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 1.000% to 1.625% or a base rate plus a margin of 0.000% to 0.625%, depending on the rating of certain index debt of the Company. The 364-Day Credit Agreement will mature on May 27, 2020, subject to the Company’s option to extend the maturity date by one year so long as certain customary conditions are satisfied.

KDP Revolving Credit Facility

The interest rate applicable to any borrowings under the KDP Revolver 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 Revolver, 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 indexed debt of KDP. The KDP Revolver will mature on February 28, 2023.

Financial Information Related to KDP Credit Agreements

The KDP Credit Agreements 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:

						December 31,
(in millions)				Fair Value Hierarchy Level		2019												2018
Issuance		Maturity Date			Available Balances				Carrying Value				Fair Value				Carrying Value				Fair Value
2018 KDP Term Loan(1)(2)		February 2023		2		$	—			$	—			$	—			$	2,583			$	2,583
2019 KDP Term Loan(3)		February 2023		2		—				1,380				1,380				—				—
KDP Revolver(4)		February 2023		2		2,400				—				—				—				—
364-Day Credit Agreement		May 2020		2		750				—				—				—				—
Principal amount										$	1,380			$	1,380			$	2,583			$	2,583
Unamortized debt issuance costs										(8		)						(22		)
Carrying amount										$	1,372							$	2,561

(1)	In January 2019, the Company borrowed $583 million of Commercial Paper to voluntarily prepay a portion of its outstanding obligations under the 2018 KDP Term Loan. As a result of these voluntary prepayments, the Company recorded a $5 million loss on early extinguishment during the year ended December 31, 2019. The 2018 KDP Term Loan was refinanced with the 2019 KDP Term Loan in February 2019.

(2)

On February 8, 2019, the Company terminated the 2018 KDP Term Loan and refinanced with the 2019 KDP Term Loan, pursuant to which the Term Loan Lenders provided $2 billion, in order to achieve a more favorable interest rate. As a result of the extinguishment of the 2018 KDP Term Loan, the Company recorded approximately $3 million of loss on early extinguishment during the year ended December 31, 2019.

(3)	The Company voluntarily prepaid $520 million of its outstanding obligations under the 2019 KDP Term Loan primarily as a result of borrowing Commercial Paper and generating cash flows from operations during the year ended December 31, 2019. As a result of these voluntary prepayments, the Company recorded $3 million loss on extinguishment of debt during the year ended December 31, 2019.

(4)	The KDP Revolver has $200 million letters of credit available and none utilized as of December 31, 2019.

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, 2019, the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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 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 notes will vary, but may not exceed 397 days from the date of issuance. The Company's intent is to classify the commercial paper notes on a short term basis, as maturities are not expected to exceed 90 days. The Company issues commercial paper notes as needed for general corporate purposes. Outstanding commercial paper notes rank equally with all of the commercial paper notes' existing and future unsecured borrowings. The Company had $1,246 million and $1,079 million of outstanding commercial paper notes as of December 31, 2019 and 2018, respectively.

The following table provides information about the Company's weighted average borrowings under its commercial paper program:

	For the Year Ended December 31,
(in millions, except %)	2019				2018**(1)**
Weighted average commercial paper borrowings	$	1,754			$	1,309
Weighted average borrowing rates	2.56		%		2.53		%

(1)	The Company assumed the commercial paper program as a result of the DPS Merger on July 9, 2018. As a result, weighted average commercial paper borrowings and weighted average borrowing rates are weighted from the assumption of the commercial paper program on July 9, 2018 through December 31, 2018.

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, $44 million of which was utilized as of December 31, 2019 and $56 million of which remains available for use.

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 early 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:

	For the Year Ended December 31,
(in millions)	2018				Transition 2017				Fiscal 2017
Loss on early extinguishment of debt	$	13			$	5			$	85

10**.** 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. As of December 31, 2019, these interest rate swap contracts have maturities ranging from March 2021 to May 2038.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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. During the Periods presented, the Company held 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 the same caption of the Consolidated Statements of Income as the associated risk. As of December 31, 2019, these FX contracts have maturities ranging from January 2020 to September 2024.

COMMODITIES

KDP centrally 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. During the Periods presented, the Company held forward, future, swap and option contracts that economically hedged certain of its 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. As of December 31, 2019, these commodity contracts have maturities ranging from January 2020 to November 2021.

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)	2019				2018
Interest rate contracts
Receive-fixed, pay-variable interest rate swaps(1)	$	50			$	1,070
Receive-variable, pay-fixed interest rate swaps(2)	575				2,125
FX forward contracts	523				348
Commodity contracts	150				296

(1)	During the year ended December 31, 2019, the Company elected to terminate $920 million notional amount of receive-fixed, pay-variable interest rate swaps and received cash of $2 million.

(2)	During the year ended December 31, 2019, the Company elected to terminate $1,400 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $38 million.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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		2019				2018
Assets:
Interest rate contracts	2		Prepaid expenses and other current assets		$	1			$	2
FX forward contracts	2		Prepaid expenses and other current assets		—				4
Commodity contracts	2		Prepaid expenses and other current assets		30				3
Interest rate contracts	2		Other non-current assets		18				77
FX forward contracts	2		Other non-current assets		—				15
Commodity contracts	2		Other non-current assets		1				3
Liabilities:
Interest rate contracts	2		Other current liabilities		$	—			$	7
FX forward contracts	2		Other current liabilities		2				—
Commodity contracts	2		Other current liabilities		10				27
Interest rate contracts	2		Other non-current liabilities		—				6
FX forward contracts	2		Other non-current liabilities		3				—
Commodity contracts	2		Other non-current liabilities		1				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.

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.

				For the Year Ended December 31,
(in millions)		Location of (Gains) Losses in the Consolidated Statements of Income		2019				2018				Transition 2017				Fiscal 2017
Commodity contracts		Cost of sales		$	(10	)		$	42			$	1			$	7
Commodity contracts		SG&A expenses		(15		)		20				—				—
Interest rate contracts		Interest expense		7				6				(19		)		(74		)
FX forward contracts		Cost of sales		5				—				—				—
FX forward contracts		Other expense (income), net		18				(27		)		(2		)		6
Cross currency swaps		Other expense (income), net		—				—				—				47
Total				$	5			$	41			$	(20	)		$	(14	)

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 material 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

11**.** Earnings Per Share

The following table presents the Company's basic and diluted EPS and shares outstanding:

	For the Year Ended December 31,
(in millions, except per share data)	2019				2018				Transition 2017				Fiscal 2017
Basic EPS:
Net income attributable to KDP	$	1,254			$	586			$	612			$	378
Weighted average common shares outstanding	1,406.7				1,086.3				790.5				790.5
Earnings per common share — basic	$	0.89			$	0.54			$	0.77			$	0.48
Diluted EPS:
Net income attributable to KDP	$	1,254			$	586			$	612			$	378
Less: Impact of dilutive securities in Maple Parent Corporation	—				—				7				3
Total	$	1,254			$	586			$	605			$	375
Weighted average common shares outstanding	1,406.7				1,086.3				790.5				790.5
Effect of dilutive securities:
Stock options	0.6				0.9				—				—
RSUs	11.8				10.4				—				—
Weighted average common shares outstanding and common stock equivalents	1,419.1				1,097.6				790.5				790.5
Earnings per common share — diluted	$	0.88			$	0.53			$	0.77			$	0.47
Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation	—				1.2				—				—

12**.** 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:

	For the Year Ended December 31,
(in millions)	2019				2018				Transition 2017				Fiscal 2017
Total stock-based compensation expense	$	64			$	35			$	15			$	58
Income tax benefit recognized in the Statements of Income	(11		)		(7		)		(3		)		(16		)
Stock-based compensation expense, net of tax	$	53			$	28			$	12			$	42

DESCRIPTION OF STOCK-BASED COMPENSATION PLANS

Prior to the DPS Merger, Maple had two share-based compensation programs. 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 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 on their existing vesting schedule.

The Company previously adopted the 2009 Incentive Plan, under which employees and non-employee directors could be granted stock options, stock appreciation rights, stock awards, RSUs and PSUs, and grants subsequent to the DPS Merger Date were granted under the 2009 Incentive Plan. During the year ended December 31, 2019, the Company adopted the 2019 Incentive Plan, which expires in 2029 and otherwise contains substantially similar provisions as the 2009 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The Company's aforementioned incentive plans provide for the issuance of up to an aggregate of 27,425,720 shares of the Company's common stock in stock-based compensation awards.

RESTRICTED STOCK UNITS

The table below summarizes RSU activity for the year ended December 31, 2019:

	RSUs			Weighted Average Grant Date Fair Value			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in millions)
Balance as of December 31, 2018	18,625,898			15.68			3.5		478
Granted	5,874,171			26.55
Vested and released	(21,338	)		17.69					1
Forfeited	(2,985,945	)		19.36
Balance as of December 31, 2019	21,492,786			18.14			2.6		622

The weighted average grant date fair value for RSUs granted for the years ended December 31, 2019 and 2018 was $26.55 and $23.81, respectively. The aggregate intrinsic value of the RSUs vested and released for the years ended December 31, 2019 and 2018 was $1 million and $23 million, respectively.

As of December 31, 2019, there was $250 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.6 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 the year ended December 31, 2019:

	Stock Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in millions)
Balance as of January 1, 2019	1,083,675			11.97			6.5		$	15
Granted	—			—
Exercised	(744,861	)		11.54					10
Outstanding as of December 31, 2019	338,814			12.93			6.0		5
Exercisable as of December 31, 2019	338,814			12.93			6.0		5

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

13**.** Accumulated Other Comprehensive Income (Loss)

The following table provides a summary of changes in AOCI, net of taxes, in the Periods presented:

(in millions)	Foreign Currency Translation Adjustments				Net Change in Pension and PRMB Liability				AOCI
Balance as of September 24, 2016	$	26			$	—			$	26
OCI before reclassifications	80				—				80
Amounts reclassified from AOCI	—				—				—
Net current period other comprehensive income	80				—				80
Balance as of September 30, 2017	106				—				106
OCI before reclassifications	(7		)		—				(7		)
Amounts reclassified from AOCI	—				—				—
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 AOCI	—				—				—
Net current period other comprehensive loss	(225		)		(4		)		(229		)
Balance as of December 31, 2018	(126		)		(4		)		(130		)
OCI before reclassifications	230				5				235
Amounts reclassified from AOCI	—				(1		)		(1		)
Net current period other comprehensive income	230				4				234
Balance as of December 31, 2019	$	104			$	—			$	104

14**.** Property, Plant and Equipment

Property, plant and equipment, net consisted of the following:

	December 31,
(in millions)	2019				2018
Land	$	55			$	138
Buildings and improvements	473				723
Machinery and equipment	1,636				1,412
Cold drink equipment	78				276
Software	241				231
Construction-in-progress	274				206
Property, plant and equipment, gross	2,757				2,986
Less: accumulated depreciation and amortization	(729		)		(676		)
Property, plant and equipment, net	$	2,028			$	2,310

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

		For the Year Ended December 31,
(in millions)		2019				2018				Transition 2017				Fiscal 2017
Cost of sales		$	199			$	123			$	19			$	88
SG&A expenses		159				110				14				54
Total depreciation expense		$	358			$	233			$	33			$	142

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

15**.** Other Financial 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:

			December 31,
	Fair Value Hierarchy Level		2019								2018
(in millions)		Carrying Value				Fair Value				Carrying Value				Fair Value
Cash and cash equivalents	1		$	75			$	75			$	83			$	83
Restricted cash and restricted cash equivalents(1)	1		26				26				46				46
Non-current restricted cash and restricted cash equivalents included in Other non-current assets	1		10				10				10				10
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the Consolidated Statement of Cash Flows			$	111			$	111			$	139			$	139

(1)	Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the Big Red Acquisition and the Core Acquisition. Amounts held in escrow are expected to be released within one year. Refer to Note 3 for additional information.

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

	December 31,
(in millions)	2019				2018
Inventories:
Raw materials	$	215			$	208
Work in process	8				6
Finished goods	447				425
Total	670				639
Allowance for excess and obsolete inventories	(16		)		(13		)
Inventories	$	654			$	626
Prepaid expenses and other current assets:
Other receivables	$	65			$	51
Customer incentive programs	12				12
Derivative instruments	31				9
Prepaid marketing	17				29
Spare parts	49				43
Assets held for sale(1)	165				8
Income tax receivable	4				22
Other	60				80
Total prepaid expenses and other current assets	$	403			$	254
Other non-current assets:
Customer incentive programs	$	33			$	34
Marketable securities - trading	40				44
Operating lease right-of-use assets(2)	497				—
Derivative instruments	19				95
Equity securities without readily determinable fair values	1				1
Non-current restricted cash and restricted cash equivalents	10				10
Related party notes receivable(3)	50				17
Other	98				58
Total other non-current assets	$	748			$	259

(1)	Amounts were comprised of property, plant and equipment expected to be sold within the next twelve months.

(2)	Refer to Notes 2 and 4 for further information.

(3)	Refer to Note 18 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)	2019				2018
Accrued expenses:
Customer rebates & incentives	$	362			$	342
Accrued compensation	183				214
Insurance reserve	39				37
Interest accrual	54				77
Accrued professional fees	31				113
Other accrued expenses	270				229
Total accrued expenses	$	939			$	1,012
Other current liabilities:
Dividends payable	$	212			$	209
Income taxes payable	75				60
Operating lease liability(1)	69				—
Finance lease liability(2)	41				26
Derivative instruments	12				34
Holdback liability	25				44
Other	11				33
Total other current liabilities	$	445			$	406
Other non-current liabilities:
Long-term pension and postretirement liability	$	29			$	30
Insurance reserves	66				57
Operating lease liability(1)	427				—
Finance lease liability(2)	269				305
Derivative instruments	4				16
Deferred compensation liability	40				44
Other	95				107
Total other non-current liabilities	$	930			$	559

(1)	Refer to Notes 2 and 4 for further information.

(2)	Amounts as of December 31, 2018 include capital leases and financing obligations reported under ASC 840. Refer to Notes 2 and 4 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 voluntarily elected by the supplier, 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, 2019 and 2018, $2,097 million and $1,438 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

16**.** 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 NCI 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.

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

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The employee NCI 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.

The following table is a rollforward of the EOP for the Periods presented. There was no activity in the EOP after the DPS Merger Date.

(in millions)	2018				Transition 2017				Fiscal 2017
Beginning balance	$	265			$	219			$	66
Net income attributable to NCI	3				7				5
Stock based compensation	24				15				58
Proceeds from redeemable NCI shareholders	18				—				5
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

17**.** Commitments and Contingencies

LEGAL MATTERS

The Company is involved from time to time in various claims, proceedings, and litigation, including those described below. The Company establishes reserves for specific legal proceedings when it determines 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 it believes 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.) 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). 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.). 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 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.), 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) (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., 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. filed suit against Keurig Green Mountain, Inc. (McLane Company, Inc. v. Keurig Green Mountain, Inc.) in the U.S. District Court Southern District of New York asserting claims and seeking relief substantially similar to the claims asserted and relief sought in the Multidistrict Antitrust Litigation.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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.

Proposition 65 Litigation

On May 9, 2011, an organization named Council for Education and Research on Toxics 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. Council for Education and Research on Toxics 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 expose persons to the chemical acrylamide in violation of Proposition 65's Health and Safety Code section 25249.5, et seq. Council for Education and Research on Toxics 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. Council for Education and Research on Toxics 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.

The Court of Appeal’s stay order was prompted by a notice published on June 15, 2018 by California’s Office of Environmental Health Hazard Assessment proposing a new Proposition 65 regulation clarifying that cancer warnings are not required for Proposition 65 chemicals, such as acrylamide, that are present in coffee as a result of roasting coffee beans. After two rounds of public comments, the regulation was finalized, adopted and approved by the Office of Administrative Law on June 3, 2019. It took effect on October 1, 2019. The Court of Appeal has lifted its 2018 stay order. Further litigation is anticipated based on CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims.

At this stage of the proceedings, prior to a trial on remedies issues, the Company is unable to reasonably estimate the potential loss or effect on the Company or its operations that could be associated with the lawsuit. The trial court has discretion to impose zero penalties against the Company or to impose significant statutory penalties. Significant labeling or warning requirements that could potentially be imposed by the trial court may increase the Company's costs and adversely affect sales of coffee products. KDP 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

PRODUCT WARRANTIES

KDP offers a one 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 December 31, 2017	$	13
Accruals for warranties issued	10
Settlements	(15		)
Balance as of December 31, 2018	8
Accruals for warranties issued	9
Settlements	(9		)
Balance as of December 31, 2019	$	8

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

•	Restaurant Transactions include transactions with Caribou Coffee, Panera Bread, Einstein Bros Bagels and Krispy Kreme Doughnuts. 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 some of these brand ownership companies. Refer to Note 3 for additional information about the Company's investments in unconsolidated affiliates. 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

Trade accounts receivable, net from related parties were $13 million and $13 million as of December 31, 2019 and 2018, respectively, primarily related to product sales and royalty revenues. Accounts payable to related parties were $18 million and $3 million as of December 31, 2019 and 2018, respectively, 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:

		For the Year Ended December 31,
(in millions)		2019				2018				Transition 2017				Fiscal 2017
Receipts from related parties		$	93			$	214			$	12			$	59
Payments to related parties		57				150				10				31

LINE OF CREDIT WITH BEDFORD

The Company and ABI, in conjunction with the creation of a joint venture, executed a line of credit agreement with Bedford on March 3, 2017, 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 credit agreement with Bedford matures on March 3, 2024. The Company has outstanding receivable balances on the credit agreement with Bedford of $50 million and $17 million as of December 31, 2019 and 2018, respectively.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

19**.** Segments

As of December 31, 2019 and 2018 and for the years ended December 31, 2019 and 2018, Transition 2017 and Fiscal 2017, the Company's operating structure consisted of the following four reportable segments:

•	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.

•	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 DSD system and the WD system.

•	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 CSD brands.

•	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.

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:

	For the Year Ended December 31,
(in millions)	2019				2018				Transition 2017				Fiscal 2017
Net sales
Coffee Systems	$	4,233			$	4,114			$	1,170			$	4,269
Packaged Beverages	4,945				2,415				—				—
Beverage Concentrates	1,414				669				—				—
Latin America Beverages	528				244				—				—
Total net sales	$	11,120			$	7,442			$	1,170			$	4,269
Income from operations
Coffee Systems	$	1,219			$	1,163			$	261			$	1,087
Packaged Beverages	757				257				—				—
Beverage Concentrates	955				430				—				—
Latin America Beverages	85				29				—				—
Unallocated corporate costs	(638		)		(642		)		(32		)		(190		)
Income from operations	2,378				1,237				229				897
Interest expense	654				401				10				101
Interest expense - related party	—				51				25				100
Loss on early extinguishment of debt	11				13				5				85
Other expense (income), net	19				(19		)		7				44
Income before provision (benefit) for income taxes	$	1,694			$	791			$	182			$	567

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

	December 31,
(in millions)	2019				2018
Identifiable operating assets
Coffee Systems	$	15,230			$	15,117
Packaged Beverages	11,399				10,791
Beverage Concentrates	20,447				19,916
Latin America Beverages	1,856				1,820
Segment total	48,932				47,644
Unallocated corporate assets	435				1,088
Total identifiable operating assets	49,367				48,732
Investments in unconsolidated affiliates	151				186
Total assets	$	49,518			$	48,918

GEOGRAPHIC DATA

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

	For the Year Ended December 31,
(in millions)	2019				2018				Transition 2017				Fiscal 2017
Net sales
U.S.	$	9,843			$	6,608			$	1,034			$	3,802
International	1,277				834				136				467
Net sales	$	11,120			$	7,442			$	1,170			$	4,269

	December 31,
(in millions)	2019				2018
Property, plant and equipment, net
U.S.	$	1,770			$	2,073
International	258				237
Total property, plant and equipment, net	$	2,028			$	2,310

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:

	For the Year Ended December 31,
(in millions)	2019				2018				Transition 2017				Fiscal 2017
Net sales
Walmart	$	1,483			$	1,053			$	178			$	625
Costco(1)	—				—				147				544

(1) Costco is not a major customer for 2019 or 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)

20**.** Revenue Recognition

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

(in millions)	Coffee Systems				Packaged Beverages				Beverage Concentrates				Latin America Beverages				Total
For the Year Ended December 31, 2019
CSD(1)	$	—			$	2,219			$	1,385			$	380			$	3,984
NCB(1)	—				2,317				13				146				2,476
Pods(2)	3,293				—				—				—				3,293
Appliances	723				—				—				—				723
Other	217				409				16				2				644
Net sales	$	4,233			$	4,945			$	1,414			$	528			$	11,120
For the Year Ended December 31, 2018
CSD(1)	$	—			$	1,084			$	656			$	174			$	1,914
NCB(1)	—				1,153				6				69				1,228
Pods(2)	3,249				—				—				—				3,249
Appliances	643				—				—				—				643
Other	222				178				7				1				408
Net sales	$	4,114			$	2,415			$	669			$	244			$	7,442
Transition 2017:
CSD(1)	$	—			$	—			$	—			$	—			$	—
NCB(1)	—				—				—				—				—
Pods(2)	856				—				—				—				856
Appliances	257				—				—				—				257
Other	57				—				—				—				57
Net sales	$	1,170			$	—			$	—			$	—			$	1,170
Fiscal 2017:
CSD(1)	$	—			$	—			$	—			$	—			$	—
NCB(1)	—				—				—				—				—
Pods(2)	3,415				—				—				—				3,415
Appliances	646				—				—				—				646
Other	208				—				—				—				208
Net sales	$	4,269			$	—			$	—			$	—			$	4,269

(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.

21**.** 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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.

GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION

	Condensed Consolidating Statements of Income
	For the Year Ended December 31, 2019
(in millions)	Parent				Guarantors				Non-Guarantors				Eliminations				Total
Net sales	$	—			$	6,302			$	4,985			$	(167	)		$	11,120
Cost of sales	—				2,492				2,453				(167		)		4,778
Gross profit	—				3,810				2,532				—				6,342
Selling, general and administrative expenses	8				2,496				1,458				—				3,962
Other operating expense (income), net	—				(35		)		37				—				2
Income from operations	(8		)		1,349				1,037				—				2,378
Interest expense	911				136				89				(482		)		654
Interest expense - related party	—				—				—				—				—
Loss on early extinguishment of debt	11				—				—				—				11
Other expense (income), net	(609		)		145				1				482				19
Income before provision (benefit) for income taxes	(321		)		1,068				947				—				1,694
Provision (benefit) for income taxes	(107		)		294				253				—				440
Income before equity in earnings of consolidated subsidiaries	(214		)		774				694				—				1,254
Equity in earnings of consolidated subsidiaries	1,468				58				—				(1,526		)		—
Net income	1,254				832				694				(1,526		)		1,254
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—				—				—				—				—
Net income attributable to KDP	$	1,254			$	832			$	694			$	(1,526	)		$	1,254

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

	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 expense (income), 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 expense (income), 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, 2019
(in millions)	Parent				Guarantors				Non-Guarantors				Eliminations				Total
Net income	$	1,254			$	832			$	694			$	(1,526	)		$	1,254
Other comprehensive income (loss), net of tax:
Other comprehensive income impact from consolidated subsidiaries	235				193				—				(428		)		—
Foreign currency translation adjustments	(1		)		—				231				—				230
Net change in pension and post-retirement liability, net of tax	—				6				(2		)		—				4
Other comprehensive income (loss), net of tax	234				199				229				(428		)		234
Total comprehensive income (loss)	1,488				1,031				923				(1,954		)		1,488
Less: comprehensive income (loss) attributable to non-controlling interest	—				—				—				—				—
Comprehensive income (loss) attributable to KDP	$	1,488			$	1,031			$	923			$	(1,954	)		$	1,488

	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	—				(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, 2019
(in millions)	Parent				Guarantors				Non-Guarantors				Eliminations				Total
Current assets:
Cash and cash equivalents	$	—			$	9			$	66			$	—			$	75
Restricted cash and restricted cash equivalents	24				—				2				—				26
Trade accounts receivable, net	—				589				526				—				1,115
Related party receivable	131				209				20				(360		)		—
Inventories	—				253				401				—				654
Prepaid expenses and other current assets	665				144				258				(664		)		403
Total current assets	820				1,204				1,273				(1,024		)		2,273
Property, plant and equipment, net	—				1,136				892				—				2,028
Investments in consolidated subsidiaries	41,881				5,004				—				(46,885		)		—
Investments in unconsolidated affiliates	—				65				86				—				151
Goodwill	—				8,239				11,933				—				20,172
Other intangible assets, net	—				16,883				7,234				—				24,117
Long-term receivable, related parties	4,835				9,508				—				(14,343		)		—
Other non-current assets	61				431				256				—				748
Deferred tax assets	—				—				29				—				29
Total assets	$	47,597			$	42,470			$	21,703			$	(62,252	)		$	49,518
Current liabilities:
Accounts payable	$	—			$	1,176			$	2,000			$	—			$	3,176
Accrued expenses	54				635				250				—				939
Structured payables	—				159				162				—				321
Related party payable	72				48				240				(360		)		—
Short-term borrowings and current portion of long-term obligations	1,593				—				—				—				1,593
Other current liabilities	236				589				284				(664		)		445
Total current liabilities	1,955				2,607				2,936				(1,024		)		6,474
Long-term obligations to third parties	12,827				—				—				—				12,827
Long-term obligations to related parties	9,478				3,500				1,365				(14,343		)		—
Deferred tax liabilities	41				4,129				1,860				—				6,030
Other non-current liabilities	39				671				220				—				930
Total liabilities	24,340				10,907				6,381				(15,367		)		26,261
Total stockholders' equity	23,257				31,563				15,322				(46,885		)		23,257
Total liabilities and stockholders' equity	$	47,597			$	42,470			$	21,703			$	(62,252	)		$	49,518

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 affiliates	—				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 payables	—				47				479				—				526
Related party payable	65				106				165				(336		)		—
Short-term borrowings and current portion of long-term obligations	1,458				—				—				—				1,458
Other current liabilities	278				626				59				(557		)		406
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		)		—
Deferred tax liabilities	46				4,075				1,802				—				5,923
Other non-current liabilities	50				337				172				—				559
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, 2019
(in millions)	Parent				Guarantors				Non-Guarantors				Eliminations				Total
Operating activities:
Net cash (used in) provided by operating activities	$	(383	)		$	1,487			$	1,424			$	(54	)		$	2,474
Investing activities:
Acquisitions of businesses	—				(3		)		(5		)		—				(8		)
Cash acquired in acquisitions	—				—				—				—				—
Issuance of related party note receivable	826				(1,673		)		(32		)		847				(32		)
Investments in unconsolidated affiliates	—				(16		)		—				—				(16		)
Purchases of property, plant and equipment	—				(143		)		(187		)		—				(330		)
Proceeds from sales of property, plant and equipment	—				230				17				—				247
Purchases of intangibles	—				(35		)		—				—				(35		)
Return of capital from investments in consolidated subsidiaries	—				51				—				(51		)		—
Other, net	13				—				11				—				24
Net cash provided by (used in) investing activities	$	839			$	(1,589	)		$	(196	)		$	796			$	(150	)
Financing activities:
Proceeds from (payments of) related party notes	1,651				—				(804		)		(847		)		—
Proceeds from issuance of common stock private placement	—				—				—				—				—
Intercompany contributions	—				—				—				—				—
Proceeds from unsecured credit facility	—				—				—				—				—
Proceeds from senior unsecured notes	—				—				—				—				—
Proceeds from term loan	2,000				—				—				—				2,000
Net Issuance of commercial paper notes	167				—				—				—				167
Proceeds from structured payables	—				167				163				—				330
Payments on structured payables	—				(53		)		(478		)		—				(531		)
Payments on senior unsecured notes	(250		)		—				—				—				(250		)
Repayment of unsecured credit facility	—				—				—				—				—
Repayment of term loan	(3,203		)		—				—				—				(3,203		)
Payments on finance leases	—				(21		)		(17		)		—				(38		)
Deferred financing charges paid	—				—				—				—				—
Proceeds from stock options exercised	—				—				—				—				—
Cash contributions from redeemable non-controlling interest shareholders	—				—				—				—				—
Cash dividends paid	(844		)		—				(105		)		105				(844		)
Other, net	5				(3		)		3				—				5
Net cash provided by (used in) financing activities	$	(474	)		$	90			$	(1,238	)		$	(742	)		$	(2,364	)
Cash and cash equivalents — net change from:
Operating, investing and financing activities	(18		)		(12		)		(10		)		—				(40		)
Effect of exchange rate changes on cash and cash equivalents	—				—				12				—				12
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	42				31				66				—				139
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	24			$	19			$	68			$	—			$	111

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 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 affiliates	—				(1		)		(38		)		—				(39		)
Proceeds from capital distributions from investments in unconsolidated and consolidated affiliates	—				35				(24		)		24				35
Purchases of property, plant and equipment	—				(62		)		(118		)		—				(180		)
Proceeds from sales of property, plant and equipment	6				2				1				—				9
Net cash used in investing activities	(21,368		)		(946		)		(146		)		3,329				(19,131		)
Financing activities:
Proceeds from (payments of) related party notes	1,045				—				2,260				(3,305		)		—
Proceeds from issuance of common stock private placement	—				—				9,000				—				9,000
Inter-company 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 notes	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 finance leases	—				(9		)		(8		)		—				(17		)
Deferred financing charges paid	(55		)		—				(46		)		46				(55		)
Cash contributions from redeemable non-controlling interest shareholders	—				—				18				—				18
Cash dividends paid	(208		)		—				(55		)		31				(232		)
Other, net	2				—				2				—				4
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)

22**.** Unaudited Quarterly Financial Information

The following table presents unaudited quarterly financial information:

(unaudited, in millions, except per share data)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
For the Year Ended December 31, 2019
Net sales	$	2,504			$	2,812			$	2,870			$	2,934
Cost of sales	1,106				1,186				1,245				1,241
Gross profit	1,398				1,626				1,625				1,693
Selling, general and administrative expenses	911				1,028				1,012				1,011
Other operating expense (income), net	(11		)		11				33				(31		)
Income from operations	498				587				580				713
Interest expense	169				170				158				157
Loss on early extinguishment of debt	9				—				—				2
Other expense (income), net	5				1				9				4
Income before provision for income taxes	315				416				413				550
Provision for income taxes	85				102				109				144
Net income	$	230			$	314			$	304			$	406
Earnings per common share:
Basic	$	0.16			$	0.22			$	0.22			$	0.29
Diluted	0.16				0.22				0.21				0.29
For the Year Ended 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 expense (income), 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 expense (income), 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 10 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

23**.** Subsequent Events

ASSET SALE-LEASEBACK TRANSACTIONS

On January 6, 2020, the Company closed an asset sale-leaseback transaction to two manufacturing properties as the buyer obtained control. The Company received proceeds of approximately $150 million, net of selling costs for the properties, which had a carrying value of $134 million, and resulted in an approximately $16 million gain on the sale transaction. The initial term of the leaseback is expected to end during 2034 and has two 10-year renewal options. The renewal options are not reasonably assured as (i) the Company's position that the dynamic environment in which it operates precludes the Company's ability to be reasonably certain of exercising the renewal options in the distant future and (ii) the options are contingent as the Company must remain investment grade and a change-in-control has not occurred as of the end of the lease term. The leaseback has a residual value guarantee; however, the Company concluded it was not probable that the Company will owe an amount at the end of the lease term and will record the lease obligation excluding the residual value guarantee.

On January 10, 2020, the Company closed the asset sale-leaseback transaction on two distribution properties as the buyer obtained control. The Company received proceeds of approximately $50 million, net of selling costs for the properties, which had a carrying value of $27 million, and resulted in an approximately $23 million gain on the sale transaction. The term of the leaseback is expected to end in 2025 and has two three-year renewals.

DEBT BORROWINGS AND REPAYMENTS

On January 15, 2020, the Company repaid $250 million for the 2020 Notes at maturity.