Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


						Page Number
Reports of Independent Registered Accounting Firm						48
Consolidated Statements of Income						51
Consolidated Statements of Comprehensive Income						52
Consolidated Balance Sheets						53
Consolidated Statements of Cash Flows						54
Consolidated Statements of Changes in Stockholders' Equity						56
Notes to Consolidated Financial Statements						57
1. Business and Basis of Presentation						57
2. Significant Accounting Policies						58
3. Long-Term Obligations and Borrowing Arrangements						67
4. Goodwill and Other Intangible Assets						71
5. Acquisitions and Investments in Unconsolidated Subsidiaries						73
6. Restructuring and Integration Costs						77
7. Income Taxes						79
8. Derivatives						81
9. Leases						84
10. Employee Benefit Plans						85
11. Earnings per Share						90
12. Stock-Based Compensation						90
13. Accumulated Other Comprehensive (Loss) Income						93
14. Property, Plant and Equipment						93
15. Other Financial Information						94
16. Commitments and Contingencies						96
17. Related Parties						98
18. Segments						99
19. Revenue Recognition						101
20. Unaudited Quarterly Financial Information						102

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the 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, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years ended December 31, 2020, 2019 and 2018, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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

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

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 - Certain Brand Assets - Refer to Notes 2 and 4 to the financial statements

Critical Audit Matter Description

As discussed in Notes 2 and 4, the Company has indefinite-lived brand intangible assets (“brand assets”). The Company’s evaluation of the brand asset’s for impairment involves the comparison of the fair value of each brand asset to its’ carrying value. Management estimates the fair value of the brand assets annually as of October 1, 2020, using a multi-period excess earnings method, which is a specific discounted cash flow method.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. Changes in these assumptions could have a significant impact on the fair value of certain indefinite-lived brand intangible assets (“certain brand assets”) that have a lower headroom percentage, the amount of any impairment, or both. During the year ended December 31, 2020, the Company recognized impairment of $67 million for the Bai brand, as the fair value of the brand was lower than its carrying value. Given the significant judgments made by management to estimate the fair value of certain brand assets, 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 certain brand 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 and for certain brand assets with a higher risk of impairment, 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.

–Underlying analysis of business strategies and growth plans.

–Internal communication to senior management.

–Forecasted information in industry reports.

–Historical and forecasted peer data.

We considered the impact of changes in management's forecast from the October 1, 2020 annual assessment date to December 31, 2020.
With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and discount rates, including testing the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the discount rates selected by management.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 25, 2021

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the 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, 2020, 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, 2020, 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, 2020 of the Company and our report dated February 25, 2021 expressed an unqualified opinion on those financial statements.

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 25, 2021

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF INCOME


	Year Ended December 31,
(in millions, except per share data)	2020		2019		2018
Net sales	$	11,618	$	11,120	$	7,442
Cost of sales	5,132		4,778		3,560
Gross profit	6,486		6,342		3,882
Selling, general and administrative expenses	3,978		3,962		2,635
Impairment of intangible assets	67		—		—
Other operating (income) expense, net	(39)		2		10
Income from operations	2,480		2,378		1,237
Interest expense	604		654		401
Interest expense - related party	—		—		51
Loss on early extinguishment of debt	4		11		13
Impairment of investments and note receivable	102		—		—
Other expense (income), net	17		19		(19)
Income before provision for income taxes	1,753		1,694		791
Provision for income taxes	428		440		202
Net income	1,325		1,254		589
Less: Net income attributable to non-controlling interest	—		—		3
Net income attributable to KDP	$	1,325	$	1,254	$	586

Earnings per common share:
Basic	$	0.94	$	0.89	$	0.54
Diluted	0.93		0.88		0.53
Weighted average common shares outstanding:
Basic	1,407.2		1,406.7		1,086.3
Diluted	1,422.1		1,419.1		1,097.6

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,
(in millions)	2020		2019		2018
Net income	$	1,325	$	1,254	$	589
Other comprehensive income
Foreign currency translation adjustments	(9)		230		(225)
Net change in pension and post-retirement liability, net of tax of $1, $(1), and $0, respectively	(4)		4		(4)
Net change in cash flow hedges, net of tax of $1, $0 and $0, respectively	(14)		—		—
Total other comprehensive income (loss)	(27)		234		(229)
Comprehensive income	1,298		1,488		360
Comprehensive income attributable to non-controlling interest	—		—		(3)
Comprehensive income attributable to KDP	$	1,298	$	1,488	$	357

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)	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	240	$	75
Restricted cash and restricted cash equivalents	15		26
Trade accounts receivable, net	1,048		1,115
Inventories	762		654
Prepaid expenses and other current assets	323		403
Total current assets	2,388		2,273
Property, plant and equipment, net	2,212		2,028
Investments in unconsolidated affiliates	88		151
Goodwill	20,184		20,172
Other intangible assets, net	23,968		24,117
Other non-current assets	894		748
Deferred tax assets	45		29
Total assets	$	49,779	$	49,518
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	3,740	$	3,176
Accrued expenses	1,040		939
Structured payables	153		321
Short-term borrowings and current portion of long-term obligations	2,345		1,593
Other current liabilities	416		445
Total current liabilities	7,694		6,474
Long-term obligations	11,143		12,827
Deferred tax liabilities	5,993		6,030
Other non-current liabilities	1,119		930
Total liabilities	25,949		26,261
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, 1,407,260,676 and 1,406,852,305 shares issued and outstanding as of December 31, 2020 and 2019, respectively	14		14
Additional paid-in capital	21,677		21,557
Retained earnings	2,061		1,582
Accumulated other comprehensive income	77		104
Total stockholders' equity	23,829		23,257
Non-controlling interest	1		—
Total equity	23,830		23,257
Total liabilities and equity	$	49,779	$	49,518

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,
(in millions)	2020		2019		2018
Operating activities:
Net income	$	1,325	$	1,254	$	589
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	362		358		233
Amortization of intangibles	133		126		121
Other amortization expense	158		174		80
Provision for sales returns	54		43		54
Deferred income taxes	(51)		(23)		(81)
Employee stock-based compensation expense	85		64		35
Loss on early extinguishment of debt	4		11		13
Gain on step acquisition of unconsolidated subsidiaries	—		—		(18)
(Gain) loss on disposal of property, plant and equipment	(36)		(14)		5
Unrealized (gain) loss on foreign currency	(1)		(24)		28
Unrealized loss on derivatives	8		36		49
Equity in losses of unconsolidated affiliates	20		51		17
Impairment of intangible assets	67		—		—
Impairment on investments and note receivable of unconsolidated affiliates	102		—		—
Other, net	60		52		31
Changes in assets and liabilities:
Trade accounts receivable	(5)		(7)		82
Inventories	(107)		(24)		185
Income taxes receivable and payables, net	(91)		36		71
Other current and non current assets	(435)		(324)		(49)
Accounts payable and accrued expenses	624		583		206
Other current and non current liabilities	180		102		(38)
Net change in operating assets and liabilities	166		366		457
Net cash provided by operating activities	2,456		2,474		1,613
Investing activities:
Acquisitions of businesses	—		(8)		(19,114)
Cash acquired in acquisitions	—		—		169
Issuance of related party note receivable	(6)		(32)		(11)
Investments in unconsolidated affiliates	(5)		(16)		(39)
Proceeds from capital distributions from investments in unconsolidated affiliates	—		—		35
Purchases of property, plant and equipment	(461)		(330)		(180)
Proceeds from sales of property, plant and equipment	203		247		3
Purchases of intangibles	(56)		(35)		—
Other, net	9		24		6
Net cash used in investing activities	$	(316)	$	(150)	$	(19,131)

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

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)


	Year Ended December 31,
(in millions)	2020		2019		2018
Financing activities:
Proceeds from issuance of common stock	$	—	$	—	9,000
Proceeds from controlling shareholder stock transactions	29		—		—
Proceeds from unsecured credit facility	1,850		—		1,900
Proceeds from senior unsecured notes	1,500		—		8,000
Proceeds from term loan	—		2,000		2,700
Net (repayment) issuance of commercial paper notes	(1,246)		167		1,080
Proceeds from structured payables	171		330		526
Payments on structured payables	(341)		(531)		—
Repayment of senior unsecured notes	(250)		(250)		—
Repayment of unsecured credit facility	(1,850)		—		(1,900)
Repayment of term loan	(955)		(3,203)		(3,447)
Payments on finance leases	(52)		(38)		(17)

Cash contributions from redeemable non-controlling interest shareholders	—		—		18
Cash dividends paid	(846)		(844)		(232)
Other, net	—		5		(51)
Net cash (used in) provided by financing activities	(1,990)		(2,364)		17,577
Net change from:
Operating, investing and financing activities	150		(40)		59
Effect of exchange rate changes	(6)		12		(15)
Beginning of period	111		139		95
End of period	$	255	$	111	$	139

Non-cash investing activities:
Capital expenditures included in accounts payable and accrued expenses	$	280	$	163	$	102
Non-cash acquisition of controlling interest	3		—		—
Measurement period adjustment of Core purchase price	—		(11)		—
Purchases of intangibles	—		2		—
Issuance of common stock for acquisition of business	—		—		(441)
Fair value of stock and replacement equity awards not converted to cash	—		—		(3,643)
Holdback liability for acquisition of business	—		—		54

Non-cash financing activities:
Dividends declared but not yet paid	212		211		211
Finance lease additions	90		69		40
Capitalization of related party debt into additional paid-in-capital	—		—		(1,815)

Supplemental cash flow disclosures:
Cash paid for interest	515		521		180
Cash paid for related party interest	—		—		51
Cash paid for income taxes	582		433		210

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 Income (Loss)		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
(in millions)	Shares	Amount
Balance as of December 31, 2017	790.5	$	8	$	6,377	$	914	$	99	$	7,398	$	—	$	7,398
Adoption of new accounting standards	—	—		—		(4)		—		(4)		—		(4)
Net income attributable to KDP	—	—		—		586		—		586				586
Other comprehensive income	—	—		—		—		(229)		(229)		—		(229)
Issuance of common stock	407.0	4		8,996		—		—		9,000		—		9,000
Acquisition of DPS	182.5	2		3,641		—		—		3,643		—		3,643
Conversion of subsidiary shares	7.9	—		172		—		—		172		—		172
Capitalization of loans with related parties	—	—		1,815		—		—		1,815		—		1,815
Adjustment of non-controlling interests to fair value	—	—		—		(16)		—		(16)		—		(16)
Reclassification of historical Maple Parent Corporation employee redeemable non-controlling interest and mezzanine equity awards	—	—		9		139		—		148		—		148
Acquisition of Core	16.7	—		441		—		—		441		—		441
Dividends declared	—	—		—		(441)		—		(441)		—		(441)
Shares issued under employee stock-based compensation plans and other	1.3	—		—		—		—		—		—		—
Stock-based compensation	—	—		20		—		—		20		—		20
Balance as of December 31, 2018	1,405.9	$	14	$	21,471	$	1,178	$	(130)	$	22,533	$	—	$	22,533
Adoption of new accounting standards	—	—		—		(5)		—		(5)		—		(5)
Net income attributable to KDP	—	—		—		1,254		—		1,254		—		1,254
Other comprehensive income	—	—		—		—		234		234		—		234
Measurement period adjustment for acquisition of Core	—	—		11		—		—		11		—		11
Dividends declared, $0.60 per share	—	—		—		(845)		—		(845)		—		(845)
Shares issued under employee stock-based compensation plans and other	0.9	—		—		—		—		—		—		—
Stock-based compensation	—	—		75		—		—		75		—		75
Balance as of December 31, 2019	1,406.8	$	14	$	21,557	$	1,582	$	104	$	23,257	$	—	$	23,257
Net income attributable to KDP	—	—		—		1,325		—		1,325		—		1,325
Other comprehensive income	—	—		—		—		(27)		(27)		—		(27)
Dividends declared, $0.60 per share	—	—		—		(846)		—		(846)		—		(846)
Proceeds from controlling shareholder stock transactions	—	—		29		—		—		29		—		29
Non-cash acquisition of controlling interest	—	—		3		—		—		3		1		4
Shares issued under employee stock-based compensation plans and other	0.5	—		—		—		—		—		—		—
Stock-based compensation	—	—		88		—		—		88		—		88
Balance as of December 31, 2020	1,407.3	$	14	$	21,677	$	2,061	$	77	$	23,829	$	1	$	23,830

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

ORGANIZATION AND 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 brewers 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.

Effective September 18, 2020, at market close, the Company's common stock ceased to be listed on the New York Stock Exchange and on September 21, 2020, the following business day, KDP's common stock began trading on Nasdaq's Global Select Market at market open. The Company's stock ticker remains "KDP".

BASIS OF PRESENTATION

For financial reporting and accounting purposes, Maple Parent Holdings Corp. was the acquirer of DPS upon completion of the DPS Merger. The consolidated financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 include 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.

FISCAL YEAR END

KDP's fiscal year end is December 31, and its interim fiscal quarters are March 31, June 30, and September 30. KDP's significant subsidiary, Maple Parent Holdings Corp., has a fiscal year end of the last Saturday in December, and its interim fiscal quarters end every thirteenth Saturday. KDP does not adjust for the difference in fiscal year, as the difference is within the range permitted by the Exchange Act.

PRINCIPLES OF CONSOLIDATION

KDP consolidates all wholly owned subsidiaries.

The Company consolidates investments in companies in which it holds the majority interest. In these cases, the third party equity interest is referred to as non-controlling interest. Non-controlling interests are presented as a separate component within equity in the Consolidated Balance Sheets, and net earnings attributable to the non-controlling interests are presented separately in the Consolidated Statements of Income.

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 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

RECLASSIFICATIONS

For the year ended December 31, 2020, the Company made certain reclassifications in the prior period presentations of the Consolidated Statements of Cash Flows to conform to the current year presentation.

Consolidated Statements of Cash Flows

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


			Year Ended December 31,
(in millions)	Prior Presentation	Revised Presentation	2019		2018
Net cash provided by operating activities:
(Gain) loss on disposal of property, plant and equipment	Other, net	(Gain) loss on disposal of property, plant and equipment	$	(14)	$	5
Amortization of deferred financing fees	Amortization expense	Other, net	13		15
Amortization of bond fair value	Amortization expense	Other, net	27		13
Net cash used in financing activities:
Payment of deferred financing fees	Deferred financing charges paid	Other, net	—		(55)

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

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 Notes and marketable securities as of December 31, 2020 and 2019 are based on quoted market prices for publicly traded securities.

The Company estimates fair values of financial instruments measured at fair value in the Company’s consolidated 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, 2020 and 2019, 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 years ended December 31, 2020, 2019 and 2018.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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 Expected Credit Losses

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 expected credit losses using information such as its customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions such as the impacts of COVID-19 in the year ended December 31, 2020. Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies or expectations of any such events in a future period when reasonable and supportable. Historical information is utilized beyond reasonable and supportable forecast periods. Amounts are charged against the allowance when it is determined that expected credit losses may occur.

Activity in the allowance for expected credit loss accounts was as follows:


	For the Year Ended December 31,
(in millions)	2020		2019		2018
Balance, beginning of the period	$	9	$	8	$	2
Charges to bad debt expense	17		2		5
Write-offs and adjustments	(5)		(1)		1
Balance, end of the period	$	21	$	9	$	8

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, 2020 and 2019 as described in Note 18. As of December 31, 2020 and 2019, Walmart accounted for approximately $184 million and $152 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 partner 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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, 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.

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, 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.

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	40 years
Machinery and equipment	2	to	20 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.

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. For the years ended December 31, 2020 and 2019, the Company recorded an impairment loss of $1 million and $24 million, respectively and no impairment loss for the year ended December 31, 2018. Impairment loss is recorded in Other expense (income), net, net in the Consolidated Statements of Income.

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. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants, except for certain 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. Leases with an initial term of 12 months or less are not recognized on the Consolidated Balance Sheets.

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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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, net 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.

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.

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 affiliates 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.

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.

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:

intangible assets with definite lives subject to amortization, and
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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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	3	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. Management's estimates of fair value, which fall under Level 3 and are non-recurring, are based on historical and forecasted revenues and profit performance and discount rates. Fair value is based on what the reporting units and intangible assets would be worth to a third party market participant. 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. KDP's six reporting units are as follows:


Segments						Reporting Units
Packaged Beverages						DSD
						WD
Coffee Systems						Coffee Systems US
						Coffee Systems Canada
Beverage Concentrates						Beverage Concentrates
Latin America Beverages						Latin America Beverages

If the carrying value of the reporting unit or intangible asset exceeds its fair value, an impairment charge will be recorded in current earnings for the difference up to the carrying value of the goodwill or intangible asset recorded. Refer to Note 4 for additional information.

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 for additional information. 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. 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, 2020, 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.

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.

Risk Management Programs

The Company retains selected levels of property, casualty, workers' compensation, health, cyber 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 liabilities 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.

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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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 contracts, FX forward contracts, commodity forward, future, swap and option contracts and supplier pricing agreements. KDP does not hold or issue derivative financial instruments for trading or speculative purposes.

The Company records all derivative instruments on a gross basis, including those subject to master netting arrangements.

KDP formally designates and accounts for certain foreign exchange forward contracts that meet established accounting criteria under U.S. GAAP as cash flow hedges. For such contracts, the effective portion of the gain or loss on the derivative instruments is recorded, net of applicable taxes, in AOCI. When net income is affected by the variability of the underlying transaction, the applicable offsetting amount of the gain or loss from the derivative instrument deferred in AOCI is reclassified to net income. Cash flows from derivative instruments designated in a qualifying hedging relationship are classified in the same category as the cash flows from the hedged items. If a cash flow hedge were to cease to qualify for hedge accounting, or were terminated, the derivatives would continue to be carried on the balance sheet at fair value until settled and hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCI would be reclassified to earnings at that time.

For derivatives that are not designated or for which the designated hedging relationship is discontinued, the gain or loss on the instrument is recognized in earnings in the period of change.

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 under defined guidelines and monitors the market position of the programs upon execution of a hedging transaction and at least on a quarterly basis.

Loss Contingencies

Legal Matters

The Company is involved from time to time in various claims, proceedings, and litigation, including those described in Note 16. 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, and where applicable, the Company provides disclosure of such legal matters in Note 16.

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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Revenue Recognition

The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include CSDs, NCBs, K-Cup 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.

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

The Company incurred $1,326 million, $1,181 million and $695 million of transportation and warehousing costs during the years ended December 31, 2020, 2019 and 2018, respectively. These amounts, which primarily relate to shipping and handling costs, are recorded in SG&A expenses in the Consolidated Statements of Income.

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 were approximately $489 million, $670 million and $411 million for the years ended December 31, 2020, 2019 and 2018, respectively. 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 Other non-current assets in the Consolidated Balance Sheets.

Research and Development Costs

Research and development costs are expensed when incurred and amounted to $69 million, $81 million and $64 million for the years ended December 31, 2020, 2019 and 2018. These expenses are recorded primarily 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. The fair value of PSUs is estimated at the date of grant using a Monte-Carlo simulation. 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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, or U.S. dollars. 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.

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.

RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323),and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 ("ASU 2020-01"). The objective of ASU 2020-01 is to clarify the interaction of the accounting for equity securities, investments accounted for under the equity method of accounting and the accounting for certain forward contracts and purchased options accounted for under different topics in U.S. GAAP. ASU 2020-01 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. The adoption of ASU 2020-01 will not materially impact KDP's consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The objective of ASU 2020-04 is to provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective and can be elected for all entities from the issuance date of ASU 2020-04 through December 31, 2022. The Company is currently evaluating ASU 2020-04 but expects the impact to be immaterial to KDP's consolidated financial statements.

RECENTLY ADOPTED PROVISIONS OF U.S. GAAP

Credit Losses

As of January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology with an expected loss methodology. The objective of ASU 2016-13 was to provide for a new impairment model which requires measurement and recognition of current expected credit losses (CECL) for most financial assets held. The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost, which means that results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Refer to the Trade Accounts Receivable and Allowance for Expected Credit Losses section above for required disclosures under ASU 2016-13. The adoption of ASU 2016-13 did not have an impact on the Company's consolidated financial statements.

Other Accounting Standards

As of January 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements. The objective of ASU 2018-13 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 adoption of ASU 2018-13 did not have an impact on the Company's consolidated financial statements.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

3. Long-term Obligations and Borrowing Arrangements

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


	December 31,
(in millions)	2020		2019
Senior unsecured notes	$	13,065	$	11,802

Term loans	423		1,372
Subtotal	13,488		13,174
Less - current portion	(2,345)		(347)
Long-term obligations	$	11,143	$	12,827

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


	December 31,
(in millions)	2020		2019
Commercial paper notes	$	—	$	1,246
Current portion of long-term obligations:
Senior unsecured notes	2,246		250
Term loans	99		97
Short-term borrowings and current portion of long-term obligations	$	2,345	$	1,593

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

SENIOR UNSECURED NOTES

The Company's Notes consisted of the following:


(in millions)			December 31,
Issuance	Maturity Date	Rate	2020		2019
2020 Notes(1)	January 15, 2020	2.000%	—		250
2021 Merger Notes	May 25, 2021	3.551%	1,750		1,750
2021-A Notes	November 15, 2021	3.200%	250		250
2021-B Notes	November 15, 2021	2.530%	250		250
2022 Notes	November 15, 2022	2.700%	250		250
2023 Merger Notes	May 25, 2023	4.057%	2,000		2,000
2023 Notes	December 15, 2023	3.130%	500		500
2025 Merger Notes	May 25, 2025	4.417%	1,000		1,000
2025 Notes	November 15, 2025	3.400%	500		500
2026 Notes	September 15, 2026	2.550%	400		400
2027 Notes	June 15, 2027	3.430%	500		500
2028 Merger Notes	May 25, 2028	4.597%	2,000		2,000
2030 Notes(2)	May 1, 2030	3.200%	750		—
2038 Notes	May 1, 2038	7.450%	125		125
2038 Merger Notes	May 25, 2038	4.985%	500		500
2045 Notes	November 15, 2045	4.500%	550		550
2046 Notes	December 15, 2046	4.420%	400		400
2048 Merger Notes	May 25, 2048	5.085%	750		750
2050 Notes(2)	May 1, 2050	3.800%	750		—
Principal amount			$	13,225	$	11,975
Adjustment from principal amount to carrying amount(3)			(160)		(173)
Carrying amount			$	13,065	$	11,802

(1)On January 15, 2020, the Company repaid the 2020 Notes at maturity, using commercial paper borrowings.

(2)On April 13, 2020, the Company completed the issuance of $1.5 billion aggregate principal amount of senior unsecured notes consisting of $750 million aggregate principal amount of 3.200% senior unsecured notes due May 1, 2030 and $750 million aggregate principal amount of 3.800% senior unsecured notes due May 1, 2050. The discount associated with the 2030 Notes and the 2050 Notes was approximately $6 million. The net proceeds from the issuance were used to repay outstanding borrowings under the KDP Revolver.

(3)The carrying amount includes unamortized discounts, debt issuance costs and fair value adjustments related to the DPS Merger.

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. As of December 31, 2020, the Company was in compliance with all financial covenant requirements of the Notes.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

BORROWING ARRANGEMENTS

Financial Information Related to KDP Credit Agreements

The KDP Credit Agreements consisted of the following:


		December 31,
(in millions)		2020			2019
Issuance	Maturity Date	Available Balances	Carrying Value		Carrying Value
2019 KDP Term Loan(1)	February 2023	—	425		1,380
KDP Revolver(2)	February 2023	2,400	—		—
2020 364-Day Credit Agreement	May 2021	1,500	—		—
Principal amount			$	425	$	1,380
Unamortized debt issuance costs			(2)		(8)
Carrying amount			$	423	$	1,372

(1)During the year ended December 31, 2020, the Company prepaid $955 million of its outstanding obligations, of which $855 million were voluntary prepayments, under the 2019 KDP Term Loan using a combination of commercial paper and cash on hand. As a result of the voluntary prepayments, the Company recorded a $4 million loss on early extinguishment during the year ended December 31, 2020.

(2)The KDP Revolver has $200 million letters of credit available, none of which were utilized as of December 31, 2020.

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, 2020, the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements.

Term Loan Agreements

On February 8, 2019, the Company terminated its 2018 KDP Term Loan and refinanced it with the $2 billion 2019 KDP Term Loan, 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.

The interest rate applicable to the 2019 KDP Term Loan 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. The 2019 KDP Term Loan requires KDP to make quarterly payments on the unpaid principal amount 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 matures on February 8, 2023.

364-Day Credit Agreements

The Company entered into the 2019 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 interest rate applicable to borrowings under the 2019 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 2019 364-Day Credit Agreement had an original maturity date of May 27, 2020.

On April 14, 2020, the Company terminated the 2019 364-Day Credit Agreement and executed the 2020 364-Day Credit Agreement in order to increase the commitment from $750 million to $1.5 billion. The 2020 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes. The interest rate applicable to borrowings under the 2020 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 2.250% to 2.750% or a base rate plus a margin of 1.250% to 1.750%, depending on the rating of certain index debt of the Company. The 2020 364-Day Credit Agreement will mature on April 13, 2021.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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 1.500% 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 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.

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 no outstanding commercial paper notes as of December 31, 2020 and $1,246 million as of December 31, 2019.

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 %)	2020			2019			2018(1)
Weighted average commercial paper borrowings	$	789		$	1,754		$	1,309
Weighted average borrowing rates	1.24		%	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 Facility

In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letters of credit facility. Under this facility, $100 million is available for the issuance of letters of credit, $50 million of which was utilized as of December 31, 2020 and $50 million of which remains available for use.

FAIR VALUE DISCLOSURES

The fair values of each of the Company's commercial paper notes and the 2019 KDP Term Loan approximate the carrying value and are considered Level 2 within the fair value hierarchy.

The fair values of the Company's Notes are based on current market rates available to the Company and are considered Level 2 within the fair value hierarchy. 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 the Notes and related unamortized costs to be incurred at such date. The fair value of the Company's Notes was $15,274 million and $12,898 million as of December 31, 2020 and December 31, 2019, respectively.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

4. Goodwill and Other Intangible Assets

GOODWILL

Changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2020 and 2019 are as follows:


	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Corporate Unallocated		Total
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
Foreign currency translation	20		13		10		(31)		—		12

Balance as of December 31, 2020	$	9,795	$	5,314	$	4,536	$	539	$	—	$	20,184

(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.

INTANGIBLE ASSETS OTHER THAN GOODWILL

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


	December 31, 2020		December 31, 2019
Brands(1)	$	19,874	$	19,948
Trade names	2,480		2,479
Contractual arrangements	123		122
Distribution rights(2)	57		16
Total	$	22,534	$	22,565

(1)The decrease in brands with indefinite lives was due to $67 million impairment of the Bai brand, as well as a decrease of $7 million due to foreign currency translation during the year ended December 31, 2020. Refer to Impairment Analysis below for further details about the impairment of Bai.

(2)The Company executed nine agreements to acquire distribution rights during the year ended December 31, 2020, which resulted in an increase of $41 million. This increase was partially offset by foreign currency translation.

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


	December 31, 2020						December 31, 2019
(in millions)	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Acquired technology	$	1,146	$	(328)	$	818	$	1,146	$	(255)	$	891
Customer relationships	638		(135)		503		638		(102)		536
Trade names	127		(69)		58		128		(55)		73
Distribution rights	26		(6)		20		24		(1)		23
Contractual arrangements	24		(5)		19		24		(3)		21
Brands	21		(5)		16		10		(2)		8
Total	$	1,982	$	(548)	$	1,434	$	1,970	$	(418)	$	1,552

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


	Year Ended December 31,
(in millions)	2020		2019		2018
Amortization expense for intangible assets with definite lives	$	133	$	126	$	121

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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


	For the Years Ending December 31,
(in millions)	2021		2022		2023		2024		2025
Expected amortization expense for intangible assets with definite lives	$	133	$	133	$	132	$	123	$	111

IMPAIRMENT ANALYSIS

For both goodwill and other indefinite lived intangible assets, KDP has the option to first assess qualitative factors to determine whether the fair value of either the reporting unit or indefinite lived intangible asset is not "more likely than not" less than its carrying value, also known as a Step 0 analysis.

For the year ended December 31, 2020, KDP performed a quantitative analysis, using the income approach, or in some cases a combination of income and market based approaches, to determine the fair value of the Company's assets, as well as an overall consideration of market capitalization and enterprise value. For the year ended December 31, 2019, KDP performed a quantitative analysis using an income based approach to determine fair value. For the year ended December 31, 2018, KDP performed a Step 0 analysis on the legacy DPS assets concluding that no further analysis was required and a quantitative step 1 analysis on the legacy Keurig assets using an income based approach to determine the fair value.

The following table provides the range of rates used in the analysis as of October 1, 2020, 2019, and 2018:


	2020				2019				2018
Rate	Minimum		Maximum		Minimum		Maximum		Minimum		Maximum
Discount rates	6.0	%	10.0	%	7.3	%	13.0	%	8.5	%	9.5	%
Long-term growth rates	—	%	3.5	%	—	%	2.5	%	0.9	%	2.4	%
Royalty rates	1.0	%	10.0	%	1.0	%	10.0	%	1.0	%	7.0	%

During the year ended December 31, 2020, the Company recorded an impairment of $67 million for Bai, an indefinite lived brand asset. No other impairment of goodwill or indefinite lived intangible assets was identified during the year ended December 31, 2020, and no impairment was identified in each of the years ended December 31, 2019 and 2018.

The factors that led to the Bai brand impairment determination were primarily performance of the brand during the COVID-19 pandemic, related shifts in consumer behaviors that are expected to be other-than-temporary, and updated forecasts of brand performance based on a refined strategic vision to market and sell the product.

The results of the impairment analysis of the Company's indefinite lived brands and trade names as of October 1, 2020, 2019, and 2018 are as follows:


	2020				2019				2018
Headroom Percentage	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value(1)
Brands
Impairment(2)	$	482	$	415	$	—	$	—	$	—	$	—
0 - 25%	5,052		5,775		6,356		7,251		19,555		19,555
26 - 50%	2,261		2,993		12,319		17,303		—		—
In excess of 50%	11,946		19,835		1,188		1,988		—		—
	$	19,741	$	29,018	$	19,863	$	26,542	$	19,555	$	19,555

Trade Names
Impairment	$	—	$	—	$	—	$	—	$	—	$	—
0 - 25%	1		1		—		—		—		—
26 - 50%	—		—		—		—		—		—
In excess of 50%	2,479		6,990		2,479		6,650		2,479		4,600
	$	2,480	$	6,991	$	2,479	$	6,650	$	2,479	$	4,600

(1)Due to the timing of the DPS Merger, the Company performed as a step 0 analysis on the indefinite lived brands as of October 1, 2018, which resulted in carrying value approximating fair value.

(2)The impairment line represents the carrying value and fair value of Bai as of the October 1, 2020 measurement date, prior to the $67 million impairment recorded during the fourth quarter of 2020.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

5. Acquisitions and Investments in Unconsolidated Affiliates

2020 ACQUISITIONS

On July 31, 2020, the Company closed on a stock purchase agreement to obtain a 66.4% ownership interest in Revive from Peet's for cash consideration of $1, with Peet's retaining a minority ownership interest. Revive is an organic, non-alcoholic kombucha brand, available in both traditional refrigerated and shelf-stable varieties. The transaction is considered a common control transaction due to KDP's relationship with Peet's through certain affiliates of JAB. The investment was accounted for as an acquisition of a controlling interest, and in accordance with the requirements of U.S. GAAP for common control transactions, KDP recognized all of Revive's assets and liabilities at their carrying values as of July 31, 2020, with the $3 million difference between the Company's ownership interest in the net assets and the purchase price recorded to additional paid-in capital. Refer to Note 1 for the Company's accounting policies with respect to the consolidation of Revive and accounting for the non-controlling interest.

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.

2018 ACQUISITIONS

For the acquisitions in the year ended December 31, 2018, the Company used consistent valuation approaches in order to derive the fair value of assets acquired. 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 valued real property using the cost approach and land using the sales comparison approach. 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. The Company valued WIP and finished goods inventory using a net realizable value approach and raw materials were valued at net book value. The brand portfolios were valued utilizing the multi-period excess earnings method, a form of the income approach. Contractual arrangements with bottlers and distributors and retail and food service customer relationships were valued utilizing the distributor method, a form of the income approach.

Acquisition of DPS

Overview and Total Consideration Exchanged

Maple Parent Holdings Corp. 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 Parent Holdings Corp. was considered to be the accounting acquirer, and DPS was considered the legal acquirer. Under the acquisition method of accounting, total consideration exchanged was:


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

(1)As a result of the DPS Merger, all DPS stock option awards, RSUs and PSUs which were unvested prior to the DPS Merger vested immediately as a result of the Change in Control (as defined in the terms of each individual award agreement). All such 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 IRS requirements.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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

A $9,000 million equity investment from JAB.
The issuance by the Company of $8,000 million of senior unsecured notes.
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 3 for additional information.
Proceeds of $124 million from the Company's structured payables.
The remainder of the total consideration exchanged in the DPS Merger was funded by cash on hand.

Allocation of Consideration Exchanged

The Company's 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)	Purchase Price Allocation		Estimated Useful Life
Cash and cash equivalents	$	147
Investments in unconsolidated subsidiaries	90
Property, plant and equipment	1,475		1 year - 41 years
Other intangible assets
Brands	19,556		n/a
Contractual arrangements	127		n/a
Customer relationships	390		10 years - 40 years
Favorable leases	5		5 years - 12 years
Long-term obligations	(4,049)
Capital lease and financing obligations	(205)
Acquired assets, net of assumed liabilities(1)	81
Deferred tax liabilities, net of deferred tax assets(2)	(5,041)
Goodwill(3)	9,906
Total consideration exchanged	22,482
Fair value of stock and replacement equity awards not converted to cash	3,643
Acquisition of business	$	18,839

(1)The Company valued WIP and finished goods inventory resulting in a step-up of $131 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.

(2)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.

(3)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.

Acquisition of Big Red

Overview and Purchase Price

On August 31, 2018, the Company closed the Big Red Acquisition for a cash purchase price of $300 million, 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 (income) expense, net during the year ended December 31, 2018.

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 Big Red Acquisition is based on estimated fair values as of August 31, 2018 and was finalized on August 31, 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 Big Red Acquisition:


(in millions)	Purchase Price Allocation		Estimated Useful Life
Cash and cash equivalents	$	3
Other intangible assets
Brands	220		n/a
Brands	11		5 years
Contractual arrangements	6		12 years
Customer relationships	1		8 years - 40 years
Assumed liabilities, net of acquired assets(1)	(48)
Goodwill(2)	113
Total consideration exchanged	306
Less: Company's previous ownership interest	22
Less: Holdback placed in Escrow	15
Acquisition of business	$	269

(1)The Company valued WIP and finished goods inventory 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.

(2)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.

Acquisition of Core

Overview and Purchase Price

On November 30, 2018, the Company closed the Core Acquisition, whereby we acquired Core for merger consideration, which represented an enterprise value of $525 million (subject to customary post-closing working capital and other adjustments), 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. Core is a brand owner with a portfolio of NCBs in the water category.

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 the year ended December 31, 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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)	Purchase Price Allocation		Estimated Useful Life
Cash and cash equivalents	$	10
Other intangible assets
Brands	142		n/a
Contractual arrangements	17		10 years
Assumed liabilities, net of acquired assets	(17)
Goodwill(1)	362
Total purchase price	$	514
Company's previous ownership interest	31
Less: Holdback placed in Escrow	23
Acquisition of business	$	460

(1)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 deductible for tax purposes.

TRANSACTION EXPENSES

The following table provides information about the Company's transaction expenses associated with business combinations (completed or abandoned) incurred during the years ended December 31, 2020, 2019 and 2018:


	Year Ended December 31,
(in millions)	2020		2019		2018
DPS Merger	$	—	$	8	$	158
Other transaction expenses	—		17		4
Total transaction expenses incurred	$	—	$	25	$	162

INVESTMENTS IN UNCONSOLIDATED AFFILIATES

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


			December 31,
(in millions)	Ownership Interest		2020		2019
BodyArmor	12.5	%	$	51	$	52
Bedford	30.0	%	—		46
Dyla LLC	12.4	%	12		13
Force Holdings LLC	33.3	%	5		5
Beverage startup companies	(various)		15		30
Other	(various)		5		5
Investments in unconsolidated affiliates			$	88	$	151

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Impairments of Investments

Bedford Investment and Related Party Note Receivable

The Company and ABI, in conjunction with the creation of Bedford, had 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 committed and funded the $51 million capacity, which incurs a fixed interest rate of 8.1% per annum. The credit agreement with Bedford matures on March 3, 2024.

In March 2020, the Company reduced its expectation of future operating performance for Bedford based on COVID-19 and a new revised five-year projection from the management of Bedford that projected the possibility of profitability two years later than previously anticipated. As a result of these indicators of impairment, the Company tested the Bedford investment for an other-than-temporary impairment using a discounted cash flow framework with multiple scenarios, including the conversion of the note receivable into equity. The results of its analysis indicated that the note receivable of $55 million was fully impaired and the investment in unconsolidated affiliates was impaired by $31 million, which was recorded on the Impairment of investments and note receivable line in the Consolidated Statements of Income. As a result of the other-than-temporary impairment, the Company has placed the note receivable in non-accrual status.

Beverage Startup Companies

In September 2020, the Company tested its investment in LifeFuels, which is included in the Beverage startup companies line in the table above, for an other-than-temporary impairment as a result of continued losses, ongoing liquidity concerns and a lack of a buyer for LifeFuels. As a result of this analysis, the Company determined that the investment was fully impaired and recorded an impairment charge of approximately $16 million to the Impairment of investments and note receivable line in the Consolidated Statements of Income.

6. Restructuring and Integration Costs

Restructuring and integration charges incurred on the defined programs during the years ended December 31, 2020, 2019 and 2018 were as follows:


	Year Ended December 31,
(in millions)	2020		2019		2018
Business realignment	$	—	$	—	$	2
Keurig K2.0 exit	—		1		12
DPS Integration program	200		232		155
Other restructuring programs	—		—		1
Total restructuring and integration charges	$	200	$	233	$	170

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, 2020 and 2019, along with charges to expense, cash payments, and non-cash charges during the years ended December 31, 2020 and 2019, were as follows:


(in millions)	Workforce Reduction Costs		Other(1)		Total
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
Charges to expense	31		—		31
Cash payments	(29)		—		(29)
Non-cash adjustment items	(3)		—		(3)
Balance as of December 31, 2020	$	14	$	—	$	14

(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

DPS Integration Program

As part of the DPS Merger, 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 and integration program resulted in cumulative pre-tax charges of approximately $587 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through December 31, 2020.

Business Realignment

In 2018, the Company approved realignment as the Company determined that its strategic priorities had shifted and as a result has redesigned its 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. The Company does not expect to incur additional restructuring charges related to this program as it was completed in 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)	2020		2019		2018
U.S.	$	1,367	$	1,389	$	635
International	386		305		156
Total	$	1,753	$	1,694	$	791

The provision for income taxes has the following components:


	For the Year Ended December 31,
(in millions)	2020		2019		2018
Current:
Federal	$	297	$	303	$	183
State	103		98		62
International	79		62		38
Total current provision	$	479	$	463	$	283

Deferred:
Federal	$	(31)	$	(31)	$	(24)
State	(6)		1		(50)
International	(14)		7		(7)
Total deferred provision	$	(51)	$	(23)	$	(81)
Total provision for income taxes	$	428	$	440	$	202

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)	2020		2019		2018
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net	4.0	%	3.7	%	5.4	%
U.S. federal domestic manufacturing benefit	—	%	—	%	(1.5)	%
Impact of non-U.S. Operations	0.2	%	0.3	%	0.1	%
Tax credits	(1.3)	%	(0.9)	%	(0.9)	%
Valuation allowance for deferred tax assets	(1.1)	%	—	%	2.0	%
U.S. taxation of foreign earnings	1.6	%	1.5	%	1.8	%
Deferred rate change	0.5	%	(0.3)	%	(4.9)	%
State refund	—	%	—	%	(0.4)	%
Uncertain tax positions	(1.3)	%	—	%	0.6	%
U.S. federal provision to return	0.1	%	(0.6)	%	(0.3)	%
Transaction costs	—	%	—	%	1.4	%
Impact of the TCJA	—	%	—	%	0.5	%
Other	0.7	%	1.3	%	0.7	%
Total provision for income taxes	24.4	%	26.0	%	25.5	%

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Deferred tax assets and liabilities were comprised of the following:


	December 31,
(in millions)	2020		2019
Deferred tax assets:
Operating lease liability	$	161	$	67
Net operating losses carryforwards	46		48
Tax credit carryforwards	54		56
Accrued expenses	153		118
Share-based compensation	36		24
Multi-year upfront payments	15		18
Equity method investments	29		—
Other	27		36
Total deferred tax assets	521		367
Valuation allowances	(51)		(71)
Total deferred tax assets, net of valuation allowances	$	470	$	296
Deferred tax liabilities:
Brands, trade names and other intangible assets	$	(5,916)	$	(5,913)
Property, plant and equipment	(293)		(263)
Derivative instruments	(38)		(48)
Right of use assets	(159)		(64)
Equity method investments	—		(1)
Other	(12)		(8)
Total deferred tax liabilities	(6,418)		(6,297)
Net deferred tax liabilities	$	(5,948)	$	(6,001)

CARRYFORWARDS

As of December 31, 2020 and 2019, the Company had $45 million and $48 million, respectively, in tax-effected Luxembourg net operating loss carry forwards. Of the $45 million of net operating loss carryforwards as of December 31, 2020, $44 million will not expire and $1 million will begin to expire in the year 2035. The Company recorded a $19 million valuation allowance release during the year ended December 31, 2020 on the Luxembourg net operating losses, as realization is more likely than not.

The Company has $53 million of U.S. foreign tax credit carryforwards and $1 million of other carryforwards, primarily related to U.S. state income tax. Of the $53 million of U.S. foreign tax credit carryforwards, $51 million have a valuation allowance. Foreign tax credits will begin to expire in 2026.

UNDISTRIBUTED INTERNATIONAL EARNINGS

For the tax year ended December 31, 2020 and 2019, undistributed earnings in non-U.S. subsidiaries for which no deferred taxes have been provided totaled approximately $130 million and $88 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 earnings and profits would be considered immaterial.

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.

OTHER TAX MATTERS

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 2017 are closed to examination by applicable tax authorities. Mexican income tax returns are generally open for tax years 2015 and forward, and Canadian income tax returns are open for audit for tax years 2012 and forward.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The Company has a tax holiday in Singapore, whereby the local statutory rate is significantly reduced if certain conditions are met. The tax holiday for Singapore is effective through June 2024. The impact of the tax holiday increased net income by approximately $6 million in the year ended December 31, 2020, resulting in no impact to basic and diluted EPS for the year ended December 31, 2020.

UNRECOGNIZED TAX BENEFITS

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


	For the Year Ended December 31,
(in millions)	2020		2019		2018
Balance, beginning of the period	$	43	$	50	$	35
Increases related to tax positions taken during the current year	2		2		1
Increases related to tax positions taken during the prior year	2		3		12
Increases related to tax positions from acquisitions	—		—		13
Decreases related to settlements with taxing authorities	(8)		(8)		(8)
Decreases related to lapse of applicable statute of limitations	(21)		(4)		(3)
Balance, end of the period	$	18	$	43	$	50

The total amount of unrecognized tax benefits that, if recognized, would reduce the effective tax rate, is $13 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 a benefit of $8 million and expense of $3 million and $1 million related to interest and penalties for uncertain tax positions for the years ended December 31, 2020, 2019 and 2018, respectively. The Company had a total of $1 million and $11 million accrued for interest and penalties for its uncertain tax positions reported as part of other non-current liabilities as of December 31, 2020 and 2019, respectively.

8. 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. 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, 2020, all interest rate swap contracts will mature in March 2025.

FOREIGN EXCHANGE

The Company is exposed to foreign exchange risk in its international subsidiaries, which may transact in currencies that are different from the functional currencies of those subsidiaries. The balance sheets of each of these businesses are also subject to exposure from movements in exchange rates.

Economic Hedges

During the years ended December 31, 2020, 2019 and 2018, the Company held FX forward contracts to economically manage the balance sheet exposures resulting from changes in the FX exchange rates described above. The intent of these FX contracts is to minimize the impact of FX risk associated with balance sheet positions not in local currency. 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. These FX contracts have maturities ranging from January 2021 to September 2024 as of December 31, 2020.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Cash Flow Hedges

During 2020, the Company began to designate certain FX forward contracts related to inventory purchases of the Canadian and Mexican businesses as cash flow hedges in order to manage the exposures resulting from changes in the FX rates described above. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. These FX contracts, carried at fair value, have maturities ranging from January 2021 to March 2022 as of December 31, 2020.

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 years ended December 31, 2020, 2019 and 2018, 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, 2020, these commodity contracts have maturities ranging from January 2021 to January 2024.

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)	2020		2019
Interest rate contracts
Receive-fixed, pay-variable interest rate swaps(1)	$	—	$	50
Receive-variable, pay-fixed interest rate swaps(2)	450		575
FX contracts
Forward contracts, not designated as hedging instruments	476		523
Forward contracts, designated as cash flow hedges	333		—
Commodity contracts	450		150

(1)During the year ended December 31, 2020, the Company elected to terminate $50 million notional amount of receive-fixed, pay-variable interest rate swaps and received cash of $18 million.

(2)During the year ended December 31, 2020, the Company elected to terminate $575 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $2 million.

FAIR VALUE OF DERIVATIVE INSTRUMENTS

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

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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	2020		2019
Assets:
Interest rate contracts	2	Prepaid expenses and other current assets	$	—	$	1

Commodity contracts	2	Prepaid expenses and other current assets	45		30
Interest rate contracts	2	Other non-current assets	—		18

Commodity contracts	2	Other non-current assets	12		1

Liabilities:
Interest rate contracts	2	Other current liabilities	$	2	$	—
FX forward contracts	2	Other current liabilities	6		2
Commodity contracts	2	Other current liabilities	5		10
Interest rate contracts	2	Other non-current liabilities	7		—
FX forward contracts	2	Other non-current liabilities	9		3
Commodity contracts	2	Other non-current liabilities	2		1

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 which are designated as hedging instruments within the Consolidated Balance Sheets:


			December 31,
(in millions)	Fair Value Hierarchy	Balance Sheet Location	2020		2019




Liabilities:
FX forward contracts	2	Other current liabilities	$	12	$	—

IMPACT OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

The following table presents the amount of (gains) losses recognized in the Consolidated Statements of Income related to derivative instruments not designated as hedging instruments under U.S. GAAP during the periods presented. Amounts include both realized and unrealized gains and losses.


		For the Year Ended December 31,
(in millions)	Income Statement Location	2020		2019		2018
Commodity contracts	Cost of sales	$	(35)	$	(10)	$	42
Commodity contracts	SG&A expenses	22		(15)		20
Interest rate contracts	Interest expense	7		7		6
FX forward contracts	Cost of sales	(6)		5		—
FX forward contracts	Other expense (income), net	6		18		(27)

IMPACT OF CASH FLOW HEDGES

During the year ended December 31, 2020, the Company reclassified $2 million of losses from AOCI into income from operations. No amounts were reclassified from AOCI into income from operations for the years ended December 31, 2019 and 2018. KDP expects to reclassify approximately $14 million of losses from AOCI into income from operations during the next twelve months.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

9. Leases

The following table presents the components of lease cost:


	Year Ended December 31,
(in millions)	2020		2019
Operating lease cost	$	113	$	82
Finance lease cost
Amortization of right-of-use assets	47		48
Interest on lease liabilities	14		15
Variable lease cost(1)	27		28
Short-term lease cost	1		5
Sublease income	(2)		(3)
Total lease cost	$	200	$	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:


	Year Ended December 31,
(in millions)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	103	$	77
Operating cash flows from finance leases	14		15
Financing cash flows from finance leases	52		38

The following table presents information about the Company's weighted average discount rate and remaining lease term:


	December 31,
	2020		2019
Weighted average discount rate
Operating leases	4.3	%	4.6	%
Finance leases	4.4	%	5.1	%
Weighted average remaining lease term
Operating leases	12 years		10 years
Finance leases	11 years		12 years

SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS

Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows:


(in millions)	Operating Leases		Finance Leases
2021	$	90	$	58
2022	84		51
2023	75		48
2024	72		45
2025	65		42
Thereafter	444		183
Total future minimum lease payments	830		427
Less: imputed interest	(178)		(85)
Present value of minimum lease payments	$	652	$	342

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED

As of December 31, 2020, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $625 million. These leases will commence between the first quarter of 2021 and the third quarter of 2021, with initial lease terms ranging from 1 year to 17 years.

ASSET SALE-LEASEBACK TRANSACTIONS

On January 10, 2020, the Company closed an asset sale-leaseback transaction on two distribution properties. 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 leaseback is accounted for as an operating lease. The term of the leaseback is expected to end in 2025 and has two three-year renewals.

On January 6, 2020, the Company closed an asset sale-leaseback transaction on 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 $131 million, and resulted in an approximately $19 million gain on the sale transaction. The leaseback is accounted for as an operating lease. 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 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 (income) expense, net. The leaseback is accounted for as an operating lease. 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 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.

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 ended in 2020 upon the Company's relocation to a new facility.

10. Employee Benefit Plans

DEFINED BENEFIT PENSION PLANS

Overview

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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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%.

Financial Statement Impact

The following table sets forth amounts recognized in the Company's financial statements and the pension plans' funded status:


	As of December 31,
(in millions)	2020		2019
Projected Benefit Obligations
Beginning balance	$	226	$	206
Service cost	3		2
Interest cost	7		9
Actuarial losses, net	22		24
Benefits paid	(4)		(7)
Impact of changes in FX rates	(1)		1
Settlements	(25)		(9)
Ending balance	$	228	$	226

Fair Value of Plan Assets
Beginning balance	$	204	$	178
Actual return on plan assets	28		39
Employer contributions	1		2
Benefits paid	(4)		(7)
Impact of changes in FX rates	(1)		1
Settlements	(25)		(9)
Ending balance	$	203	$	204

Net liability recognized	$	(25)	$	(22)
Non-current assets	$	11	$	4
Current liability	(1)		(1)
Non-current liability	(35)		(25)

The accumulated benefit obligations for the defined benefit pension plans were $208 million and $223 million as of December 31, 2020 and 2019. The pension plan assets and the projected benefit obligations of KDP's U.S. pension plans represent approximately 98% of the total plan assets and 95% of the total projected benefit obligation of all plans combined as of December 31, 2020.

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)	2020		2019
Aggregate projected benefit obligation	$	87	$	97
Aggregate accumulated benefit obligation	84		96
Aggregate fair value of plan assets	61		71

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)	2020		2019		2018
Service cost	$	3	$	2	$	1
Interest cost	7		9		5
Expected return on assets	(8)		(9)		(5)

Settlements	(1)		(1)		—
Total net periodic benefit costs	$	1	$	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 2021. The Company included $3 million net actuarial loss in AOCI as of December 31, 2020 and none as of December 31, 2019.

Contributions and Expected Benefit Payments

The Company's contributions to its pension plans for the years ended December 31, 2020, 2019 and 2018, and its projected contributions for the year ended December 31, 2021, are insignificant.

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


			2021						2022						2023						2024						2025						2026-2030
Estimated future benefit payments			$	11					$	11					$	12					$	12					$	12					$	60

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, 2020 and 2019, as well as projected 2021 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, 2020. 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.

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-2020 published by the Society of Actuaries’ Retirement Plans Experience Committee for the year ended December 31, 2020, and the Pri-2012 mortality tables and the Mortality Improvement Scale MP-2019 for the year ended December 31, 2019.

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,
	2020		2019
Weighted average discount rate	2.55	%	3.30	%
Rate of increase in compensation levels	3.00	%	3.00	%

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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,
	2020		2019		2018
Weighted average discount rate	3.30	%	3.30	%	4.25	%
Rate of increase in compensation levels	3.00	%	3.00	%	3.00	%
Expected long-term rate of return	4.00	%	4.00	%	5.25	%

For the years ended December 31, 2020 and 2019, 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,
	2020		2019
Fixed income securities:
Asset allocation assumption	80	%	80	%
Expected long-term rate of return	3.4	%	3.1	%

Equity securities:
Asset allocation assumption	20	%	20	%
Expected long-term rate of return	7.4	%	7.5	%

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, 2020 and 2019, 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.

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, 2020 and 2019.

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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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


		Fair Value Measurement as of December 31,
		2020				2019
(in millions)	Fair Value Hierarchy Level	Pension Assets		PRMB Assets		Pension Assets		PRMB Assets
Cash and cash equivalents	Level 1	$	8	$	1	$	3	$	—
U.S. equity securities(1)(2)	Level 2	22		1		21		1
International equity securities(1)(2)	Level 2	12		7		10		6
International fixed income securities(2)	Level 2	4		—		15		—
Fixed income securities(3)	Level 2	157		1		155		1
Total		$	203	$	10	$	204	$	8

(1)Equity securities are comprised of actively managed U.S. and international 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. Multi-employer plan expenses were $7 million, $4 million and $2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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, 2020:


Plan's employer identification number			36-6044243
Plan number			001
Expiration dates of collective bargaining agreements(1)			February 17,2021 through January 20, 2025
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 March 2, 2024, covers approximately 56% of the employees included in Central States. Two of the collective bargaining agreements are set to expire during 2021, covering approximately 6% of the employees included in Central States.

The most recent Pension Protection Act zone status available as of December 31, 2020 is for the plan's year-end as of December 31, 2019. 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, 2020, 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:


			2021						2022						2023						2024						2025
Future estimated contributions to Central States			$	2					$	2					$	2					$	2					$	2

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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 IRS 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	2020		2019
Marketable securities - trading	Level 1	$	41	$	40

The corresponding liability related to the deferred defined 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 associated with these trading securities during each of the years ended December 31, 2020 and 2019, and $5 million in losses during the year ended December 31, 2018.

The Company makes matching contributions and discretionary profit sharing contributions to each of the respective plans. The Company incurred contribution expense of $77 million, $66 million and $36 million to the defined contribution plans for the years ended December 31, 2020, 2019 and 2018, respectively.

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)	2020		2019		2018
Basic EPS:
Net income attributable to KDP	$	1,325	$	1,254	$	586
Weighted average common shares outstanding	1,407.2		1,406.7		1,086.3
Earnings per common share — basic	$	0.94	$	0.89	$	0.54
Diluted EPS:
Net income attributable to KDP	$	1,325	$	1,254	$	586
Weighted average common shares outstanding	1,407.2		1,406.7		1,086.3
Effect of dilutive securities:
Stock options	0.3		0.6		0.9
RSUs	14.6		11.8		10.4
Weighted average common shares outstanding and common stock equivalents	1,422.1		1,419.1		1,097.6
Earnings per common share — diluted	$	0.93	$	0.88	$	0.53

Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation	0.5		—		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)	2020		2019		2018
Total stock-based compensation expense	$	85	$	64	$	35
Income tax benefit recognized in the Statements of Income	(13)		(11)		(7)
Stock-based compensation expense, net of tax	$	72	$	53	$	28

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

DESCRIPTION OF STOCK-BASED COMPENSATION PLANS

Prior to the DPS Merger, Maple Parent Holdings Corp. had share-based compensation programs under which certain designated employees were granted awards in the form of RSUs. 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.

RSUs generally vest on the following schedule:


Period Granted						Vesting Terms
RSUs granted prior to the DPS Merger						4 years, 6 months term with cliff-vesting at the end of the term
RSUs granted after the DPS Merger through 2019						5-year term with cliff-vesting at the end of the term
RSUs granted during 2020						5-year term with graded vesting as follows: 0% in year 1, 0% in year 2, 60% in year 3, 20% in year 4, 20% in year 5

However, from time to time, the Company grants RSUs outside of the normal grant cycle which have different terms and vesting conditions. For all RSU grants, the Company recognizes the expense ratably over the vesting period.

During the year ended December 31, 2020, the Company modified the terms of one RSU grant to a named executive officer. A grant of 868,056 RSUs with a five-year vesting term which were previously granted in September 2020 were forfeited, and a corresponding grant of 651,042 PSUs and 217,014 RSUs were granted. The PSUs will vest three years from the beginning date of a predetermined performance period, to the extent that the Company has achieved the performance criteria during the performance period. The performance criteria for the modified award includes a specified market condition which compares total shareholder return to that of certain indices. Additionally, the PSUs are required to be held by the grantee for one year after the awards have vested. The RSUs will vest ratably over a three-year term. As a result of the award modification, no incremental compensation expense will be recognized over the life of the award.

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 SHARE UNITS

The table below summarizes RSU activity for the year ended December 31, 2020:


	RSUs	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Balance as of December 31, 2019	21,492,786	$	18.14	2.6	$	622
Granted	8,542,934	24.91		—	—
Vested and released	(97,681)	16.95		—	3
Forfeited	(3,249,735)	23.52		—	—
Balance as of December 31, 2020	26,688,304	19.66		2.0	854

The weighted average grant date fair value for RSUs granted for the years ended December 31, 2020 and 2019 was $24.91 and $26.55, respectively. The aggregate intrinsic value of the RSUs vested and released for the years ended December 31, 2020, 2019 and 2018 was $3 million, $1 million and $23 million, respectively.

As of December 31, 2020, there was $303 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.6 years.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

PERFORMANCE SHARE UNITS

In 2020, the Compensation Committee of the Board approved a PSU plan in connection with the aforementioned award modification. Each PSU is equivalent in value to one share of the Company's common stock. The maximum payout percentage for all PSUs granted by the Company is 100%.

The PSUs that are subject to the market condition are valued using a Monte Carlo simulation model, which requires certain assumptions, including the risk-free interest rate, expected volatility, and the estimated dividend yield. The risk-free interest rate used in the Monte Carlo simulation model is based on zero-coupon yields implied by U.S. Treasury issues with remaining terms similar to the performance period on the PSUs. The performance period of the PSUs represents the period of time between the PSU grant date and the end of the performance period. Expected volatility is based on historical data of the Company and certain indices over the most recent time period equal to the performance period. For purposes of determining that the aforementioned award modification resulted in no incremental cost, the Monte Carlo simulation assumed a risk-free interest rate of 0.10%, expected volatility of 29.83% and a dividend yield of 2.08%.

The table below summarizes PSU activity for the year ended December 31, 2020:


	PSUs	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Balance as of December 31, 2019	—	$	—	—	$	—
Granted	651,042	28.80		2.0	—
Vested and released	—	—		—	—
Forfeited	—	—		—	—
Balance as of December 31, 2020	651,042	28.80		2.0	21

As of December 31, 2020, there was $17 million of unrecognized compensation cost related to unvested PSUs that is expected to be recognized over a weighted average period of 3.0 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, 2020:


	Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Balance as of December 31, 2019	338,814	$	12.93	6.0	$	5
Granted	—	—		—	—
Exercised	(143,242)	14.04		—	2
Outstanding as of December 31, 2020	195,572	12.11		4.7	4
Exercisable as of December 31, 2020	195,572	12.11		4.7	4

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 millions)	Foreign Currency Translation		Pension and PRMB Liabilities(1)		Cash Flow Hedges(2)		AOCI
Balance as of December 31, 2017	$	99	$	—	$	—	$	99
OCI before reclassifications	(225)		(4)		—		(229)

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
OCI before reclassifications	(9)		(5)		(16)		(30)
Amounts reclassified from AOCI	—		1		2		3
Net current period other comprehensive income	(9)		(4)		(14)		(27)
Balance as of December 31, 2020	$	95	(4)		$	(14)	$	77

(1)Amounts reclassified from AOCI during the period represent settlement gains (losses), which are recorded to SG&A expenses within the Consolidated Statements of Income.

(2)Amounts reclassified from AOCI during the period represent settled FX forward contracts, which are recorded to Cost of sales within the Consolidated Statements of Income.

14. Property, Plant and Equipment

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


	December 31,
(in millions)	2020		2019
Land	$	54	$	55
Buildings and improvements	520		473
Machinery and equipment	1,870		1,636
Cold drink equipment	80		78
Software	315		241
Construction-in-progress	393		274
Property, plant and equipment, gross	3,232		2,757
Less: accumulated depreciation and amortization	(1,020)		(729)
Property, plant and equipment, net	$	2,212	$	2,028

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


	For the Year Ended December 31,
(in millions)	2020		2019		2018
Cost of sales	$	215	$	199	$	123
SG&A expenses	147		159		110
Total depreciation expense	$	362	$	358	$	233

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

15. Other Financial Information

The carrying value of cash, cash equivalents, restricted cash and restricted cash equivalents is valued as of the balance sheet date equating fair value and is classified as Level 1. 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,
(in millions)	2020		2019
Cash and cash equivalents	$	240	$	75
Restricted cash and restricted cash equivalents(1)	15		26
Non-current restricted cash and restricted cash equivalents(2)	—		10
Total cash, cash equivalents, restricted cash and restricted cash equivalents	$	255	$	111

(1)Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the acquisitions of Core, Bai and Big Red, and have a corresponding holdback liability recorded in other current liabilities, as shown below. During the year ended December 31, 2020, the Company released restricted cash and cash equivalents and the corresponding holdback liability primarily related to the acquisition of Core, in accordance with the terms of the respective acquisition agreement. Refer to Note 5 for additional information.

(2)Included within the Other non-current assets caption below.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The following tables provide selected financial information from the Consolidated Balance Sheets:


	December 31,
(in millions)	2020		2019
Inventories:
Raw materials	$	260	$	215
Work in process	6		8
Finished goods	520		447
Total	786		670
Allowance for excess and obsolete inventories	(24)		(16)
Inventories	$	762	$	654
Prepaid expenses and other current assets:
Other receivables	$	85	$	65
Customer incentive programs	34		12
Derivative instruments	45		31
Prepaid marketing	15		17
Spare parts	55		49
Assets held for sale(1)	2		165
Income tax receivable	11		4
Other	76		60
Total prepaid expenses and other current assets	$	323	$	403
Other non-current assets:
Customer incentive programs	$	70	$	33
Marketable securities - trading	41		40
Operating lease right-of-use assets	645		497
Derivative instruments	12		19
Equity securities without readily determinable fair values	1		1
Non-current restricted cash and restricted cash equivalents	—		10
Related party notes receivable(2)	—		50
Other	125		98
Total other non-current assets	$	894	$	748

(1)The decrease in assets held for sale was due to the assets included in sale-leaseback transactions that closed during the year ended December 31, 2020. Refer to Note 9 for additional information about the transactions. The remaining amounts were comprised of property, plant and equipment expected to be sold within the next twelve months.

(2)Refer to Note 5 for information about the impairment of the Company's related party note receivable from Bedford.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)


	December 31,
(in millions)	2020		2019
Accrued expenses:
Customer rebates & incentives	$	382	$	362
Accrued compensation	215		183
Insurance reserve	35		39
Interest accrual	57		54
Accrued professional fees	21		31
Other accrued expenses	330		270
Total accrued expenses	$	1,040	$	939
Other current liabilities:
Dividends payable	$	212	$	212
Income taxes payable	39		75
Operating lease liability	72		69
Finance lease liability	44		41
Derivative instruments	25		12
Holdback liability	15		25
Other	9		11
Total other current liabilities	$	416	$	445
Other non-current liabilities:
Long-term pension and postretirement liability	$	38	$	29
Insurance reserves	72		66
Operating lease liability	580		427
Finance lease liability	298		269
Derivative instruments	18		4
Deferred compensation liability	41		40
Other	72		95
Total other non-current liabilities	$	1,119	$	930

ACCOUNTS PAYABLE

KDP has an agreement with a third party which allows participating suppliers to track payment obligations from KDP, and if voluntarily elected by the supplier, to 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. KDP has been informed by the third party administrator that as of December 31, 2020 and 2019, $2,578 million and $2,097 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

16. Commitments and Contingencies

ANTITRUST LITIGATION

In February 2014, TreeHouse Foods, Inc. and certain affiliated entities filed suit against KDP’s wholly-owned subsidiary, KGM, in the U.S. District Court for the Southern District of New York (“SDNY”) (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. In March 2014, JBR, Inc. filed suit against KGM 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, Inc. complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Beginning in March 2014, twenty-seven putative class actions asserting similar claims and seeking similar relief were filed on behalf of purported direct and indirect purchasers of KGM’s products in various federal district courts. In June 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 (the “Multidistrict Antitrust Litigation”). Consolidated putative class action complaints by direct purchaser and indirect purchaser plaintiffs were filed in July 2014. 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 transferred into the Multidistrict Antitrust Litigation in November 2015. In January 2019, McLane Company, Inc. filed suit against KGM (McLane Company, Inc. v. Keurig Green Mountain, Inc.) in the SDNY asserting similar claims and was also transferred into the Multidistrict Antitrust Litigation. These actions are now pending in the SDNY (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation). Discovery in the Multidistrict Antitrust Litigation commenced in December 2017.

Separately, a statement of claim was filed in September 2014 against KGM and Keurig Canada Inc. in Ontario, Canada by Club Coffee L.P., a Canadian manufacturer of single serve beverage pods, asserting a breach of competition law and false and misleading statements by Keurig.

In July 2020, KGM reached an agreement with the putative indirect purchaser class plaintiffs in the Multidistrict Antitrust Litigation to settle the claims asserted in their complaint for $31 million. The settlement class consists of individuals and entities in the United States that purchased, from persons other than KGM and not for purposes of resale, KGM manufactured or licensed single serve beverage portion packs during the applicable class period (beginning in September 2010 for most states). The court granted approval of the settlement in December 2020, and the Company paid the settlement amount in January 2021. Putative class members will now be given notice and the opportunity to object or opt out of the settlement.

KDP intends to vigorously defend the remaining pending lawsuits brought by Treehouse, JBR, McLane, the putative direct purchaser class and Club Coffee. 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

In May 2011, CERT filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, (Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182), alleging that KGM, and certain other defendants who manufacture, package, distribute or sell coffee, failed to warn persons in California that KGM's coffee products expose persons to the chemical acrylamide in violation of Proposition 65.

KGM, as part of a joint defense group organized to defend against the lawsuit, disputed CERT's claims and asserted multiple affirmative defenses. The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees, but such trial did not occur in light of California’s Office of Environmental Health Hazard Assessment proposal of a new Proposition 65 regulation clarifying that cancer warnings are not required for chemicals, such as acrylamide, that are present in coffee as a result of roasting coffee beans. After the regulation took effect in October 2019, the litigation continued based on, among other items, CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims. In August 2020, the court granted the defendants' motion for summary judgment, effectively ending CERT's Proposition 65 litigation at the trial court level. CERT has filed its notice to appeal, and the Company intends to continue vigorously defending itself in this action. However, the Company believes that the likelihood that it will incur a material loss in connection with the CERT litigation is remote and accordingly, no loss contingency has been recorded.

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)

UNCONDITIONAL PURCHASE OBLIGATIONS

As of December 31, 2020, KDP had $116 million in fixed service fee commitments related to a 15-year distribution agreement effective on December 28, 2020, with Veyron SPE. These commitments were used to assist Veyron SPE in obtaining financing. Such fixed service fee payments begin January 1, 2021.

Fixed service fees over the next five years are expected to be as follows:


	For the Years Ending December 31,
(in millions)	2021		2022		2023		2024		2025
Fixed service fees	$	8	$	8	$	8	$	8	$	8

FINANCIAL GUARANTEES

ABC, a wholly-owned subsidiary of KDP, has provided a guarantee in connection with its distribution agreement with Veyron SPE to be paid only in the event Veyron SPE sells specific distribution rights and the value of those distribution rights does not exceed $142 million, which is the maximum undiscounted amount that KDP could pay under the guarantee. All obligations with respect to the guarantee will cease upon termination of the distribution agreement, which would occur upon notice by ABC not to renew the distribution agreement, KDP no longer being investment grade at the end of the term or the sale of the distribution rights by Veyron SPE. As of December 31, 2020, KDP has not recorded a liability as it is not probable that the Company will have to make any payments required under the residual value guarantee, as the fair value of the distribution rights is not expected to fall below $142 million over the next fifteen years.

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, 2018	$	8
Accruals for warranties issued	9
Settlements	(9)
Balance as of December 31, 2019	8
Accruals for warranties issued	15
Settlements	(13)
Balance as of December 31, 2020	$	10

17. Related Parties

IDENTIFICATION OF RELATED PARTIES

Prior to August 19, 2020, KDP was indirectly controlled by JAB, a privately held investor group. Since August 19, 2020, JAB continues to hold a significant but non-controlling interest in KDP. As of December 31, 2020, JAB beneficially owned approximately 34% of KDP's outstanding common stock. JAB and its affiliates also hold investments in a number of other companies that have commercial relationships with the Company, including Peet's, Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc.

KDP purchases certain raw materials from Peet's and manufactures coffee and tea portion packs under Peet's brands for sale by KDP and Peet's in the U.S. and Canada.
KDP exclusively manufactures, distributes and sells Peet's RTD beverage products in the U.S. and Canada.
KDP licenses the Caribou Coffee, Panera Bread and Krispy Kreme trademarks for use in the manufacturing of portion packs for the Keurig brewing system.
KDP sells various syrups and packaged beverages to Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc. for resale to retail customers.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

KDP holds investments in certain brand ownership companies, and in certain instances, the Company also has rights in specified territories to bottle and/or distribute the brands owned by such companies. KDP 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 considered related party transactions. ABI purchases Clamato from KDP and pays the Company a royalty for use of the brand name. Refer to Note 5 for additional information about the Company's investments in unconsolidated affiliates.

RECEIPT AND PAYMENT TRANSACTIONS WITH RELATED PARTIES

Trade accounts receivable, net from related parties were $18 million and $13 million as of December 31, 2020 and 2019, respectively, primarily related to product sales and royalty revenues. Accounts payable to related parties were $13 million and $18 million as of December 31, 2020 and 2019, respectively, primarily related to purchases of finished goods inventory for distribution.

Receipts to and payments generated from these related parties were as follows:


	For the Year Ended December 31,
(in millions)	2020		2019		2018
Receipts from related parties	$	112	$	93	$	214
Payments to related parties	73		57		150

18. Segments

As of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018, the Company's operating structure consisted of the following four operating 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 innovative single serve brewers and specialty coffee.
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 and WD systems.
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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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


	For the Year Ended December 31,
(in millions)	2020		2019		2018
Net sales
Coffee Systems	$	4,433	$	4,233	$	4,114
Packaged Beverages	5,363		4,945		2,415
Beverage Concentrates	1,325		1,414		669
Latin America Beverages	497		528		244
Total net sales	$	11,618	$	11,120	$	7,442

Income from operations
Coffee Systems	$	1,268	$	1,219	$	1,163
Packaged Beverages	822		757		257
Beverage Concentrates	932		955		430
Latin America Beverages	105		85		29
Unallocated corporate costs	(647)		(638)		(642)
Income from operations	$	2,480	$	2,378	$	1,237


	December 31,
(in millions)	2020		2019
Identifiable operating assets
Coffee Systems	$	15,295	$	15,230
Packaged Beverages	11,540		11,399
Beverage Concentrates	20,575		20,447
Latin America Beverages	1,763		1,856
Segment total	49,173		48,932
Unallocated corporate assets	518		435
Total identifiable operating assets	49,691		49,367
Investments in unconsolidated affiliates	88		151
Total assets	$	49,779	$	49,518

GEOGRAPHIC DATA

The following table presents information about the Company's operations by geographic region:


	For the Year Ended December 31,
(in millions)	2020		2019		2018
Net sales
U.S.	$	10,318	$	9,843	$	6,608
International	1,300		1,277		834
Net sales	$	11,618	$	11,120	$	7,442


	December 31,
(in millions)	2020		2019
Property, plant and equipment, net
U.S.	$	1,893	$	1,770
International	319		258
Total property, plant and equipment, net	$	2,212	$	2,028

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

MAJOR CUSTOMER

Walmart is considered a major customer, accounting for more than 10% of the Company's total net sales. The following table provides net sales for Walmart:


	For the Year Ended December 31,
(in millions)	2020		2019		2018
Net sales
Walmart	$	1,782	$	1,483	$	1,053

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.

19. Revenue Recognition

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


(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total
For the Year Ended December 31, 2020
CSD(1)	$	—	$	2,489	$	1,304	$	361	$	4,154
NCB(1)	—		2,477		10		135		2,622
K-cup pods(2)	3,369		—		—		—		3,369
Appliances	850		—		—		—		850
Other	214		397		11		1		623
Net sales	$	4,433	$	5,363	$	1,325	$	497	$	11,618

For the Year Ended December 31, 2019
CSD(1)	$	—	$	2,219	$	1,385	$	380	$	3,984
NCB(1)	—		2,317		13		146		2,476
K-cup 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
K-cup 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

(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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

20. 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, 2020
Net sales	$	2,613	$	2,864	$	3,020	$	3,121
Cost of sales	1,161		1,302		1,316		1,353
Gross profit	1,452		1,562		1,704		1,768
Selling, general and administrative expenses	1,028		1,001		949		1,000
Impairment of intangible assets	—		—		—		67
Other operating (income) expense, net	(42)		—		2		1
Income from operations	466		561		753		700
Interest expense	153		157		148		146
Loss on early extinguishment of debt	2		2		—		—
Impairment of investments and note receivable	86		—		16		—
Other expense (income), net	20		(4)		5		(4)
Income before provision for income taxes	205		406		584		558
Provision for income taxes	49		108		141		130
Net income	156		298		443		428
Less: Net income attributable to non-controlling interest	—		—		—		—
Net income attributable to KDP	$	156	$	298	$	443	$	428

Earnings per common share:
Basic	$	0.11	$	0.21	$	0.31	$	0.30
Diluted	0.11		0.21		0.31		0.30

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 (income) expense, 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

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