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 (PCAOB ID No. 34)						50
Consolidated Statements of Income						53
Consolidated Statements of Comprehensive Income						54
Consolidated Balance Sheets						55
Consolidated Statements of Cash Flows						56
Consolidated Statements of Changes in Stockholders' Equity						58
Notes to Consolidated Financial Statements						59
1. Business and Basis of Presentation						59
2. Significant Accounting Policies						60
3. Goodwill and Other Intangible Assets						69
4. Long-Term Obligations and Borrowing Arrangements						71
5. Derivatives						74
6. Leases						78
7. Segments						80
8. Revenue Recognition						82
9. Earnings per Share						82
10. Employee Benefit Plans						83
11. Stock-Based Compensation						88
12. Investments and Acquisitions						90
13. Income Taxes						91
14. Restructuring and Integration Costs						94
15. Accumulated Other Comprehensive Income (Loss)						95
16. Property, Plant and Equipment						95
17. Other Financial Information						96
18. Commitments and Contingencies						98
19. Transactions with Variable Interest Entities						100
20. Related Parties						101

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Keurig Dr Pepper Inc.

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, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 23, 2023, 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 3 to the financial statements

Critical Audit Matter Description

As discussed in Notes 2 and 3, the Company has indefinite-lived brand intangible assets (“brand assets”) with a balance of $19,291 million as of December 31, 2022. Management recognized non-cash impairment losses of $472 million for the year ended December 31, 2022. The Company’s evaluation of the brand assets for impairment is performed annually as of October 1, or more frequently if events or circumstances indicate the carrying amount may not be recoverable and involves the comparison of the fair value of each brand asset to its carrying value. Management estimates the fair value of the brand assets 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, operating margins, and discount rates. 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. 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 timing and reasonableness of management’s estimates and assumptions.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures consisted of risk assessment and testing the timing of management’s impairment assessment and the underlying business and valuation assumptions for certain brand assets. Those procedures included, but were not limited to, the following:

We tested the effectiveness of controls over the Company’s indefinite-lived brand intangible asset impairment review process, including annual and interim controls when circumstances indicated that the carrying amount may not be recoverable.
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, 2022 annual assessment date to December 31, 2022.
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

Dallas, Texas

February 23, 2023

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.

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, 2022, 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, 2022, 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, 2022, of the Company and our report dated February 23, 2023, 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

Dallas, Texas

February 23, 2023

KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF INCOME


	Year Ended December 31,
(in millions, except per share data)	2022		2021		2020
Net sales	$	14,057	$	12,683	$	11,618
Cost of sales	6,734		5,706		5,132
Gross profit	7,323		6,977		6,486
Selling, general and administrative expenses	4,645		4,153		3,978
Impairment of intangible assets	477		—		67
Gain on litigation settlement	(299)		—		—
Other operating income, net	(105)		(70)		(39)
Income from operations	2,605		2,894		2,480
Interest expense	693		500		604
Loss on early extinguishment of debt	217		105		4
Gain on sale of equity method investment	(50)		(524)		—
Impairment of investments and note receivable	12		17		102
Other expense (income), net	14		(2)		17
Income before provision for income taxes	1,719		2,798		1,753
Provision for income taxes	284		653		428
Net income including non-controlling interest	1,435		2,145		1,325
Less: Net loss attributable to non-controlling interest	(1)		(1)		—
Net income attributable to KDP	$	1,436	$	2,146	$	1,325

Earnings per common share:
Basic	$	1.01	$	1.52	$	0.94
Diluted	1.01		1.50		0.93
Weighted average common shares outstanding:
Basic	1,416.8		1,415.7		1,407.2
Diluted	1,428.5		1,427.9		1,422.1

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)	2022		2021		2020
Net income including non-controlling interest	$	1,435	$	2,145	$	1,325
Other comprehensive income
Foreign currency translation adjustments	(167)		(14)		(9)
Net change in pension and post-retirement liability, net of tax of $3, $—, and $1, respectively	(6)		—		(4)
Net change in cash flow hedges, net of tax of $(87), $30 and $1, respectively	328		(89)		(14)
Total other comprehensive income (loss)	155		(103)		(27)
Comprehensive income	1,590		2,042		1,298
Comprehensive income attributable to non-controlling interest	—		—		—
Comprehensive income attributable to KDP	$	1,590	$	2,042	$	1,298

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)	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	535	$	567
Restricted cash and restricted cash equivalents	—		1
Trade accounts receivable, net	1,484		1,148
Inventories	1,314		894
Prepaid expenses and other current assets	471		447
Total current assets	3,804		3,057
Property, plant and equipment, net	2,491		2,494
Investments in unconsolidated affiliates	1,000		30
Goodwill	20,072		20,182
Other intangible assets, net	23,183		23,856
Other non-current assets	1,252		937
Deferred tax assets	35		42
Total assets	$	51,837	$	50,598
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	5,206	$	4,316
Accrued expenses	1,153		1,110
Structured payables	137		142
Short-term borrowings and current portion of long-term obligations	895		304
Other current liabilities	685		613
Total current liabilities	8,076		6,485
Long-term obligations	11,072		11,578
Deferred tax liabilities	5,739		5,986
Other non-current liabilities	1,825		1,577
Total liabilities	26,712		25,626
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, 1,408,394,293 and 1,418,119,197 shares issued and outstanding as of December 31, 2022 and 2021, respectively	14		14
Additional paid-in capital	21,444		21,785
Retained earnings	3,539		3,199
Accumulated other comprehensive income (loss)	129		(26)
Total stockholders' equity	25,126		24,972
Non-controlling interest	(1)		—
Total equity	25,125		24,972
Total liabilities and equity	$	51,837	$	50,598

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)	2022		2021		2020
Operating activities:
Net income attributable to KDP	$	1,436	$	2,146	$	1,325
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	399		410		362
Amortization of intangibles	138		134		133
Other amortization expense	172		164		158
Provision for sales returns	61		63		54
Deferred income taxes	(289)		31		(51)
Employee stock-based compensation expense	52		88		85
Loss on early extinguishment of debt	217		105		4
Gain on sale of equity method investment	(50)		(524)		—
Gain on disposal of property, plant and equipment	(80)		(75)		(36)
Unrealized loss (gain) on foreign currency	26		9		(1)
Unrealized loss (gain) on derivatives	383		(70)		8
Settlements of interest rate contracts	125		—		—
Equity in losses of unconsolidated affiliates	5		5		20
Impairment of intangible assets	477		—		67
Impairment on investments and note receivable of unconsolidated affiliates	12		17		102
Other, net	28		20		60
Changes in assets and liabilities:
Trade accounts receivable	(398)		(152)		(5)
Inventories	(426)		(133)		(107)
Income taxes receivable and payables, net	(105)		114		(91)
Other current and non current assets	(456)		(243)		(435)
Accounts payable and accrued expenses	903		762		624
Other current and non current liabilities	207		3		180
Net change in operating assets and liabilities	(275)		351		166
Net cash provided by operating activities	2,837		2,874		2,456
Investing activities:
Proceeds from sale of investment in unconsolidated affiliates	50		578		—
Purchases of property, plant and equipment	(353)		(423)		(461)
Proceeds from sales of property, plant and equipment	168		122		203
Purchases of intangibles	(26)		(32)		(56)


Issuance of related party note receivable	(18)		(19)		(6)
Investments in unconsolidated affiliates	(962)		—		(5)

Other, net	6		(16)		9
Net cash (used in) provided by investing activities	$	(1,135)	$	210	$	(316)

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)	2022		2021		2020
Financing activities:
Proceeds from issuance of Notes	$	3,000	$	2,150	$	1,500
Repayment of Notes	(3,365)		(3,595)		(250)
Proceeds from issuance of commercial paper	1,198		5,406		7,288
Repayments of commercial paper	(948)		(5,257)		(8,534)
Proceeds from KDP Revolver	—		—		1,850
Repayment of KDP Revolver	—		—		(1,850)

Repayments of term loan	—		(425)		(955)
Repurchases of common stock	(379)		—		—
Proceeds from issuance of common stock	—		140		—
Proceeds from structured payables	155		156		171
Payments on structured payables	(158)		(167)		(341)
Cash dividends paid	(1,080)		(955)		(846)
Tax withholdings related to net share settlements	(15)		(125)		—
Payments on finance leases	(90)		(54)		(52)

Proceeds from controlling shareholder stock transactions	—		—		29
Other, net	(46)		(36)		—
Net cash used in financing activities	(1,728)		(2,762)		(1,990)
Net change from:
Operating, investing and financing activities	(26)		322		150
Effect of exchange rate changes	(7)		(9)		(6)
Beginning of period	568		255		111
End of period	$	535	$	568	$	255

Non-cash investing activities:
Capital expenditures included in accounts payable and accrued expenses	$	213	$	189	$	280
Transaction costs included in accounts payable and accrued expenses	8		—		—
Conversion of note receivable to equity method investment	6		15		—
Non-cash acquisition of controlling interest	—		—		3
Non-cash purchases of intangibles	19		—		—

Non-cash financing activities:
Dividends declared but not yet paid	281		265		212


Supplemental cash flow disclosures:
Cash paid for interest	363		477		515
Cash paid for income taxes	686		506		582

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, 2019	1,406.8	$	14	$	21,557	$	1,582	$	104	$	23,257	$	—	$	23,257

Net income	—	—		—		1,325		—		1,325		—		1,325
Other comprehensive loss	—	—		—		—		(27)		(27)		—		(27)
Dividends declared, $0.60 per share	—	—		—		(846)		—		(846)		—		(846)
Proceeds from sale of stock by JAB	—	—		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
Net income	—	—		—		2,146		—		2,146		(1)		2,145
Other comprehensive loss	—	—		—		—		(103)		(103)		—		(103)
Issuance of common stock	4.3	—		140		—		—		140		—		140
Dividends declared, $0.7125 per share	—	—		—		(1,008)		—		(1,008)		—		(1,008)


Shares issued under employee stock-based compensation plans and other	6.5	—		—		—		—		—		—		—
Tax withholdings related to net share settlements	—	—		(125)		—		—		(125)				(125)
Stock-based compensation	—	—		93		—		—		93		—		93
Balance as of December 31, 2021	1,418.1	$	14	$	21,785	$	3,199	$	(26)	$	24,972	$	—	$	24,972
Net income	—	—		—		1,436		—		1,436		(1)		1,435
Other comprehensive income	—	—		—		—		155		155		—		155

Dividends declared, $0.775 per share	—	—		—		(1,096)		—		(1,096)		—		(1,096)
Repurchases of common stock	(10.6)	—		(379)		—		—		(379)		—		(379)
Shares issued under employee stock-based compensation plans and other	0.9	—		—		—		—		—		—		—
Tax withholdings related to net share settlements	—	—		(15)		—		—		(15)		—		(15)
Stock-based compensation	—	—		53		—		—		53		—		53
Balance as of December 31, 2022	1,408.4	$	14	$	21,444	$	3,539	$	129	$	25,126	$	(1)	$	25,125

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 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.

BASIS OF PRESENTATION

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. The fiscal year for Maple Parent Holdings Corp. includes 53 weeks for the year ended December 31, 2022 and 52 weeks for the years ended December 31, 2021 and 2020. 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 would be required to consolidate VIEs for which KDP has been determined to be the primary beneficiary. To determine if KDP is the primary beneficiary, the Company assesses specific criteria and uses judgment when determining if it has the power to direct the significant activities of the VIE and the obligation to absorb losses or receive benefits from the VIE that may be significant to the VIE. Factors considered include risk and reward sharing, voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s governance structure, existence of unilateral kick-out rights exclusive of protective rights or voting rights, and level of economic disproportionality between the Company and the VIE’s other partner(s). The Company has determined that it is not the primary beneficiary of any VIEs. However, future events may require the Company to consolidate VIEs if the Company becomes the primary beneficiary.

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)

UNALLOCATED CORPORATE COST ALIGNMENT

Effective January 1, 2022, the Company updated its presentation of certain of KDP's unallocated corporate costs, primarily related to IT, to be aligned among the Company's segments and to more consistently reflect controllable costs at the segment level. Refer to Note 7 for current year presentation. The following table summarizes the revised and prior presentations of income from operations at the segment level:


	Year Ended December 31,
(in millions)	2021				2020
Segment Results – Income from operations	Current Presentation		Prior Presentation		Current Presentation		Prior Presentation
Coffee Systems	$	1,446	$	1,318	$	1,398	$	1,268
Packaged Beverages	1,023		1,010		835		822
Beverage Concentrates	1,047		1,044		935		932
Latin America Beverages	133		133		105		105
Unallocated corporate costs	(755)		(611)		(793)		(647)
Income from operations	$	2,894	$	2,894	$	2,480	$	2,480

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, 2022 and 2021 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, 2022 and 2021, 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, 2022, 2021 and 2020.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Acquisitions

The Company evaluates the facts and circumstances of each acquisition to determine whether the transaction should be accounted for as an asset acquisition or a business combination.

Asset Acquisitions

When substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction is accounted for as an asset acquisition. Direct transaction costs associated with asset acquisitions are capitalized.

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, 2022. 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)	2022		2021		2020
Balance, beginning of the period	$	7	$	21	$	9
Charges to (reversals of) bad debt expense	3		(13)		17
Write-offs and adjustments	(1)		(1)		(5)
Balance, end of the period	$	9	$	7	$	21

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, 2022 and 2021 as described in Note 7. As of December 31, 2022 and 2021, Walmart accounted for approximately $303 million and $157 million of trade receivables, respectively, which exceeded 10% of the Company's total trade accounts receivable.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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 and certain beverages from third-party manufacturers. Inventories are stated at the lower of cost or net realizable value. Cost is measured using standard cost method which approximates first-in, first-out. The Company regularly reviews whether the net realizable value of its inventory is lower than its carrying value. If the valuation shows that the net realizable value is lower than the carrying value, the Company takes a charge to cost of sales and directly reduces the carrying value of the inventory.

The Company estimates any required write downs for inventory obsolescence by examining its inventories on a quarterly basis to determine if there are indicators that the carrying values exceed net realizable value. Indicators that could result in additional inventory write downs include age of inventory, damaged inventory, slow moving products and products at the end of their life cycles. While management believes that inventory is appropriately stated, 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, 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, 2022 and 2021, the Company recorded no impairment loss related to these assets. For the year ended December 31, 2020, the Company recorded an impairment loss of $1 million. Impairment loss is recorded in Other operating income, 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 restrictive covenants. KDP has certain leases of manufacturing and distribution properties and the Frisco headquarters that contain a residual value guarantee at the end of the term. Refer to Note 19 for additional information about the Company’s residual value guarantees.

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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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

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

Sale-and-leaseback transactions occur when the Company sells assets to a third-party and subsequently leases them back. The resulting leases that qualify for sale-and-leaseback accounting are evaluated and accounted for as an operating lease. A transaction that does not qualify for sale-and-leaseback accounting as a result of finance lease classification or the failure to meet certain revenue recognition criteria is accounted for as a financing transaction. For a financing transaction, the Company will retain the assets sold within Property, plant and equipment, 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. Contributions under the non-qualified defined contribution plan are maintained in a rabbi trust and are not readily available to the Company. 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, equity securities with readily determinable fair value, 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, which includes third-party transaction costs, and are 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 Gain on sale of equity method investment. 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.

Investments with readily determinable fair values for which we do not have the ability to exercise significant influence are measured at fair value and reported in Other non-current assets in the Company's Consolidated Balance Sheets. As of December 31, 2022 and 2021, all such investments were categorized as Level 1. Unrealized gains and losses on these investments are recorded in Other (income) expense, net in the Consolidated Statements of Income.

Investments without readily determinable fair values for which we do not have the ability to exercise significant influence are accounted for 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, 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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.

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	10	to	40 years
Trade names			10 years
Distribution rights	4	to	10 years
Brands			5 years
Contractual arrangements	10	to	12 years

For intangible assets with definite lives, tests for impairment are performed if conditions exist that indicate the carrying value may not be recoverable. For goodwill and indefinite-lived intangible assets, the Company conducts tests for impairment annually on the first day of the fourth quarter, or more frequently if events or circumstances indicate the carrying amount may not be recoverable.

The tests for impairment include significant judgment in estimating the fair value of reporting units and intangible assets. 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:


Reportable Segments						Reporting Units
Packaged Beverages						DSD
						WD
Coffee Systems						Coffee Systems
Beverage Concentrates						Branded Concentrates
						Fountain Foodservice
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 3 for additional information.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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 17 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.

Accounts Payable

KDP has agreements with third party administrators which allow 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, 2022 and 2021, $3,839 million and $3,194 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

Structured Payables

The Company has 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 pays amounts on behalf of the Company and sells the amounts due from the Company to a participating financial institution. The card sponsor then bills the Company the original payment amount, effectively financing the transaction. 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

Additionally, the Company has commercial arrangements with suppliers who use third party administrators to sell payment obligations from KDP to financial institutions. The Company evaluates the commercial arrangements with suppliers to determine if they are more representative of debt or accounts payable classification. If the Company determines these commercial arrangements are more representative of a financing transaction, then the Company records those payment obligations as structured payables.

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, 2022, 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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.

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 and interest rate 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 underlying 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Loss Contingencies

Legal Matters

The Company is involved from time to time in various claims, proceedings, and litigation, including those described in Note 18. 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 18.

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.

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, which are recorded as a reduction of revenue, 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.

Selling, General and Administrative Expenses

Transportation and Warehousing Costs

The Company incurred $1,746 million, $1,475 million and $1,326 million of transportation and warehousing costs during the years ended December 31, 2022, 2021 and 2020, 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 $537 million, $540 million and $489 million for the years ended December 31, 2022, 2021 and 2020, 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 $65 million, $66 million and $69 million for the years ended December 31, 2022, 2021 and 2020, respectively. These expenses are recorded primarily in SG&A expenses in the Consolidated Statements of Income.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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. Prior to January 1, 2022, the Company recorded forfeitures as incurred.

Effective January 1, 2022, the Company changed its accounting policy election to record expense only for awards expected to vest. Estimated forfeiture rates are based on historical data and are periodically reassessed. The cumulative effect of this change in accounting policy was recorded effective January 1, 2022, as the impact of forfeitures on stock-based compensation has historically been insignificant to the Company. Stock-based compensation expense is recognized ratably over the vesting period and is recorded SG&A expenses in the Consolidated Statements of Income. Refer to Note 11 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, IT implementation costs and other incremental costs. The Company has recorded these costs within SG&A expenses on the Consolidated Statements of Income, and these costs are held within unallocated corporate costs.

Foreign Currency Translation and Transaction

The Company translates assets and liabilities of our foreign subsidiaries from their respective functional currencies to U.S. dollars at the appropriate spot rates as of the balance sheet date. The functional currency of the Company's operations outside the U.S. is generally the local currency of the country where the operations are located, 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. Such differences are recorded in Cost of sales or Other expense (income), net in the Consolidated Statements of Income, depending on the nature of the underlying transaction.

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.

Repurchases of Common Stock

Shares repurchased under authorized share repurchase programs are retired, and the excess purchase price over the par value is recorded to additional paid-in capital.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

RECENTLY ISSUED ACCOUNTING STANDARDS

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, later amended by ASU 2021-01, Reference Rate Reform (Topic 848) Scope and ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. 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. This was further clarified by ASU 2021-01, which confirmed that certain optional expedients and exceptions in Topic 848 apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result 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, 2024, as amended by ASU 2022-06. The Company is currently evaluating ASU 2020-04 but expects the impact to be immaterial to KDP’s consolidated financial statements.

In September 2022, the FASB issued ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The objective of ASU 2022-04 is to require entities to disclose information about the use of supplier finance programs in connection with the purchase of goods and services. ASU 2022-04 is effective for all entities for annual periods beginning after December 15, 2022. The Company is currently evaluating ASU 2022-04 but expects the impact to be immaterial to KDP’s current consolidated financial statement disclosures.

3. Goodwill and Other Intangible Assets

GOODWILL

Changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2022 and 2021 are as follows:


(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total
Balance as of December 31, 2020	$	9,795	$	5,314	$	4,536	$	539	$	20,184
Foreign currency translation	5		5		3		(15)		(2)
Balance as of December 31, 2021	9,800		5,319		4,539		524		20,182
Foreign currency translation	(64)		(46)		(31)		31		(110)

Balance as of December 31, 2022	$	9,736	$	5,273	$	4,508	$	555	$	20,072

INTANGIBLE ASSETS OTHER THAN GOODWILL

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


(in millions)	December 31, 2022		December 31, 2021
Brands(1)	$	19,291	$	19,865
Trade names	2,480		2,480
Contractual arrangements(2)	122		123
Distribution rights(3)	100		85
Total	$	21,993	$	22,553

(1)The decrease in brands with indefinite lives was driven by impairment charges of $472 million, led by Bai and Schweppes, and $102 million of FX translation during the year ended December 31, 2022. Refer to Impairment Analysis below.

(2)The decrease in contractual arrangements is driven by FX translation during the year ended December 31, 2022.

(3)The Company executed seven agreements to acquire distribution rights during the year ended December 31, 2022, which resulted in an increase of $15 million.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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


	December 31, 2022						December 31, 2021
(in millions)	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Acquired technology	$	1,146	$	(475)	$	671	$	1,146	$	(401)	$	745
Customer relationships	638		(204)		434		638		(169)		469
Trade names(1)	127		(101)		26		128		(86)		42
Brands(2)	51		(19)		32		21		(8)		13
Distribution rights	29		(16)		13		29		(11)		18
Contractual arrangements	24		(10)		14		24		(8)		16
Total	$	2,015	$	(825)	$	1,190	$	1,986	$	(683)	$	1,303

(1)The decrease in trade names is driven by FX translation during the year ended December 31, 2022.

(2)The increase in brands with definite lives during the year ended December 31, 2022 is driven by the acquisition of Atypique, which was recorded as a definite lived brand asset of $30 million with an estimated useful life of five years. This increase was partially offset by impairment expense recognized through accumulated amortization of $5 million on a definite lived brand asset.

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


	Year Ended December 31,
(in millions)	2022		2021		2020
Amortization expense for intangible assets with definite lives	$	138	$	134	$	133

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


	For the Years Ending December 31,
(in millions)	2023		2024		2025		2026		2027
Expected amortization expense for intangible assets with definite lives	$	138	$	130	$	117	$	113	$	95

IMPAIRMENT ANALYSIS

The following table summarizes impairment recognized on indefinite lived intangible assets as a result of the annual impairment analyses as of October 1 of each year and interim triggering analyses during the periods:


	Year Ended December 31,
(in millions)	2022		2021		2020
Interim triggering analysis	$	311	$	—	$	—
Annual analysis	161		—		67
Total impairment of indefinite lived intangible assets	$	472	$	—	$	67

Quarterly Triggering Event Analysis

The Company performed an analysis as of September 30, 2022 to evaluate whether any triggering events occurred during the third quarter of 2022. Management identified specific performance and margin challenges for Bai and performed a Step 1 quantitative discounted cash flow analysis using the income approach. As a result of this analysis, KDP recorded an impairment charge of $311 million in the Packaged Beverages segment.

Annual 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 "more likely than not" less than its carrying value, also known as a Step 0 analysis.

For the years ended December 31, 2022 and 2021, KDP performed a Step 0 analysis for certain indefinite lived intangible assets, including trade names, contractual arrangements and distribution rights and did not identify any indicators of impairment. For goodwill and the primary indefinite-lived brands, 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.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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.

The following table provides the range of rates used in the analysis as of October 1, 2022, 2021, and 2020:


	2022				2021				2020
Rate	Minimum		Maximum		Minimum		Maximum		Minimum		Maximum
Discount rates	7.3	%	10.3	%	6.5	%	10.0	%	6.0	%	10.0	%
Long-term growth rates	—	%	3.8	%	—	%	3.8	%	—	%	3.5	%
Royalty rates(1)	N/A		N/A		N/A		N/A		1.0	%	10.0	%

(1)Royalty rates were not used for the impairment analysis for the years ended December 31, 2022 or 2021, as KDP performed a Step 0 qualitative analysis for the trade names which historically utilized the Relief From Royalty Method.

The primary factors that led to the brand impairment determination in the fourth quarter of 2022, driven primarily by Schweppes, was the change in the macroeconomic environment leading to increases in discount rates, as shown in the table above, as well as supply chain disruptions within third-party distribution networks.

The factors that led to the Bai brand impairment determination in the fourth quarter of 2020 were primarily performance of the brand during the COVID-19 pandemic, related shifts in consumer behaviors that were 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 as of October 1, 2022, 2021, and 2020 are as follows:


	2022				2021				2020
Headroom Percentage	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Brands
0%(1)	$	2,136	$	2,136	$	—	$	—	$	415	$	415
Less than 25%	2,186		2,547		3,311		3,663		5,052		5,775
26 - 50%	—		—		5,335		7,456		2,261		2,993
In excess of 50%	14,848		28,942		11,173		21,982		11,946		19,835

(1)Carrying value reflects the results of the annual impairment analysis recognized during the years ended December 31, 2022 and 2020.

4. Long-term Obligations and Borrowing Arrangements

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


	December 31,
(in millions)	2022		2021
Notes	$	11,568	$	11,733
Less: current portion of long-term obligations	(496)		(155)
Long-term obligations	$	11,072	$	11,578

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


	December 31,
(in millions)	2022		2021
Commercial paper notes	$	399	$	149
Current portion of long-term obligations:	496		155
Short-term borrowings and current portion of long-term obligations	$	895	$	304

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	2022		2021
2023 Merger Notes	May 25, 2023	4.057%	—		1,000
2023 Notes	December 15, 2023	3.130%	500		500
2024 Notes	March 15, 2024	0.750%	1,150		1,150
2025 Merger Notes	May 25, 2025	4.417%	529		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%	1,112		2,000
2029 Notes	April 15, 2029	3.950%	1,000		—
2030 Notes	May 1, 2030	3.200%	750		750
2031 Notes	March 15, 2031	2.250%	500		500
2032 Notes	April 15, 2032	4.050%	850		—
2038 Notes	May 1, 2038	7.450%	—		125
2038 Merger Notes	May 25, 2038	4.985%	211		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%	391		750
2050 Notes	May 1, 2050	3.800%	750		750
2051 Notes	March 15, 2051	3.350%	500		500
2052 Notes	April 15, 2052	4.500%	1,150		—
Principal amount			$	11,743	$	11,875
Adjustment from principal amount to carrying amount(1)			(175)		(142)
Carrying amount			$	11,568	$	11,733

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

On January 24, 2022, KDP redeemed and retired the remainder of its 2038 Notes. The loss on early extinguishment of the 2038 Notes was approximately $45 million, comprised of the make-whole premium and the write-off of the associated unamortized fair value adjustment related to the DPS Merger.

On April 22, 2022, the Company undertook the 2022 Strategic Refinancing and completed the issuance of the 2029 Notes, the 2032 Notes, and the 2052 Notes. The discount associated with these notes was approximately $16 million, and the Company incurred $23 million in debt issuance costs. The proceeds from the issuance were used to voluntarily prepay and retire the remaining 2023 Merger Notes and to tender portions of the 2025 Merger Notes, the 2028 Merger Notes, the 2038 Merger Notes, and the 2048 Merger Notes. The Company recorded approximately $169 million of loss on early extinguishment of debt, comprised of the tender and make-whole premiums, the write-off of debt issuance costs, and the impact of terminating reverse treasury lock contracts.

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, 2022, 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

Revolving Credit Agreement

On February 23, 2022, KDP terminated the 2021 364-Day Credit Agreement and the KDP Revolver. The loss on early extinguishment of these instruments was approximately $3 million, comprised of termination fees and the write-off of the associated deferred financing fees. There were no amounts drawn upon the 2021 364-Day Credit Agreement or the KDP Revolver prior to termination.

Also on February 23, 2022, KDP entered into the 2022 Revolving Credit Agreement among KDP, as borrower, the lenders from time to time party thereto and JPMorgan Chase, Bank, N.A., as administrative agent. The Company incurred approximately $4 million in deferred financing fees related to the issuance.

The following table summarizes information about the 2022 Revolving Credit Agreement:


(in millions)		December 31, 2022				December 31, 2021
Issuance	Maturity Date	Capacity		Carrying Value		Carrying Value
2022 Revolving Credit Agreement(1)	February 23, 2027	$	4,000	$	—	$	—

(1)The 2022 Revolving Credit Agreement has $200 million letters of credit available, none of which were utilized as of December 31, 2022.

The 2022 Revolving Credit Agreement replaced the KDP Revolver and the 2021 364-Day Credit Agreement and the proceeds of the credit facility are intended to be used for working capital and for other general corporate purposes of KDP.

Borrowings under the 2022 Revolving Credit Agreement will bear interest at a rate per annum equal to, at KDP's option, an adjusted SOFR rate plus a margin of 0.875% to 1.500% or a base rate plus a margin of 0.000% to 0.500%, in each case, depending on the rating of certain index debt of KDP. The 2022 Revolving Credit Agreement contains customary representations and warranties for investment grade financings. The 2022 Revolving Credit Agreement also contains (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 minimum interest coverage ratio (as defined therein) of 3.25 to 1.00 and (iv) customary events of default (including a change of control) for financings of this type.

As of December 31, 2022, KDP was in compliance with its minimum interest coverage ratio relating to the 2022 Revolving Credit Agreement.

Commercial Paper Program

KDP has a 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 vary, but commercial paper notes are classified as short-term, as maturities do not exceed one year. 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 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 %)	2022			2021			2020
Weighted average commercial paper borrowings	$	40		$	943		$	789
Weighted average borrowing rates	2.36		%	0.25		%	1.24		%

Letters of Credit Facility

In addition to the portion of the 2022 Revolving Credit Agreement reserved for issuance of letters of credit, the Company has an incremental letters of credit facility. Under this facility, $150 million is available for the issuance of letters of credit, $68 million of which was utilized as of December 31, 2022 and $82 million of which remains available for use.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

FAIR VALUE DISCLOSURES

The fair values of the Company's commercial paper notes 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 $10,495 million and $13,078 million as of December 31, 2022 and December 31, 2021, respectively.

5. Derivatives

INTEREST RATES

Economic Hedges

KDP is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate contracts to provide predictability in the Company's overall cost structure and to manage the balance of fixed-rate and variable-rate debt. KDP primarily enters into receive-fixed, pay-variable and receive-variable, pay-fixed swaps and swaption contracts. 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, 2022, economic interest rate derivative instruments have maturities ranging from January 2027 to April 2032.

Additionally, during the year ended December 31, 2022, KDP entered into reverse treasury lock contracts in order to manage the interest rate risk related to changes in value of the tender offers in the 2022 Strategic Refinancing prior to the pricing date. These contracts terminated during the year ended December 31, 2022, and the realized losses associated with these contracts are reported in loss on early extinguishment of debt in the Consolidated Statements of Income.

Cash Flow Hedges

In order to hedge the variability in cash flows from interest rate changes associated with the Company’s planned future issuances of long-term debt, during the first quarter of 2021, the Company entered into forward starting swaps and designated them as cash flow hedges.

In April 2022, concurrently with the 2022 Strategic Refinancing, KDP terminated $1.5 billion of notional amount of the forward starting swaps. Upon termination, KDP received $125 million to settle the contracts with the counterparties, which will be amortized to interest expense over the respective terms of the issued Notes.

On September 30, 2022, KDP de-designated $500 million of notional amount of the forward starting swaps. As the forecasted debt transaction is still probable to occur, the fair value of the these instruments as of September 30, 2022 was recorded in AOCI. Changes in fair value of the these instruments from the point of de-designation will be recorded as unrealized gains or losses in interest expense in the Consolidated Statements of Income. As of December 31, 2022, the remaining forward starting swaps designated as cash flow hedges have a mandatory termination date in May 2025.

FOREIGN EXCHANGE

KDP 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, 2022, 2021 and 2020, KDP 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. As of December 31, 2022, these FX contracts have maturities ranging from January 2023 to September 2024.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Cash Flow Hedges

KDP designates certain FX forward contracts as cash flow hedges in order to manage the exposures resulting from changes in the FX rates described above. These designated FX forward contracts relate to either forecasted inventory purchases in U.S. dollars of the Canadian and Mexican businesses or forecasted capital expenditures of certain equipment in euros for KDP’s U.S. manufacturing facilities. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. As of December 31, 2022, these FX contracts have maturities ranging from January 2023 to October 2024.

COMMODITIES

Economic Hedges

KDP centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. During the years ended December 31, 2022, 2021 and 2020, 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 or as an offset to certain costs of production. 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, 2022, these commodity contracts have maturities ranging from January 2023 to April 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)	2022		2021
Interest rate contracts
Forward starting swaps, designated as cash flow hedges	$	500	$	2,500
Forward starting swaps, not designated as hedging instruments	1,000		—

Receive-fixed, pay-variable interest rate swaps, not designated as hedging instruments	1,900		400

FX contracts
Forward contracts, not designated as hedging instruments	490		463
Forward contracts, designated as cash flow hedges	511		385
Commodity contracts, not designated as hedging instruments(1)	754		529

(1)Notional value for commodity contracts is calculated as the expected volume times strike price per unit on a gross basis.

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 or SOFR 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	2022		2021
Assets:
Interest rate contracts	2	Prepaid expenses and other current assets	$	—	$	2
FX forward contracts	2	Prepaid expenses and other current assets	8		3
Commodity contracts	2	Prepaid expenses and other current assets	6		133
Interest rate contracts	2	Other non-current assets	49		—
FX forward contracts	2	Other non-current assets	1		—
Commodity contracts	2	Other non-current assets	1		2

Liabilities:
Interest rate contracts	2	Other current liabilities	$	58	$	—
FX forward contracts	2	Other current liabilities	—		2
Commodity contracts	2	Other current liabilities	51		28
Interest rate contracts	2	Other non-current liabilities	194		5
FX forward contracts	2	Other non-current liabilities	—		9
Commodity contracts	2	Other non-current liabilities	1		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)	Balance Sheet Location	2022		2021
Assets:
FX contracts	Prepaid expenses and other current assets	$	21	$	6
FX contracts	Other non-current assets	1		1

Interest rate contracts	Other non-current assets	88		—

Liabilities:
FX contracts	Other current liabilities	$	3	$	1

Interest rate contracts	Other current liabilities	—		8

Interest rate contracts	Other non-current liabilities	—		128

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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	2022		2021		2020
Interest rate contracts	Interest expense	$	231	$	(25)	$	7
Interest rate contracts	Loss on early extinguishment of debt	31		—		—
FX forward contracts	Cost of sales	(7)		4		(6)
FX forward contracts	Other expense (income), net	(9)		—		6
Commodity contracts	Cost of sales	12		(148)		(35)
Commodity contracts	SG&A expenses	(46)		(60)		22

IMPACT OF CASH FLOW HEDGES

The following table presents the amount of (gains) losses, net, reclassified from AOCI into the Consolidated Statements of Income related to derivative instruments designated as cash flow hedging instruments during the periods presented:


		For the Year Ended December 31,
(in millions)	Income Statement Location	2022		2021		2020
Interest rate contracts	Interest expense	$	(6)	$	—	$	—
FX contracts	Cost of sales	5		18		2

KDP expects to reclassify approximately $8 million and $15 million of pre-tax net gains from AOCI into net income during the next twelve months related to interest rate contracts and FX contracts, respectively.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

6. Leases

The following table presents the components of lease cost:


	For the Year Ended December 31,
(in millions)	2022		2021		2020
Operating lease cost	$	137	$	121	$	113
Finance lease cost
Amortization of right-of-use assets	76		63		47
Interest on lease liabilities	23		18		14
Variable lease cost(1)	35		31		27
Short-term lease cost	2		—		1
Sublease income	—		(1)		(2)
Total lease cost	$	273	$	232	$	200

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

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


	For the Year Ended December 31,
(in millions)	2022		2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	125	$	113	$	103
Operating cash flows from finance leases	23		18		14
Financing cash flows from finance leases	90		54		52
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	320	$	293	$	234
Finance leases	104		408		90

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


	December 31,
	2022		2021
Weighted average discount rate
Operating leases	5.0	%	4.3	%
Finance leases	3.7	%	3.6	%
Weighted average remaining lease term
Operating leases	11 years		12 years
Finance leases	9 years		10 years

SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS

Future minimum lease payments under non-cancellable leases as of December 31, 2022 were as follows:


(in millions)	Operating Leases		Finance Leases
2023	$	128	$	119
2024	132		114
2025	124		109
2026	115		146
2027	94		59
Thereafter	585		299
Total future minimum lease payments	1,178		846
Less: imputed interest	(275)		(133)
Present value of minimum lease payments	$	903	$	713

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED

As of December 31, 2022, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $220 million. These leases will commence between 2023 and 2025, with initial lease terms ranging from 4 to 10 years.

ASSET SALE-LEASEBACK TRANSACTIONS

Transactions with Special Purpose Entities with Same Sponsor

The Company has entered into a number of asset sale-leaseback transactions with the same sponsor, the Veyron SPEs. The following table presents details of the transactions. Gains on the sale-leasebacks are recorded in Other operating income, net, and the leasebacks are accounted for as operating leases.


(in millions)	Sale Proceeds		Carrying Value		Gain on Sale
2022
March 31, 2022(1)	$	77	$	39	$	38
November 30, 2022(2)	26		12		14
December 14, 2022(3)	65		35		30
2021
December 29, 2021(4)	102		32		70
2020
January 6, 2020(5)	150		131		19

(1)The sale-leaseback transaction included one manufacturing property and one distribution property.

(2)The sale-leaseback transaction included one manufacturing property and one multipurpose property.

(3)The sale-leaseback transaction included one distribution property.

(4)The sale-leaseback transaction included two manufacturing properties and two distribution properties.

(5)The sale-leaseback transaction included two manufacturing properties.

The initial term of each leaseback is 15 years, with 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. Each leaseback has a RVG. Refer to Note 19 for additional information about RVGs associated with asset sale-leaseback transactions.

Others

The Company has additionally entered into an asset sale-leaseback transaction with another entity. The following table presents details of the transaction. The gain on the sale-leaseback is recorded in Other operating income, net, and the leaseback is accounted for as an operating lease.


	Sale Proceeds		Carrying Value		Gain on Sale

January 10, 2020(1)	$	50	$	27	$	23

(1)The sale-leaseback transaction included two distribution properties. The initial term of the leaseback is five years and has two three-year renewal options.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

7. Segments

Effective January 1, 2022, the Company updated its presentation of certain of KDP's corporate costs, primarily related to IT, to be aligned among the Company's segments and to more consistently reflect controllable costs at the segment level. The prior period segment disclosures reflect the revised presentation.

Effective January 1, 2021, the Company modified its internal reporting and operating segments to reflect changes in the executive leadership team to further enhance speed-to-market and decision effectiveness. These changes did not change the Company’s reportable segments.

As of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020, the Company's reportable segments consist of the following:

The Coffee Systems segment reflects sales in the U.S. and Canada of the manufacture and distribution of finished goods relating to the Company's coffee system, K-Cup pods and brewers.
The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third-party brands, through both the DSD and WD systems. DSD and WD have both been identified as operating segments that the Company aggregated into Packaged Beverages due to similar economic characteristics and similarities in the nature of finished goods sales and route-to-markets.
The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third-party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are CSD brands. Our FFS operating segment is aggregated with our Branded Concentrates operating segment into our Beverage Concentrates reportable segment due to similar economic characteristics and similarities in the nature of the product sold.
The Latin America Beverages segment reflects sales in Mexico, the Caribbean, and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.

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

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


	For the Year Ended December 31,
(in millions)	2022		2021		2020
Net sales
Coffee Systems	$	4,982	$	4,716	$	4,433
Packaged Beverages	6,607		5,882		5,363
Beverage Concentrates	1,725		1,486		1,325
Latin America Beverages	743		599		497
Total net sales	$	14,057	$	12,683	$	11,618

Income from operations
Coffee Systems	$	1,316	$	1,446	$	1,398
Packaged Beverages	1,014		1,023		835
Beverage Concentrates	1,061		1,047		935
Latin America Beverages	158		133		105
Unallocated corporate costs	(944)		(755)		(793)
Income from operations	$	2,605	$	2,894	$	2,480

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)


	December 31,
(in millions)	2022		2021
Identifiable operating assets
Coffee Systems	$	15,830	$	15,397
Packaged Beverages	11,870		11,819
Beverage Concentrates	20,495		20,674
Latin America Beverages	1,885		1,763
Segment total	50,080		49,653
Unallocated corporate assets	757		915
Total identifiable operating assets	50,837		50,568
Investments in unconsolidated affiliates	1,000		30
Total assets	$	51,837	$	50,598

GEOGRAPHIC DATA

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


	For the Year Ended December 31,
(in millions)	2022		2021		2020
Net sales
U.S.	$	12,454	$	11,267	$	10,318
International	1,603		1,416		1,300
Net sales	$	14,057	$	12,683	$	11,618


	December 31,
(in millions)	2022		2021
Property, plant and equipment, net
U.S.	$	2,088	$	2,084
International	403		410
Total property, plant and equipment, net	$	2,491	$	2,494

MAJOR CUSTOMER

Walmart is considered a major customer, accounting for more than 10% of the Company's total net sales, and is represented in all four of the Company’s reportable segments. The following table provides KDP’s net sales to Walmart:


	For the Year Ended December 31,
(in millions)	2022		2021		2020
Net sales
Walmart	$	2,184	$	1,989	$	1,782

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

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

8. 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, 2022
CSD(1)	$	—	$	3,193	$	1,700	$	542	$	5,435
NCB(1)	—		2,993		14		201		3,208
K-cup pods(2)	3,772		—		—		—		3,772
Appliances	923		—		—		—		923
Other	287		421		11		—		719
Net sales	$	4,982	$	6,607	$	1,725	$	743	$	14,057

For the Year Ended December 31, 2021
CSD(1)	$	—	$	2,825	$	1,463	$	435	$	4,723
NCB(1)	—		2,617		11		163		2,791
K-cup pods(2)	3,546		—		—		—		3,546
Appliances	907		—		—		—		907
Other	263		440		12		1		716
Net sales	$	4,716	$	5,882	$	1,486	$	599	$	12,683

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

(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.

9. Earnings Per Share

The following table presents the Company's basic and diluted EPS and shares outstanding. Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.


	For the Year Ended December 31,
(in millions, except per share data)	2022		2021		2020
Net income attributable to KDP	$	1,436	$	2,146	$	1,325

Weighted average common shares outstanding	1,416.8		1,415.7		1,407.2
Dilutive effect of stock-based awards	11.7		12.2		14.9
Weighted average common shares outstanding and common stock equivalents	1,428.5		1,427.9		1,422.1

Basic EPS	$	1.01	$	1.52	$	0.94
Diluted EPS	$	1.01	$	1.50	$	0.93

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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.

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)	2022		2021
Projected Benefit Obligations
Beginning balance	$	215	$	228
Service cost	4		4
Interest cost	7		6
Actuarial losses, net	(53)		(9)
Benefits paid	(4)		(5)
Impact of changes in FX rates	1		—
Plan amendments	3		—
Settlements	(14)		(9)
Ending balance	$	159	$	215

Fair Value of Plan Assets
Beginning balance	$	190	$	203
Actual return on plan assets	(49)		1
Employer contributions	3		—
Benefits paid	(4)		(5)

Settlements	(14)		(9)
Ending balance	$	126	$	190

Net liability recognized	$	(33)	$	(25)
Non-current assets	$	2	$	14
Current liability	(1)		(1)
Non-current liability	(34)		(38)

The accumulated benefit obligations for the defined benefit pension plans were $156 million and $195 million as of December 31, 2022 and 2021. 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 92% of the total projected benefit obligation of all plans combined as of December 31, 2022.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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)	2022		2021
Aggregate projected benefit obligation	$	81	$	104
Aggregate accumulated benefit obligation	78		101
Aggregate fair value of plan assets	45		65

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


	For the Year Ended December 31,
(in millions)	2022		2021		2020
Service cost	$	4	$	4	$	3
Interest cost	7		6		7
Expected return on assets	(7)		(8)		(8)

Settlements	(1)		(1)		(1)
Total net periodic benefit costs	$	3	$	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. The estimated service costs or net actuarial losses for the defined benefit pension plans amortized from AOCI into periodic benefit cost in 2023 are expected to be insignificant.

The following table summarizes amounts included in AOCI for the Company’s defined benefit plans:


	As of December 31,
(in millions)	2022		2021
Net actuarial loss	$	6	$	2
Prior service cost	3		—
Total	$	9	$	2

Contributions and Expected Benefit Payments

The Company's contributions to its pension plans for the years ended December 31, 2022, 2021 and 2020, and its projected contributions for the year ended December 31, 2023, are insignificant.

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


(in millions)			2023						2024						2025						2026						2027						2028-2032
Estimated future benefit payments			$	11					$	11					$	12					$	12					$	12					$	62

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, 2022 and 2021, as well as projected 2023 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, 2022. The population of bonds utilized to calculate the discount rate includes those having an average yield between the 10th and 90th percentiles. Projected cash flows from the U.S. plans are then matched to spot rates along that yield curve in order to determine their present value and a single equivalent discount rate is calculated that produces the same present value as the spot rates.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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 each of the years ended December 31, 2022 and 2021.

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,
	2022		2021
Weighted average discount rate	5.40	%	2.85	%
Rate of increase in compensation levels	3.00	%	3.00	%

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


	For the Year Ended December 31,
	2022		2021		2020
Weighted average discount rate	5.40	%	2.55	%	3.30	%
Rate of increase in compensation levels	3.00	%	3.00	%	3.00	%
Expected long-term rate of return	6.00	%	4.00	%	4.00	%

For the years ended December 31, 2022, 2021 and 2020, 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,
	2022		2021		2020
Fixed income securities:
Asset allocation assumption	80	%	80	%	80	%
Expected long-term rate of return	6.0	%	3.4	%	3.4	%

Equity securities:
Asset allocation assumption	20	%	20	%	20	%
Expected long-term rate of return	6.0	%	6.5	%	7.4	%

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, 2022 and 2021, the Company was in compliance with the investment policy for the U.S. defined benefit pension plans, which contains allowable ranges in asset mix of 5-15% for U.S. equity securities, 5-15% for international equity securities, and 70-90% for fixed income securities.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

PRMB PLANS

The Company has 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, 2022 and 2021.

FAIR VALUE OF THE PENSION AND PRMB ASSETS

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

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


		Fair Value Measurement as of December 31,
		2022				2021
(in millions)	Fair Value Hierarchy Level	Pension Assets		PRMB Assets		Pension Assets		PRMB Assets
Cash and cash equivalents	Level 1	$	3	$	—	$	4	$	—
U.S. equity securities(1)(2)	Level 2	15		—		21		1
International equity securities(1)(2)	Level 2	5		6		11		8
Fixed income securities(3)	Level 2	103		1		154		1
Total		$	126	$	7	$	190	$	10

(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 domestic and international corporate bonds and U.S. 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

The Company has three multi-employer plans, which are 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 $5 million, $5 million and $7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Individually Significant Multi-Employer Plan

The Company participates in one multi-employer plan, Central States, which is considered to be individually significant. The following table presents information about Central States as of December 31, 2022:


Plan's employer identification number			36-6044243
Plan number			001
Expiration dates of collective bargaining agreements(1)			May 6, 2023 through March 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 January 20, 2025, covers approximately 56% of the employees included in Central States. One of the collective bargaining agreements is set to expire during 2023, covering approximately 6% of the employees included in Central States.

The most recent Pension Protection Act zone status available as of December 31, 2022 is for the plan's year-end as of December 31, 2021. 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, 2022, 2021 and 2020.

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


(in millions)			2023						2024						2025						2026						2027
Future estimated contributions to Central States			$	2					$	2					$	2					$	2					$	2

DEFINED CONTRIBUTION PLANS

The Company sponsors various qualified defined contribution plans that cover U.S. and foreign based employees who meet certain eligibility requirements. The U.S. plans permit both pre-tax and after-tax contributions, which are subject to limitations imposed by IRS regulations. The Company makes matching contributions and discretionary profit sharing contributions to these plans. The Company incurred contribution expense of $61 million, $73 million and $77 million to the defined contribution plan for the years ended December 31, 2022, 2021 and 2020, respectively.

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	2022		2021
Marketable securities - trading	Level 1	$	30	$	43

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 losses, as well as $5 million and $8 million in gains associated with these trading securities during the years ended December 31, 2022, 2021 and 2020, respectively.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

11. 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)	2022		2021		2020
Total stock-based compensation expense(1)	$	52	$	88	$	85
Income tax benefit recognized in the Consolidated Statements of Income	(7)		(14)		(13)
Stock-based compensation expense, net of tax	$	45	$	74	$	72

(1)Effective January 1, 2022, the Company changed its accounting policy for stock-based compensation expense with respect to forfeitures. The cumulative effect of this change resulted in a one-time reduction in stock-based compensation expense of $40 million recognized in the first quarter of 2022. Refer to Note 2 for additional information.

DESCRIPTION OF STOCK-BASED COMPENSATION PLANS

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 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 after the DPS Merger through 2019						5-year term with cliff-vesting at the end of the term
RSUs granted during 2020, 2021, and 2022						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, 2022:


	RSUs	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Balance as of December 31, 2021	18,808,491	$	25.74	2.2	$	693
Granted	4,035,861	35.76		—	—
Vested and released	(1,123,292)	24.66		—	42
Forfeited	(3,682,315)	28.59		—	—
Balance as of December 31, 2022	18,038,745	27.46		1.6	643

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

The weighted average grant date fair value for RSUs granted for the years ended December 31, 2022, 2021 and 2020 was $35.76, $28.83 and $24.91, respectively. The aggregate intrinsic value of the RSUs vested and released for the years ended December 31, 2022, 2021 and 2020 was $42 million, $333 million and $3 million, respectively.

As of December 31, 2022, there was $192 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.1 years.

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, 2022:


	PSUs	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Balance as of December 31, 2021	651,042	$	28.80	1.1	$	24
Granted	—	—		—	—
Vested and released	—	—		—	—
Forfeited	(214,844)	28.80		—	—
Balance as of December 31, 2022	436,198	28.80		0.5	16

As of December 31, 2022, there was $6 million of unrecognized compensation cost related to unvested PSUs that is expected to be recognized over a weighted average period of 1.0 year.

STOCK OPTIONS

The table below summarizes stock option activity for the year ended December 31, 2022:


	Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Balance as of December 31, 2021	193,572	$	12.09	3.7	$	5
Granted	—	—		—	—
Exercised	(17,974)	14.76		—	—
Outstanding as of December 31, 2022	175,598	11.81		2.5	4
Exercisable as of December 31, 2022	175,598	11.81		2.5	4

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

12. Investments and Acquisitions

INVESTMENTS IN UNCONSOLIDATED AFFILIATES

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


			December 31,
(in millions)	Ownership Interest		2022		2021

Nutrabolt	29.8	%	$	874	$	—
Tractor	19.2	%	49		—
Athletic Brewing(1)	13.1	%	51		—
Dyla LLC	12.4	%	12		12
Force Holdings LLC(2)	33.3	%	4		5
Beverage startup companies(3)	(various)		5		8
Other	(various)		5		5
Investments in unconsolidated affiliates			$	1,000	$	30

(1)In November 2022, the Company invested $51 million in exchange for a 13.1% ownership interest in Athletic Brewing.

(2)Force Holdings LLC has a 14.1% ownership interest in Dyla LLC.

(3)Beverage startup companies represent equity method investments in development stage entities and may include entities which are pre-revenue, in test markets, or in early operations.

Nutrabolt Investment

In December 2022, the Company invested $871 million, which includes $8 million of incremental third-party costs, in exchange for preferred equity units in Nutrabolt that represent a 29.8% ownership interest on an as-converted basis. The Company will earn the greater of (i) a 5% annual coupon on the preferred equity units plus any accretion for amounts not yet paid or (ii) our share of Nutrabolt’s earnings as if our preferred equity was converted into common units. During the year ended December 31, 2022, the Company recorded preferred dividends of $3 million, which increased the investment balance for Nutrabolt.

Tractor Investment

In May 2022, the Company invested $44 million in exchange for equity interests in Tractor. The Company also issued a $6 million convertible note to Tractor with an annual interest rate of LIBOR + 5% and a term of six months. The convertible note was converted into equity interests during the second quarter of 2022, increasing the Company’s total ownership in Tractor to 19.2%.

BodyArmor Investment

On November 1, 2021, Coca-Cola announced that it had acquired full ownership of BodyArmor for cash consideration of $5.6 billion for the remaining 85% of equity interests that Coca-Cola did not previously own. Prior to the transaction, KDP held an ownership interest in BodyArmor of 12.5% on an undiluted basis, which had a carrying value of approximately $52 million. As a result of BodyArmor’s change in control, KDP’s ownership interest was diluted to 10.6% as a result of the vesting of incentive equity compensation previously granted by BodyArmor to employees, athletes, and endorsers. KDP received cash consideration from the sale of its interests in BodyArmor, net of holdback liabilities, of $576 million on December 15, 2021, resulting in a gain on the sale of the investment of $524 million. This gain was recorded to Gain on sale of investment in the Consolidated Statements of Income.

In January 2022, KDP agreed to a $350 million payment from BodyArmor for a full settlement of all of the claims under the litigation against BodyArmor and in complete satisfaction of the holdback amount owed to ABC in association with the sale of ABC’s equity interest in BodyArmor in 2021. ABC received the settlement payment in January 2022 and the lawsuit was dismissed.

The Company allocated approximately $300 million of the settlement for resolution of the prior litigation, of which $299 million was recorded to Gain on litigation settlement and $1 million was applied against outstanding receivables from BodyArmor. Approximately $28 million of the $299 million gain on litigation settlement was held in unallocated corporate costs as a recovery of legal fees incurred during the litigation process, with the remaining $271 million of the $299 million recorded to our Packaged Beverages segment.

Approximately $50 million of the $350 million payment was allocated to the settlement of the holdback liability, which was recorded to Gain on the sale of our equity method investment.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Bedford Investment

The Company has a 30% ownership interest in Bedford, which has a carrying value of $0 as of December 31, 2022 and 2021. In December 2021, the board of directors of Bedford communicated to KDP that it was unable to obtain additional investors, and that Bedford will begin procedures to wind down the company. As part of the wind down procedures, KDP and ABI agreed to together fund a $68 million credit agreement to Bedford. KDP will fund 30% of this loan, in line with the Company’s ownership percentage in Bedford. Approximately $14 million of the Company’s responsibility under this credit agreement has been funded and impaired through December 31, 2022. The Company recorded $12 million and $2 million in impairment losses related to this credit agreement during the years ended December 31, 2022 and 2021, respectively, which are included in the impairment charges described below.

The Company has also issued various promissory notes to Bedford since 2020, which have been fully impaired and placed in non-accrual status. The Company has recorded impairment charges related to its investment and notes receivable in Bedford of $12 million, $17 million, and $86 million during the years ended December 31, 2022, 2021 and 2020, respectively. The impairment charges were recorded on the Impairment of investments and note receivable line in the Consolidated Statements of Income.

LifeFuels Investment

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.

ACQUISITIONS

Revive

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 was considered a common control transaction due to KDP's relationship with Peet's at the transaction date, 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.

13. Income Taxes

Income before provision for income taxes was as follows:


	For the Year Ended December 31,
(in millions)	2022		2021		2020
U.S.	$	789	$	2,353	$	1,367
International	930		445		386
Total	$	1,719	$	2,798	$	1,753

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

The provision for income taxes has the following components:


	For the Year Ended December 31,
(in millions)	2022		2021		2020
Current:
Federal	$	320	$	386	$	297
State	97		136		103
International	156		100		79
Total current provision	$	573	$	622	$	479

Deferred:
Federal	$	(141)	$	41	$	(31)
State	(147)		(8)		(6)
International	(1)		(2)		(14)
Total deferred provision	(289)		31		(51)
Total provision for income taxes	$	284	$	653	$	428

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)	2022		2021		2020
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net	2.6	%	3.8	%	4.0	%
Impact of non-U.S. operations	(2.3)	%	0.1	%	0.2	%
Tax credits	(3.9)	%	(0.8)	%	(1.3)	%
Valuation allowance for deferred tax assets	—	%	(0.1)	%	(1.1)	%
U.S. taxation of foreign earnings	3.7	%	0.7	%	1.6	%
Deferred rate change	(5.2)	%	(0.7)	%	0.5	%
Uncertain tax positions	0.3	%	—	%	(1.3)	%
U.S. federal provision to return	(0.1)	%	(0.3)	%	0.1	%
Excess tax deductions on stock-based compensation	(0.1)	%	(1.0)	%	—	%
Other	0.5	%	0.6	%	0.7	%
Total provision for income taxes	16.5	%	23.3	%	24.4	%

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Deferred tax assets and liabilities were comprised of the following:


	December 31,
(in millions)	2022		2021
Deferred tax assets:
Operating lease liability	$	226	$	166
Net operating losses carryforwards	36		43
Tax credit carryforwards	35		49
Accrued expenses	149		125
Share-based compensation	41		32
Multi-year upfront payments	10		13
Equity method investments	48		50
Other	69		41
Total deferred tax assets	614		519
Valuation allowances	(47)		(48)
Total deferred tax assets, net of valuation allowances	$	567	$	471
Deferred tax liabilities:
Brands, trade names and other intangible assets	$	(5,685)	$	(5,909)
Property, plant and equipment	(343)		(314)
Derivative instruments	(9)		(18)
Right of use assets	(222)		(164)
Other	(12)		(10)
Total deferred tax liabilities	(6,271)		(6,415)
Net deferred tax liabilities	$	(5,704)	$	(5,944)

CARRYFORWARDS

As of December 31, 2022 and 2021, the Company had $36 million and $39 million, respectively, in tax-effected Luxembourg net operating loss carry forwards. Of the $36 million of net operating loss carryforwards as of December 31, 2022, $34 million will not expire and $2 million will begin to expire in the year 2034.

As of December 31, 2022, the Company has $34 million of U.S. foreign tax credit carryforwards and $1 million of other carryforwards, primarily related to U.S. state income tax. Foreign tax credits will begin to expire in 2024.

UNDISTRIBUTED INTERNATIONAL EARNINGS

For the tax year ended December 31, 2022, undistributed earnings in non-U.S. subsidiaries for which no deferred taxes have been provided totaled approximately $604 million. 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, Ireland, and Mexico. The U.S. and most state income tax returns for years prior to 2017 are closed to examination by applicable tax authorities. Canadian and Mexican income tax returns are generally open for audit for tax years 2018 and forward.

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 for each of the years ended December 31, 2022 and 2021, respectively, resulting in no impact to basic and diluted EPS for each of the years ended December 31, 2022 and 2021.

On August 16, 2022, the “Inflation Reduction Act” (H.R. 5376) was signed into law in the United States. The Company does not currently expect the Inflation Reduction Act to have a material impact on KDP’s consolidated financial statements.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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)	2022		2021		2020
Balance, beginning of the period	$	12	$	18	$	43
Increases related to tax positions taken during the current year	4		2		2
(Decreases) increases related to tax positions taken during the prior year	3		(3)		2
Decreases related to settlements with taxing authorities	(3)		(1)		(8)
Decreases related to lapse of applicable statute of limitations	(1)		(4)		(21)
Balance, end of the period	$	15	$	12	$	18

The total amount of unrecognized tax benefits that would reduce the effective tax rate if recognized is $12 million after considering the federal impact of state income taxes. KDP does not expect a significant change to its unrecognized tax benefits, but it is reasonably possible that a change in the unrecognized tax benefits may occur within the next twelve months related to the settlement of audits or the lapse of applicable statutes of limitations.

KDP accrues interest and penalties on its uncertain tax positions as a component of its provision for income taxes. KDP recognized no expense related to interest and penalties for uncertain tax positions for the year ended December 31, 2022, and recognized expense of $1 million and benefit of $8 million for the years ended December 31, 2021 and 2020, respectively. The Company had a total of $2 million accrued for interest and penalties for its uncertain tax positions reported as part of other non-current liabilities as of both December 31, 2022 and 2021.

14. Restructuring and Integration Costs

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. Although the program was initially expected to be completed in 2021, as a result of delays due to COVID-19, KDP continued to recognize expenditures for certain initiatives which began during the integration period through 2022. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $962 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through December 31, 2022.

Restructuring and integration charges incurred on the defined programs during the years ended December 31, 2022, 2021 and 2020 were as follows:


	Year Ended December 31,
(in millions)	2022		2021		2020
DPS Integration program	$	172	$	202	$	200

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 for the DPS Integration Program, all of which were workforce reduction costs, as of December 31, 2022 and 2021 were as follows:


(in millions)	Workforce Reduction Costs
Balance as of December 31, 2020	$	14
Charges to expense	41
Cash payments	(36)

Balance as of December 31, 2021	19
Charges to expense	66
Cash payments	(30)

Balance as of December 31, 2022	$	55

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

15. 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		Cash Flow Hedges		AOCI
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 loss	(9)		(4)		(14)		(27)
Balance as of December 31, 2020	95		(4)		(14)		77
OCI before reclassifications	(14)		—		(102)		(116)
Amounts reclassified from AOCI	—		—		13		13
Net current period other comprehensive loss	(14)		—		(89)		(103)
Balance as of December 31, 2021	81		(4)		(103)		(26)
OCI before reclassifications	(167)		(6)		329		156
Amounts reclassified from AOCI	—		—		(1)		(1)
Net current period other comprehensive (loss) income	(167)		(6)		328		155
Balance as of December 31, 2022	$	(86)	(10)		$	225	$	129

The following table presents the amount of losses reclassified from AOCI into the Consolidated Statements of Income:


		For the Year Ended December 31,
(in millions)	Income Statement Caption	2022		2021		2020
Pension and PRMB liabilities	SG&A expenses	$	—	$	—	$	1
Income tax benefit		—		—		—
Total, net of tax		$	—	$	—	$	1

Cash flow hedges:
Interest rate contracts	Interest expense	$	(6)	$	—	$	—
FX contracts	Cost of sales	5		18		2
Total		(1)		18		2
Income tax benefit		—		(5)		—
Total, net of tax		$	(1)	$	13	$	2

16. Property, Plant and Equipment

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


	December 31,
(in millions)	2022		2021
Land	$	44	$	50
Buildings and improvements	720		793
Machinery and equipment	2,566		2,369
Cold drink equipment	102		89
Software	459		404
Construction-in-progress	251		138
Property, plant and equipment, gross	4,142		3,843
Less: accumulated depreciation and amortization	(1,651)		(1,349)
Property, plant and equipment, net	$	2,491	$	2,494

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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


	For the Year Ended December 31,
(in millions)	2022		2021		2020
Cost of sales	$	229	$	233	$	215
SG&A expenses	170		177		147
Total depreciation expense	$	399	$	410	$	362

17. Other Financial Information

SELECTED BALANCE SHEET INFORMATION

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


	December 31,
(in millions)	2022		2021
Inventories:
Raw materials	$	475	$	330
Work in process	8		6
Finished goods	858		577
Total	1,341		913
Allowance for excess and obsolete inventories	(27)		(19)
Inventories	$	1,314	$	894
Prepaid expenses and other current assets:
Other receivables	$	167	$	112
Prepaid income taxes	49		5
Customer incentive programs	25		21
Derivative instruments	35		144
Prepaid marketing	19		12
Spare parts	89		72

Income tax receivable	17		14
Other	70		67
Total prepaid expenses and other current assets	$	471	$	447
Other non-current assets:
Operating lease right-of-use assets	$	881	$	673
Customer incentive programs	46		59
Derivative instruments	140		3
Equity securities(1)	48		58

Equity securities without readily determinable fair values	1		1


Other	136		143
Total other non-current assets	$	1,252	$	937

(1)Equity securities are comprised of assets held in a rabbi trust in connection with a non-qualified defined contribution plan, as well as our ownership interest in Vita Coco. Refer to Note 10 for additional information about the rabbi trust. Unrealized mark-to-market losses on the Vita Coco investment of $4 million and $5 million for the years ended December 31, 2022 and 2021, respectively, are recorded in Other (income) expense, net.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)


	December 31,
(in millions)	2022		2021
Accrued expenses:
Customer rebates & incentives	$	429	$	446
Accrued compensation	246		227
Insurance reserve	53		33
Interest accrual	76		55
Accrued professional fees	7		19
Other accrued expenses	342		330
Total accrued expenses	$	1,153	$	1,110
Other current liabilities:
Dividends payable	$	281	$	265
Income taxes payable	87		144
Operating lease liability	100		76
Finance lease liability	95		79
Derivative instruments	112		39

Other	10		10
Total other current liabilities	$	685	$	613
Other non-current liabilities:
Operating lease liability	$	803	$	608
Finance lease liability	618		621
Long-term pension and postretirement liability	37		40
Insurance reserves	69		75
Derivative instruments	195		143
Deferred compensation liability	30		43
Other	73		47
Total other non-current liabilities	$	1,825	$	1,577

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

18. Commitments and Contingencies

KDP is occasionally subject to litigation or other legal proceedings. Reserves are recorded for specific legal proceedings when the Company determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. As of December 31, 2022 and 2021, the Company had litigation reserves of $12 million and $14 million, respectively, which includes the specific amounts disclosed below. KDP has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. The Company does not believe that the outcome of these, or any other, pending legal matters, individually or collectively, will have a material adverse effect on the results of operations, financial condition or liquidity of KDP.

ANTITRUST LITIGATION

In February 2014, TreeHouse Foods, Inc. and certain affiliated entities filed suit against KDP’s wholly-owned subsidiary, Keurig, 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 treble monetary damages, declaratory relief, injunctive relief and attorneys’ fees. In March 2014, JBR, Inc. filed suit against Keurig in the U.S. District Court for the Eastern District of California (JBR, Inc. v. Keurig Green Mountain, Inc.). The claims asserted and relief sought in the JBR complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint.

Beginning in 2014, a number of putative class actions asserting similar claims and seeking similar relief to the matters described above were filed on behalf of purported direct purchasers of Keurig’s products in various federal district courts. In June 2014, these various actions, including the TreeHouse and JBR suits, were transferred to a single judicial district for coordinated pre-trial proceedings (the “Multidistrict Antitrust Litigation”). A consolidated putative class action complaint by direct purchaser plaintiffs was filed in July 2014. In January 2019, McLane Company, Inc. filed suit against Keurig (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 concluded in 2021, with plaintiffs collectively claiming more than $5 billion of monetary damages. Keurig strongly disputes the merits of the claims and the calculation of damages. As a result, Keurig has fully briefed a summary judgment motion that, if successful, would end the cases entirely. Keurig has also fully briefed other significant motions, including challenges to the validity of plaintiffs’ damages calculations. Keurig is also pursuing its opposition to direct purchaser plaintiffs’ motion for class certification.

In July 2021, BJ’s Wholesale Club, Inc. filed suit against Keurig (BJ’s Wholesale Club, Inc. v. Keurig Green Mountain, Inc.) in the U.S. District Court for the Eastern District of New York (“EDNY”) asserting similar claims and also was transferred into the Multidistrict Antitrust Litigation. In August 2021, Winn-Dixie Stores, Inc. and Bi-Lo Holding LLC filed suit against Keurig (Winn-Dixie Stores, Inc. et al. v. Keurig Green Mountain, Inc. et al.) in the EDNY asserting similar claims and was also transferred into the Multidistrict Antitrust Litigation. Discovery in these cases is expected to continue into early 2023.

A number of putative class actions asserting similar claims and seeking similar relief were previously filed on behalf of purported indirect purchasers of Keurig’s products. In July 2020, Keurig reached an agreement with the putative indirect purchaser class plaintiffs in the Multidistrict Antitrust Litigation to settle the claims asserted for $31 million. The settlement class consists of individuals and entities in the United States that purchased, from persons other than Keurig and not for purposes of resale, Keurig manufactured or licensed single serve beverage portion packs during the applicable class period (beginning in September 2010 for most states). The court granted preliminary approval of the settlement in December 2020, and the Company paid the settlement amount in January 2021. In June 2021, the Court granted final approval of the settlement, entered final judgment, and dismissed the indirect purchasers’ claims.

Separate from the U.S. actions described above, a statement of claim was filed in September 2014 against Keurig 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. To date, this plaintiff has not taken substantive action to prosecute its claims.

KDP intends to vigorously defend the remaining lawsuits described above. 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. Accordingly, the Company has not accrued for a loss contingency. Additionally, as the timelines in these cases may be beyond our control, we cannot assure you if or when there will be material developments in these matters.

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

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 Keurig, and certain other defendants who manufacture, package, distribute or sell coffee, failed to warn persons in California that Keurig's coffee products expose persons to the chemical acrylamide in violation of Proposition 65.

Keurig, 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 appealed the trial court’s ruling, and the California Court of Appeals affirmed the trial court’s ruling in October 2022. On February 15, 2023, the California Supreme Court denied CERT’s petition to review the Court of Appeals’ affirmance. This action effectively concludes the litigation, and accordingly, no loss contingency will be 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.

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, 2020	$	10
Accruals for warranties issued	21
Settlements	(18)
Balance as of December 31, 2021	13
Accruals for warranties issued	23
Settlements	(23)
Balance as of December 31, 2022	$	13

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

19. Transactions with Variable Interest Entities

Transactions with Veyron SPEs

The Company has a number of leasing arrangements and one licensing arrangement with special purpose entities associated with the same sponsor, which are referred to as the Veyron SPEs. The Veyron SPEs are VIEs for which KDP is not the primary beneficiary, as KDP has limited power based on the contractual agreements to direct the activities that most significantly impact the VIEs’ performance.

Leasing Arrangements

As of December 31, 2022, the Company has entered into fifteen lease transactions with the Veyron SPEs, fourteen of which were associated with asset sale-leaseback transactions. Refer to Note 6 for additional information about the asset sale-leaseback transactions. Each lease has a RVG based on a percentage of the Veyron SPEs’ purchase price; however, the Company concluded it was not probable that the Company will owe an amount at the end of each individual lease term, as the fair values of the properties are not expected to fall below the RVGs at the end of each individual lease term. As such, the Company recorded each lease obligation excluding the associated RVG. The aggregate maximum undiscounted RVG associated with the leasing arrangements as of December 31, 2022 and 2021 were $650 million and $549 million, respectively. This aggregate maximum value assumes that the fair value of each property at the end of either the original lease term or renewal term is equal to zero, which the Company has concluded is not probable.

The following table provides the carrying amounts of the right-to-use assets and lease obligations recorded on the Company’s Consolidated Balance Sheets associated with these leasing arrangements related to the VIEs as of December 31, 2022 and 2021:


	December 31,
(in millions)	2022(1)		2021(2)
Current assets	$	—	$	19
Non-current assets	430		312
Current liabilities	22		13
Non-current liabilities	419		323

(1)The leasing agreements included as of December 31, 2022 include nine manufacturing sites, four distribution centers, one multipurpose property and our Frisco, Texas headquarters.

(2)The leasing agreements included as of December 31, 2021 include seven manufacturing sites, two distribution centers and our Frisco, Texas headquarters.

Licensing Arrangement

ABC, a wholly-owned subsidiary of KDP, has provided a guarantee in connection with its distribution agreement with the Veyron SPEs to be paid only in the event the Veyron SPEs sell 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 the Veyron SPEs. As of December 31, 2022, 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 term of the agreement.

As of December 31, 2022, KDP had $100 million in fixed service fee commitments related to the 15-year distribution agreement which was effective on December 28, 2020, with Veyron SPEs. These commitments were used to assist the Veyron SPEs in obtaining financing. Such fixed service fee payments began on 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)	2023		2024		2025		2026		2027
Fixed service fees	$	8	$	8	$	8	$	8	$	8

KEURIG DR PEPPER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Transaction with Nutrabolt

The Company has a preferred equity investment in Nutrabolt, which will earn the greater of (i) a 5% annual coupon on the preferred equity units plus any accretion for amounts not yet paid or (ii) KDP’s share of Nutrabolt’s earnings as if KDP’s preferred equity was converted into common units. As the other investors of Nutrabolt have to share in Nutrabolt's earnings with KDP if in excess of the 5% annual coupon, the other investors lack certain characteristics of a controlling financial interest, which qualifies Nutrabolt as a VIE. KDP is not the primary beneficiary of the VIE and therefore is not required to consolidate Nutrabolt, as the primary shareholder of the VIE has control over the board and decision-making for the activities that most significantly impact the VIE’s economic performance, including sales, marketing, and operations. KDP has no obligation to provide additional funding to Nutrabolt, and thus the Company’s maximum exposure and risk of loss related to Nutrabolt is limited to the carrying value of KDP’s investment. Refer to Note 12 for additional information about the transaction with Nutrabolt and the carrying value of the investment.

20. 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, 2022, JAB beneficially owned approximately 31% 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. These commercial relationships may take the form of KDP’s purchase of raw materials, KDP’s license of the companies’ trademarks for use in the manufacturing of K-cup pods, KDP’s sale of products for resale to retail customers, or KDP’s manufacture or distribution of products to, or on behalf of, these companies.

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 12 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 $12 million and $17 million as of December 31, 2022 and 2021, respectively, primarily related to product sales and royalty revenues. Accounts payable to related parties were $8 million and $7 million as of December 31, 2022 and 2021, respectively, primarily related to purchases of finished goods inventory for distribution.

Revenues from and payments to these related parties were as follows:


	For the Year Ended December 31,
(in millions)	2022		2021		2020
Revenues from related parties	$	127	$	113	$	112
Payments to related parties	64		67		73

NOTE RECEIVABLE FROM BEDFORD

KDP has issued various promissory notes to Bedford since 2020, all of which have been fully impaired and placed in non-accrual status. Refer to Note 12 for additional information.

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