Item 1. Financial Statements (Unaudited)

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Item 1. Financial Statements (Unaudited)

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Third Quarter				First Nine Months
(in millions, except per share data)	2021		2020		2021		2020
Net sales	$	3,250	$	3,020	$	9,292	$	8,497
Cost of sales	1,415		1,316		4,087		3,779
Gross profit	1,835		1,704		5,205		4,718
Selling, general and administrative expenses	1,040		949		3,040		2,978
Other operating expense (income), net	—		2		(4)		(40)
Income from operations	795		753		2,169		1,780
Interest expense	116		148		381		458
Loss on early extinguishment of debt	—		—		105		4
Impairment of investments and note receivable	—		16		—		102
Other expense (income), net	1		5		(6)		21
Income before provision for income taxes	678		584		1,689		1,195
Provision for income taxes	149		141		387		298
Net income including non-controlling interest	529		443		1,302		897
Less: Net loss attributable to non-controlling interest	(1)		—		(1)		—
Net income attributable to KDP	$	530	$	443	$	1,303	$	897

Earnings per common share:
Basic	$	0.37	$	0.31	$	0.92	$	0.64
Diluted	0.37		0.31		0.91		0.63
Weighted average common shares outstanding:
Basic	1,417.6		1,407.3		1,414.9		1,407.2
Diluted	1,428.5		1,422.9		1,427.5		1,421.5

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Third Quarter				First Nine Months
(in millions)	2021		2020		2021		2020
Net income including non-controlling interest	$	529	$	443	$	1,302	$	897
Other comprehensive income
Foreign currency translation adjustments	(137)		111		(9)		(321)
Net change in pension and post-retirement liability, net of tax of $—, $—, $— and $—, respectively	—		(1)		—		(2)
Net change in cash flow hedges, net of tax of $4, $—, $(22) and $—, respectively	15		1		(62)		2
Total other comprehensive income (loss)	(122)		111		(71)		(321)
Comprehensive income including non-controlling interest	407		554		1,231		576
Less: Comprehensive income attributable to non-controlling interest	—		—		—		—
Comprehensive income attributable to KDP	$	407	$	554	$	1,231	$	576

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30,		December 31,
(in millions, except share and per share data)	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	200	$	240
Restricted cash and restricted cash equivalents	3		15
Trade accounts receivable, net	1,138		1,048
Inventories	972		762
Prepaid expenses and other current assets	490		323
Total current assets	2,803		2,388
Property, plant and equipment, net	2,425		2,212
Investments in unconsolidated affiliates	85		88
Goodwill	20,193		20,184
Other intangible assets, net	23,883		23,968
Other non-current assets	901		894
Deferred tax assets	40		45
Total assets	$	50,330	$	49,779
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	4,072	$	3,740
Accrued expenses	1,121		1,040
Structured payables	142		153
Short-term borrowings and current portion of long-term obligations	998		2,345
Other current liabilities	462		416
Total current liabilities	6,795		7,694
Long-term obligations	11,727		11,143
Deferred tax liabilities	5,940		5,993
Other non-current liabilities	1,463		1,119
Total liabilities	25,925		25,949
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, 1,417,914,437 and 1,407,260,676 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	14		14
Additional paid-in capital	21,764		21,677
Retained earnings	2,621		2,061
Accumulated other comprehensive income	6		77
Total stockholders' equity	24,405		23,829
Non-controlling interest	—		1
Total equity	24,405		23,830
Total liabilities and equity	$	50,330	$	49,779

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	First Nine Months
(in millions)	2021		2020
Operating activities:
Net income attributable to KDP	$	1,303	$	897
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	304		272
Amortization of intangibles	101		100
Other amortization expense	118		118
Provision for sales returns	48		36
Deferred income taxes	(21)		(27)
Employee stock-based compensation expense	68		62
Loss on early extinguishment of debt	105		4

Gain on disposal of property, plant and equipment	(5)		(39)
Unrealized loss on foreign currency	1		14
Unrealized (gain) loss on derivatives	(94)		47
Equity in loss of unconsolidated affiliates	2		19
Impairment on investments and note receivable of unconsolidated affiliate	—		102
Other, net	10		50
Changes in assets and liabilities:
Trade accounts receivable	(126)		(1)
Inventories	(210)		(175)
Income taxes receivable and payables, net	(11)		(118)
Other current and non-current assets	(181)		(387)
Accounts payable and accrued expenses	536		500
Other current and non-current liabilities	(15)		192
Net change in operating assets and liabilities	(7)		11
Net cash provided by operating activities	1,933		1,666
Investing activities:



Purchases of property, plant and equipment	(325)		(356)
Proceeds from sales of property, plant and equipment	18		203
Purchases of intangibles	(31)		(26)
Issuance of related party note receivable	(17)		(6)
Investments in unconsolidated affiliates	—		(4)
Other, net	5		7
Net cash used in investing activities	$	(350)	$	(182)

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

**(**UNAUDITED, CONTINUED)


	First Nine Months
(in millions)	2021		2020
Financing activities:
Proceeds from issuance of Notes	$	2,150	$	1,500
Repayments of Notes	(3,595)		(250)
Proceeds from issuance of commercial paper	4,756		6,843
Repayments of commercial paper	(3,758)		(7,754)
Proceeds from KDP Revolver	—		1,850
Repayments of KDP Revolver	—		(1,850)
Proceeds from sale of stock by JAB	—		29

Repayments of 2019 KDP Term Loan	(425)		(880)
Proceeds from structured payables	112		128
Repayments of structured payables	(123)		(290)
Cash dividends paid	(687)		(635)
Proceeds from issuance of common stock	140		—
Tax withholdings related to net share settlements	(125)		—
Payments on finance leases	(40)		(35)
Other, net	(35)		(22)
Net cash used in financing activities	(1,630)		(1,366)
Cash, cash equivalents, restricted cash, and restricted cash equivalents:
Net change from operating, investing and financing activities	(47)		118
Effect of exchange rate changes	(5)		(11)
Beginning balance	255		111
Ending balance	$	203	$	218

Supplemental cash flow disclosures of non-cash investing activities:
Capital expenditures included in accounts payable and accrued expenses	$	180	$	255
Non-cash acquisition of controlling interest	—		3

Supplemental cash flow disclosures of non-cash financing activities:
Dividends declared but not yet paid	268		211
Finance lease additions	309		30
Supplemental cash flow disclosures:
Cash paid for interest	284		250
Cash paid for income taxes	408		448

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)


	Common Stock Issued			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity		Non-controlling Interest		Total Equity
(in millions, except per share data)	Shares	Amount
Balance as of January 1, 2021	1,407.3	$	14	$	21,677	$	2,061	$	77	$	23,829	$	1	$	23,830
Net income	—	—		—		325		—		325		—		325
Other comprehensive income	—	—		—		—		87		87		—		87
Dividends declared, $0.15 per share	—	—		—		(212)		—		(212)		—		(212)
Issuance of common stock	4.3	—		140		—		—		140		—		140
Shares issued under employee stock-based compensation plans and other	5.7	—		—		—		—		—		—		—
Stock-based compensation and stock options exercised	—	—		(99)		—		—		(99)		—		(99)
Balance as of March 31, 2021	1,417.3	14		21,718		2,174		164		24,070		1		24,071
Net income	—	—		—		448		—		448		—		448
Other comprehensive income	—	—		—		—		(36)		(36)		—		(36)
Dividends declared, $0.1875 per share	—	—		—		(265)		—		(265)		—		(265)

Shares issued under employee stock-based compensation plans and other	0.1	—		—		—		—		—		—		—
Stock-based compensation and stock options exercised	—	—		25		—		—		25		—		25
Balance as of June 30, 2021	1,417.4	14		21,743		2,357		128		24,242		1		24,243
Net income	—	—		—		530		—		530		(1)		529
Other comprehensive income	—	—		—		—		(122)		(122)		—		(122)
Dividends declared, $0.1875 per share	—	—		—		(266)		—		(266)		—		(266)
Shares issued under employee stock-based compensation plans and other	0.5	—		—		—		—		—		—		—
Stock-based compensation and stock options exercised	—	—		21		—		—		21		—		21
Balance as of September 30, 2021	1,417.9	$	14	$	21,764	$	2,621	$	6	$	24,405	$	—	$	24,405

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED, CONTINUED)


	Common Stock Issued			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity		Non-controlling Interest		Total Equity
(in millions, except per share data)	Shares	Amount
Balance as of January 1, 2020	1,406.8	$	14	$	21,557	$	1,582	$	104	$	23,257	$	—	$	23,257

Net income	—	—		—		156		—		156		—		156
Other comprehensive loss	—	—		—		—		(584)		(584)		—		(584)
Dividends declared, $0.15 per share	—	—		—		(211)		—		(211)		—		(211)

Shares issued under stock-based compensation plans and other	0.3	—		—		—		—		—		—		—
Stock-based compensation and stock options exercised	—	—		22		—		—		22		—		22
Balance as of March 31, 2020	1,407.1	14		21,579		1,527		(480)		22,640		—		22,640
Net income	—	—		—		298		—		298		—		298
Other comprehensive income	—	—		—		—		152		152		—		152
Dividends declared, $0.15 per share	—	—		—		(212)		—		(212)		—		(212)
Proceeds from sale of stock by JAB	—	—		22		—		—		22		—		22
Shares issued under employee stock-based compensation plans and other	0.1	—		—		—		—		—		—		—
Stock-based compensation and stock options exercised	—	—		23		—		—		23		—		23
Balance as of June 30, 2020	1,407.2	14		21,624		1,613		(328)		22,923		—		22,923
Net income	—	—		—		443		—		443		—		443
Other comprehensive loss	—	—		—		—		111		111		—		111
Dividends declared, $0.15 per share	—	—		—		(211)		—		(211)		—		(211)
Proceeds from sale of stock by JAB	—	—		7		—		—		7		—		7
Non-cash acquisition of controlling interest	—	—		3		—		—		3		1		4
Shares issued under employee stock-based compensation plans and other	0.1	—		—		—		—		—		—		—
Stock-based compensation and stock options exercised	—	—		20		—		—		20		—		20
Balance as of September 30, 2020	1,407.3	$	14	$	21,654	$	1,845	$	(217)	$	23,296	$	1	$	23,297

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

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. General

ORGANIZATION

References in this Quarterly Report on Form 10-Q to "KDP" or "the Company" refer to Keurig Dr Pepper Inc. and all entities included in the unaudited condensed consolidated financial statements. Definitions of terms used in this Quarterly Report on Form 10-Q are included within the Master Glossary.

This Quarterly Report on Form 10-Q 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 unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with KDP's consolidated financial statements and accompanying notes, included in the Company's Annual Report.

Except as otherwise specified, references to the "third quarter" indicate the Company's quarterly periods ended September 30, 2021 and 2020.

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 interest is presented as a separate component within equity in the unaudited Condensed Consolidated Balance Sheets, and net income attributable to the non-controlling interest is presented separately in the unaudited Condensed Consolidated Statements of Income.

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

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

USE OF ESTIMATES

The process of preparing KDP's unaudited condensed 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.

RECLASSIFICATIONS

KDP reclassified amounts in the Financing Activities section of the unaudited condensed consolidated Statement of Cash Flows for the first nine months of 2020 in order to conform to current year presentation. Refer to Note 2 for additional information about changes to the maturities of KDP’s commercial paper.


(in millions)	Prior Presentation	First Nine Months of 2020
Proceeds from commercial paper	Net (repayment) issuance of commercial paper	$	6,843
Repayments of commercial paper	Net (repayment) issuance of commercial paper	(7,754)

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

RECENTLY ADOPTED PROVISIONS OF U.S. GAAP

As of January 1, 2021, the Company adopted ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The objective of the new standard is to clarify the interaction of the accounting for equity securities, investments accounted for under the equity method of accounting and the accounting for certain forward contracts and purchased options accounted for under different topics in U.S. GAAP. The adoption of the standard did not impact KDP's consolidated financial statements.

2. Long-term Obligations and Borrowing Arrangements

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


(in millions)	September 30, 2021		December 31, 2020
Notes	$	11,727	$	13,065

Term loan	—		423
Subtotal	11,727		13,488
Less - current portion	—		(2,345)
Long-term obligations	$	11,727	$	11,143

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


(in millions)	September 30, 2021		December 31, 2020
Commercial paper notes	$	998	$	—
Revolving credit facilities	—		—
Current portion of long-term obligations:
Notes	—		2,246
Term loan	—		99
Short-term borrowings and current portion of long-term obligations	$	998	$	2,345

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

SENIOR UNSECURED NOTES

The Company's Notes consisted of the following:


(in millions, except %)
Issuance	Maturity Date	Rate	September 30, 2021		December 31, 2020
2021 Merger Notes	May 25, 2021	3.551%	$	—	$	1,750
2021-A Notes	November 15, 2021	3.200%	—		250
2021-B Notes	November 15, 2021	2.530%	—		250
2022 Notes	November 15, 2022	2.700%	—		250
2023 Merger Notes	May 25, 2023	4.057%	1,000		2,000
2023 Notes	December 15, 2023	3.130%	500		500
2024 Notes(1)	March 15, 2024	0.750%	1,150		—
2025 Merger Notes	May 25, 2025	4.417%	1,000		1,000
2025 Notes	November 15, 2025	3.400%	500		500
2026 Notes	September 15, 2026	2.550%	400		400
2027 Notes	June 15, 2027	3.430%	500		500
2028 Merger Notes	May 25, 2028	4.597%	2,000		2,000
2030 Notes	May 1, 2030	3.200%	750		750
2031 Notes	March 15, 2031	2.250%	500		—
2038 Notes	May 1, 2038	7.450%	125		125
2038 Merger Notes	May 25, 2038	4.985%	500		500
2045 Notes	November 15, 2045	4.500%	550		550
2046 Notes	December 15, 2046	4.420%	400		400
2048 Merger Notes	May 25, 2048	5.085%	750		750
2050 Notes	May 1, 2050	3.800%	750		750
2051 Notes	March 15, 2051	3.350%	500		—
Principal amount			$	11,875	$	13,225
Adjustment from principal amount to carrying amount(2)			(148)		(160)
Carrying amount			$	11,727	$	13,065

(1)The 2024 Notes may be called anytime on or after March 15, 2022, in whole or in part, at the Company’s option, at a redemption price equal to 100% of the principal amount being redeemed, plus accrued and unpaid interest.

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

On March 15, 2021, the Company completed the issuance of the 2024 Notes, the 2031 Notes, and the 2051 Notes. The discount associated with these notes was approximately $3 million and the Company incurred $13 million in debt issuance costs. The net proceeds from the issuance were used to repay the Company’s 2021-A Notes, 2021-B Notes, 2022 Notes, and approximately $1 billion of the 2023 Merger Notes, as well as to repay and terminate the 2019 KDP Term Loan as described below. As a result of the repayments of senior unsecured notes, the Company recorded losses on early extinguishment of debt of $104 million during the first quarter of 2021, comprised of a make-whole premium, fair market value adjustments and deferred financing fees written off.

On May 25, 2021, the Company repaid the 2021 Merger Notes at maturity using commercial paper.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

VARIABLE-RATE BORROWING ARRANGEMENTS

The KDP Credit Agreements consist of the following:


(in millions)		September 30, 2021				December 31, 2020
Issuance	Maturity Date	Available Balances		Carrying Value		Carrying Value
2019 KDP Term Loan	February 8, 2023	$	—	$	—	$	425
KDP Revolver(1)	February 28, 2023	2,400		—		—
2020 364-Day Credit Agreement	April 13, 2021	—		—
2021 364-Day Credit Agreement	March 23, 2022	1,500		—		—
Principal amount				$	—	$	425
Unamortized discounts and debt issuance costs				—		(2)
Carrying amount				$	—	$	423

(1)The KDP Revolver has $200 million letters of credit availability and none utilized as of September 30, 2021.

As of September 30, 2021, KDP was in compliance with all financial covenant requirements relating to the KDP Credit Agreements.

2019 KDP Term Loan

In March 2021, KDP voluntarily prepaid and terminated the 2019 KDP Term Loan using proceeds from the aforementioned issuance of senior unsecured notes, which resulted in $1 million of loss on early extinguishment of debt for the first nine months of 2021.

364-Day Credit Agreements

In March 2021, KDP terminated its 2020 364-Day Credit Agreement, which was originally available through April 2021. No amounts were drawn under the 2020 364-Day Credit Agreement prior to termination.

KDP then entered into the 2021 364-Day Credit Agreement on March 24, 2021 among KDP, the banks party thereto and Bank of America, N.A. as administrative agent, pursuant to which KDP obtained a $1,500 million commitment. The interest rate applicable to borrowings under the 2021 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 1.000% to 1.625% or a base rate plus a margin of 0.000% to 0.625%, depending on the rating of certain index debt of the Company. The 2021 364-Day Credit Agreement matures on March 23, 2022, and includes a term-out option which allows KDP to extend any outstanding amounts borrowed under the agreement for one year for a fee of 0.750% on the amounts borrowed.

Commercial Paper Program

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


	Third Quarter						First Nine Months
(in millions, except %)	2021			2020			2021			2020
Weighted average commercial paper borrowings	$	1,398		$	597		$	781		$	919
Weighted average borrowing rates	0.26		%	0.31		%	0.26		%	1.38		%

In April 2021, KDP began issuing commercial paper notes with maturities greater than 90 days. KDP continues to classify its commercial paper notes as short-term, as maturities do not exceed one year.

Letter of Credit Facility

In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, KDP has an incremental letter of credit facility. Under this facility, $100 million is available for the issuance of letters of credit, $44 million of which was utilized as of September 30, 2021 and $56 million of which remains available for use.

FAIR VALUE DISCLOSURES

The fair values of KDP's commercial paper approximate the carrying value and are considered Level 2 within the fair value hierarchy.

The fair values of KDP's Notes are based on current market rates available to KDP 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 KDP's Notes was $13,268 million and $15,274 million as of September 30, 2021 and December 31, 2020, respectively.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

3. Goodwill and Other Intangible Assets

GOODWILL

Changes in the carrying amount of goodwill by reportable segment are as follows:


(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total
Balance as of January 1, 2021	$	9,795	$	5,314	$	4,536	$	539	$	20,184
Foreign currency translation	19		3		2		(15)		9

Balance as of September 30, 2021	$	9,814	$	5,317	$	4,538	$	524	$	20,193

INTANGIBLE ASSETS OTHER THAN GOODWILL

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


(in millions)	September 30, 2021		December 31, 2020
Brands(1)	$	19,858	$	19,874
Trade names	2,480		2,480
Contractual arrangements	123		123
Distribution rights(2)	85		57
Total	$	22,546	$	22,534

(1)The decrease of $16 million in brands with indefinite lives was due to foreign currency translation during the first nine months of 2021.

(2)The Company executed nine agreements to acquire distribution rights during the first nine months of 2021, which resulted in an increase of $28 million.

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


	September 30, 2021						December 31, 2020
(in millions)	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Acquired technology	$	1,146	$	(383)	$	763	$	1,146	$	(328)	$	818
Customer relationships	638		(160)		478		638		(135)		503
Trade names	128		(82)		46		127		(69)		58
Contractual arrangements	24		(7)		17		24		(5)		19
Brands	21		(7)		14		21		(5)		16
Distribution rights	29		(10)		19		26		(6)		20
Total	$	1,986	$	(649)	$	1,337	$	1,982	$	(548)	$	1,434

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


	Third Quarter				First Nine Months
(in millions)	2021		2020		2021		2020
Amortization expense	$	34	$	34	$	101	$	100

Amortization expense of these intangible assets over the remainder of 2021 and the next five years is expected to be as follows:


	Remainder of 2021			For the Years Ending December 31,
(in millions)			2022			2023			2024			2025			2026
Expected amortization expense	$	34		$	134		$	132		$	124		$	109		$	105

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(UNAUDITED, CONTINUED)

IMPAIRMENT TESTING

KDP conducts impairment tests on goodwill and all indefinite lived intangible assets annually, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. As a result of the changes to the Company’s operating segments effective January 1, 2021, as described in Note 7, which resulted in a change to the Company’s reporting units, management performed a step zero analysis as of the effective date of the goodwill for the impacted reporting units. The Company also performed an analysis as of September 30, 2021 to ensure that there were no additional triggering events which occurred during the quarter. As a result of these analyses, management did not identify any indications that the carrying amount of any goodwill or any intangible asset may not be recoverable.

4. Restructuring and Integration 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, its restructuring activities, which do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments, implementation costs and other incremental costs. These costs are primarily recorded within SG&A expenses on the income statement and are held primarily within unallocated corporate 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. The Company expects to incur total cash expenditures of $750 million, comprised of both capital expenditures and expense, and expects to complete the program in 2021. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $732 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through September 30, 2021. Restructuring and integration charges on the DPS Integration Program were as follows:


	Third Quarter				First Nine Months
(in millions)	2021		2020		2021		2020
Restructuring and integration charges	$	53	$	38	$	145	$	143

Restructuring liabilities that qualify as exit and disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements. Restructuring liabilities for the DPS Integration Program, all of which were workforce reduction costs, were as follows for the period presented:


(in millions)	Restructuring Liabilities
Balance as of January 1, 2021	$	14
Charges to expense	30
Cash payments	(25)

Balance as of September 30, 2021	$	19

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5. Derivatives

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.

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 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.

INTEREST RATES

Economic Hedges

KDP is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate swaps to provide predictability in the Company's overall cost structure 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 unaudited Condensed Consolidated Statements of Income. As of September 30, 2021, economic interest rate derivative instruments have maturities ranging from December 2021 to May 2028.

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. The forward starting swaps are planned to be unwound at the issuance of long-term debt. As of September 30, 2021, the forward starting swaps have mandatory termination dates ranging from June 2022 to 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 third quarter and first nine months of 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 unaudited Condensed Consolidated Statements of Income as the associated risk. As of September 30, 2021, these FX contracts have maturities ranging from October 2021 to September 2024.

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Cash Flow Hedges

During 2020, KDP began to designate certain FX forward contracts related to inventory purchases of the Canadian and Mexican businesses as cash flow hedges in order to manage the exposures resulting from changes in the FX rates described above. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. As of September 30, 2021, these FX contracts have maturities ranging from October 2021 to March 2023.

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 third quarter and first nine months of 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. 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 unaudited Condensed 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 September 30, 2021, these commodity contracts have maturities ranging from October 2021 to February 2023.

NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS

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


(in millions)	September 30, 2021		December 31, 2020
Interest rate contracts
Forward starting swaps, designated as cash flow hedges	$	2,500	$	—
Receive-variable, pay-fixed interest rate swaps, not designated as hedging instruments	450		450
Receive-fixed, pay-variable interest rate swaps, not designated as hedging instruments	250		—
Swaptions, not designated as hedging instruments	1,500		—
FX contracts
Forward contracts, not designated as hedging instruments	499		476
Forward contracts, designated as cash flow hedges	380		333
Commodity contracts, not designated as hedging instruments	440		450

FAIR VALUE OF DERIVATIVE INSTRUMENTS

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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Not Designated as Hedging Instruments

The following table summarizes the location of the fair value of the Company's derivative instruments which are not designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets. All such instruments are designated level 2 within the fair value hierarchy.


(in millions)	Balance Sheet Location	September 30, 2021		December 31, 2020
Assets:
Interest rate contracts	Prepaid expenses and other current assets	$	2	$	—
FX contracts	Prepaid expenses and other current assets	2		—
Commodity contracts	Prepaid expenses and other current assets	144		45
Interest rate contracts	Other non-current assets	2		—

Commodity contracts	Other non-current assets	15		12

Liabilities:
Interest rate contracts	Other current liabilities	$	4	$	2
FX contracts	Other current liabilities	2		6
Commodity contracts	Other current liabilities	25		5
Interest rate contracts	Other non-current liabilities	1		7
FX contracts	Other non-current liabilities	13		9
Commodity contracts	Other non-current liabilities	1		2

Designated as Hedging Instruments

The following table summarizes the location of the fair value of the Company's derivative instruments which are designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets. All such instruments are designated level 2 within the fair value hierarchy.


(in millions)	Balance Sheet Location	September 30, 2021		December 31, 2020
Assets:
FX contracts	Prepaid expenses and other current assets	$	4	$	—
FX contracts	Other non-current assets	1		—
Interest rate contracts	Prepaid expenses and other current assets	1		—


Liabilities:
FX contracts	Other current liabilities	$	3	$	12


Interest rate contracts	Other non-current liabilities	99		—

IMPACT OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

The following table presents the amount of (gains) losses, net, recognized in the unaudited Condensed 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.


		Third Quarter				First Nine Months
(in millions)	Income Statement Location	2021		2020		2021		2020
Interest rate contracts	Interest expense	$	(7)	$	—	$	(20)	$	9
FX contracts	Cost of sales	(4)		5		5		(15)
FX contracts	Other expense (income), net	(7)		7		4		(5)
Commodity contracts	Cost of sales	(71)		(45)		(127)		6
Commodity contracts	SG&A expenses	—		5		(56)		41

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IMPACT OF CASH FLOW HEDGES

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


		Third Quarter				First Nine Months
(in millions)	Income Statement Location	2021		2020		2021		2020
Interest rate contracts	Interest expense	$	—	$	—	$	—	$	—
FX contracts	Cost of sales	6		(1)		15		(2)

KDP expects to reclassify approximately $3 million of pre-tax net losses from AOCI into net income during the next twelve months related to its FX contracts. KDP expects to reclassify $1 million of pre-tax net losses from AOCI into net income during the next twelve months related to its interest rate contracts.

6. Leases

KDP 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 the Company to renew the lease at rates equivalent to fair market value at the end of the lease term. KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

KDP's lease agreements do not contain any material residual value guarantees or restrictive covenants, except for leases of certain manufacturing properties and of our Frisco headquarters, which contain residual value guarantees at the end of the respective lease terms that approximate a percentage of the cost of the asset as of the inception of the lease. The Company considers the possibility of incurring costs associated with the residual value guarantees to be remote.

The following table presents the components of lease cost:


	Third Quarter				First Nine Months
(in millions)	2021		2020		2021		2020
Operating lease cost	$	29	$	28	$	92	$	84
Finance lease cost
Amortization of right-of-use assets	15		12		45		34
Interest on lease liabilities	5		3		12		10
Variable lease cost(1)	8		6		23		19
Short-term lease cost	—		—		—		1
Sublease income	—		—		(1)		(1)
Total lease cost	$	57	$	49	$	171	$	147

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

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


	First Nine Months
(in millions)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	84	$	75
Operating cash flows from finance leases	12		11
Financing cash flows from finance leases	40		35

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


	September 30, 2021		December 31, 2020
Weighted average discount rate
Operating leases	4.2	%	4.3	%
Finance leases	4.0	%	4.4	%
Weighted average remaining lease term
Operating leases	11 years		12 years
Finance leases	11 years		11 years

Future minimum lease payments for non-cancellable leases that have commenced and are reflected on the unaudited Condensed Consolidated Balance Sheets as of September 30, 2021 were as follows:


(in millions)	Operating Leases		Finance Leases
Remainder of 2021	$	20	$	18
2022	96		89
2023	83		88
2024	79		83
2025	71		79
2026	60		101
Thereafter	387		281
Total future minimum lease payments	796		739
Less: imputed interest	(158)		(128)
Present value of minimum lease payments	$	638	$	611

SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED

As of September 30, 2021, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $296 million. These leases are expected to commence between the fourth quarter of 2021 and the third quarter of 2022, with initial lease terms ranging from 5 years to 10 years.

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7. Segments

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 modifications did not change the Company’s reportable segments. 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 carbonated soft drink 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 primarily in Mexico and the Caribbean 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 unaudited Condensed 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:


	Third Quarter				First Nine Months
(in millions)	2021		2020		2021		2020
Segment Results – Net sales
Coffee Systems	$	1,155	$	1,097	$	3,398	$	3,113
Packaged Beverages	1,547		1,447		4,352		4,056
Beverage Concentrates	392		352		1,095		967
Latin America Beverages	156		124		447		361
Net sales	$	3,250	$	3,020	$	9,292	$	8,497


	Third Quarter				First Nine Months
(in millions)	2021		2020		2021		2020
Segment Results – Income from operations
Coffee Systems	$	334	$	320	$	992	$	882
Packaged Beverages	288		260		721		657
Beverage Concentrates	286		262		778		679
Latin America Beverages	37		25		95		73
Unallocated corporate costs	(150)		(114)		(417)		(511)
Income from operations	$	795	$	753	$	2,169	$	1,780

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8. 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.


	Third Quarter				First Nine Months
(in millions, except per share data)	2021		2020		2021		2020
Net income attributable to KDP	$	530	$	443	$	1,303	$	897

Weighted average common shares outstanding	1,417.6		1,407.3		1,414.9		1,407.2
Dilutive effect of stock-based awards	10.9		15.6		12.6		14.3
Weighted average common shares outstanding and common stock equivalents	1,428.5		1,422.9		1,427.5		1,421.5

Basic EPS	$	0.37	$	0.31	$	0.92	$	0.64
Diluted EPS	0.37		0.31		0.91		0.63

9. Stock-Based Compensation

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


	Third Quarter				First Nine Months
(in millions)	2021		2020		2021		2020
Total stock-based compensation expense	$	20	$	20	$	68	$	62
Income tax benefit	(4)		(3)		(12)		(11)
Stock-based compensation expense, net of tax	$	16	$	17	$	56	$	51

RESTRICTED SHARE UNITS

The table below summarizes RSU activity:


	RSUs	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2020	26,688,304	$	19.66	2.0	$	854
Granted	4,458,353	28.68
Vested and released	(9,799,213)	10.76			330
Forfeited	(1,910,582)	25.43
Outstanding as of September 30, 2021	19,436,862	$	25.64	2.4	$	664

As of September 30, 2021, there was $318 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 2.3 years.

Total payments for the employees' tax obligations to the relevant taxing authorities were $125 million for the first nine months of 2021, which were funded through the issuance of shares in at-the-market offerings, known as an ATM program. There were no such payments made during the first nine months of 2020. This payment is reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows.

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10. Revenue Recognition

KDP recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include CSDs, NCBs, K-Cup pods and appliances, occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration that KDP expects to receive in exchange for transferring goods. The amount of consideration KDP receives and revenue KDP recognizes varies with changes in customer incentives that KDP offers to its customers and their customers. 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.

The following table disaggregates KDP's revenue by portfolio:


(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total
For the third quarter of 2021:
CSD(1)	$	—	$	728	$	386	$	115	$	1,229
K-Cup pods(2)	848		—		—		—		848
NCB(1)	—		705		2		41		748
Appliances	243		—		—		—		243
Other	64		114		4		—		182
Net sales	$	1,155	$	1,547	$	392	$	156	$	3,250

For the third quarter of 2020:
CSD(1)	$	—	$	658	$	345	$	89	$	1,092
K-Cup pods(2)	812		—		—		—		812
NCB(1)	—		689		4		35		728
Appliances	230		—		—		—		230
Other	55		100		3		—		158
Net sales	$	1,097	$	1,447	$	352	$	124	$	3,020

For the first nine months of 2021:
CSD(1)	$	—	$	2,063	$	1,077	$	324	$	3,464
K-Cup pods(2)	2,582		—		—		—		2,582
NCB(1)	—		1,959		9		123		2,091
Appliances	627		—		—		—		627
Other	189		330		9		—		528
Net sales	$	3,398	$	4,352	$	1,095	$	447	$	9,292

For the first nine months of 2020:
CSD(1)	$	—	$	1,842	$	951	$	262	$	3,055
K-Cup pods(2)	2,433		—		—		—		2,433
NCB(1)	—		1,913		8		98		2,019
Appliances	530		—		—		—		530
Other	150		301		8		1		460
Net sales	$	3,113	$	4,056	$	967	$	361	$	8,497

(1)Represents net sales of owned and partner brands within our 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.

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11. Income Taxes

The Company’s effective tax rates were as follows:


	Third Quarter				First Nine Months
(in millions)	2021		2020		2021		2020
Effective tax rate	22.0	%	24.1	%	22.9	%	24.9	%

For the third quarter of 2021, the provision for income taxes was lower than the third quarter of 2020, which was primarily driven by the decrease on the revaluation of state deferred tax liabilities due to state legislative and apportionment changes in 2021, as well as the benefit received from U.S. provision-to-return adjustments.

For the first nine months of 2021, the provision for income taxes was lower than the first nine months of 2020, which was primarily driven by the tax benefit received from excess tax deductions that were generated from the vesting of RSUs during the first nine months of 2021, as well as the benefits received from the Company’s election of the high-tax exception to the GILTI calculation and U.S. provision-to-return adjustments.

12. Investments in Unconsolidated Affiliates

The following table summarizes investments in unconsolidated affiliates as of September 30, 2021 and December 31, 2020:


(in millions)	Ownership Interest		September 30, 2021		December 31, 2020
BodyArmor	12.5	%	$	53	$	51

Dyla LLC	12.4	%	12		12
Force Holdings LLC(1)	33.3	%	5		5
Beverage startup companies(2)	(various)		10		15
Other	(various)		5		5
Investments in unconsolidated affiliates			$	85	$	88

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

(2)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.

13. Other Financial Information

CASH AND CASH EQUIVALENTS

The carrying value of cash, cash equivalents, restricted cash and restricted cash equivalents is valued as of the balance sheet date equating fair value and classified as Level 1. The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the unaudited Condensed Consolidated Balance Sheets to the total of the same amounts shown in the unaudited Condensed Consolidated Statements of Cash Flows:


(in millions)	September 30, 2021		December 31, 2020
Cash and cash equivalents	$	200	$	240
Restricted cash and restricted cash equivalents(1)	3		15
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows	$	203	$	255

(1)Restricted cash and cash equivalents as of September 30, 2021 primarily represent amounts held in escrow in connection with the acquisitions of Core Nutrition LLC and Big Red Group Holdings, LLC, which have a corresponding holdback liability recorded in other current liabilities, as shown below. The decrease during the first nine months of 2021 was primarily driven by the release of $10 million from escrow in April 2021 related to the 2017 acquisition of Bai Brands LLC.

ALLOWANCE FOR EXPECTED CREDIT LOSSES

Activity in the allowance for expected credit losses account during the periods presented was as follows:


(in millions)	Allowance for Expected Credit Losses



Balance as of December 31, 2020	$	21
Provision (reversal) for allowance for expected credit losses	(12)
Write-offs and adjustments	—
Balance as of September 30, 2021	$	9

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

ACCOUNTS PAYABLE

KDP has agreements with third party administrators which allow participating suppliers to track payments 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 administrators that as of September 30, 2021 and December 31, 2020, $3,027 million and $2,578 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.

SELECTED BALANCE SHEET INFORMATION

The tables below provide selected financial information from the unaudited Condensed Consolidated Balance Sheets:


	September 30,		December 31,
(in millions)	2021		2020
Inventories:
Raw materials	$	335	$	260
Work-in-progress	6		6
Finished goods	651		520
Total	992		786
Allowance for excess and obsolete inventories	(20)		(24)
Total Inventories	$	972	$	762
Prepaid expenses and other current assets:
Other receivables	$	109	$	85
Customer incentive programs	49		34
Derivative instruments	153		45
Prepaid marketing	23		15
Spare parts	66		55
Income tax receivable	14		11
Assets held for sale	—		2
Other	76		76
Total prepaid expenses and other current assets	$	490	$	323
Other non-current assets:
Operating lease right-of-use assets	$	627	$	645
Customer incentive programs	68		70
Derivative instruments	18		12

Equity securities(1)	41		41
Equity securities without readily determinable fair values	1		1

Related party notes receivable(2)	15		—
Other	131		125
Total other non-current assets	$	901	$	894

(1)Fair values of these equity securities are determined using quoted market prices from daily exchange traded markets, based on the closing price as of the balance sheet date, and are classified as Level 1. The fair value of marketable securities was $41 million and $41 million as of September 30, 2021 and December 31, 2020, respectively.

(2)Refer to Note 16 for additional information about the Company's related party note receivable from Bedford.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)


	September 30,		December 31,
(in millions)	2021		2020
Accrued expenses:
Customer rebates & incentives	$	375	$	382
Accrued compensation	211		215
Insurance reserve	39		35
Accrued interest	143		57
Accrued professional fees	15		21
Other accrued expenses	338		330
Total accrued expenses	$	1,121	$	1,040
Other current liabilities:
Dividends payable	$	268	$	212
Income taxes payable	17		39
Operating lease liability	77		72
Finance lease liability	56		44
Derivative instruments	34		25
Holdback liabilities	2		15
Other	8		9
Total other current liabilities	$	462	$	416
Other non-current liabilities:
Pension and post-retirement liability	$	38	$	38
Insurance reserves	74		72
Operating lease liability	561		580
Finance lease liability	555		298
Derivative instruments	114		18
Deferred compensation liability	41		41
Other	80		72
Total other non-current liabilities	$	1,463	$	1,119

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

14. Accumulated Other Comprehensive Income (Loss)

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


(in millions)	Foreign Currency Translation Adjustments		Pension and Post-Retirement Benefit Liabilities		Cash Flow Hedges		Accumulated Other Comprehensive Income (Loss)
For the third quarter of 2021:
Beginning balance	$	223	$	(4)	$	(91)	$	128
Other comprehensive income (loss)	(137)		—		10		(127)
Amounts reclassified from AOCI	—		—		5		5
Other comprehensive income, net	(137)		—		15		(122)
Balance as of September 30, 2021	$	86	$	(4)	$	(76)	$	6

For the third quarter of 2020:
Beginning balance	$	(328)	$	(1)	$	1	$	(328)
Other comprehensive income (loss)	111		(1)		1		111
Balance as of September 30, 2020	$	(217)	$	(2)	$	2	$	(217)

For the first nine months of 2021:
Beginning balance	$	95	$	(4)	$	(14)	$	77
Other comprehensive income (loss)	(9)		—		(74)		(83)
Amounts reclassified from AOCI	—		—		12		12
Other comprehensive income, net	(9)		—		(62)		(71)
Balance as of September 30, 2021	$	86	$	(4)	$	(76)	$	6

For the first nine months of 2020:
Beginning balance	$	104	$	—	$	—	$	104
Other comprehensive income (loss)	(321)		(2)		2		(321)

Balance as of September 30, 2020	$	(217)	$	(2)	$	2	$	(217)

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


		Third Quarter				First Nine Months
(in millions)	Income Statement Caption	2021		2020		2021		2020
Cash Flow Hedges:
Interest rate contracts	Interest expense	$	—	$	—	$	—	$	—
FX contracts	Cost of sales	6		—		15		—
Total		6		—		15		—
Income tax benefit		(1)		—		(3)		—
Total, net of tax		$	5	$	—	$	12	$	—

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

15. Commitments and Contingencies

LEGAL MATTERS

KDP is involved from time to time in various claims, proceedings, and litigation. KDP establishes reserves 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. KDP has also identified certain other legal matters where the Company believes an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made.

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 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, Inc. complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint.

Beginning in March 2014, twenty-seven putative class actions asserting similar claims and seeking similar relief were filed on behalf of purported direct and indirect purchasers of Keurig’s products in various federal district courts. In June 2014, the Judicial Panel on Multidistrict Litigation granted a motion to transfer these various actions, including the TreeHouse and JBR actions, to a single judicial district for coordinated or consolidated pre-trial proceedings (the “Multidistrict Antitrust Litigation”). Consolidated putative class action complaints by direct purchaser and indirect purchaser plaintiffs were filed in July 2014. An additional class action on behalf of indirect purchasers, originally filed in the Circuit Court of Faulkner County, Arkansas (Julie Rainwater et al. v. Keurig Green Mountain, Inc.), was transferred into the Multidistrict Antitrust Litigation in November 2015. In January 2019, McLane Company, Inc. filed suit against Keurig (McLane Company, Inc. v. Keurig Green Mountain, Inc.) in the SDNY asserting similar claims and also was transferred into the Multidistrict Antitrust Litigation. 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. These actions are now pending in the SDNY (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation). Discovery in the Multidistrict Antitrust Litigation commenced in December 2017. 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 transferred into the Multidistrict Antitrust Litigation; the complaint in this litigation has not been served.

Separately, 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.

In July 2020, Keurig reached an agreement with the putative indirect purchaser class plaintiffs in the Multidistrict Antitrust Litigation to settle the claims asserted in their complaint for $31 million. The settlement class consists of individuals and entities in the United States that purchased, from persons other than 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. Final approval of the settlement was granted by the court in June 2021.

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.

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.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

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 has filed its appeal brief, and the Company intends to continue vigorously defending itself in this action. However, the Company believes that the likelihood that it will incur a material loss in connection with the CERT litigation is remote and accordingly, no loss contingency has been recorded.

16. Related Parties

JAB AND ITS AFFILIATES

JAB holds a significant but non-controlling interest in KDP. As of September 30, 2021, JAB beneficially owned approximately 33% of KDP's outstanding common stock. JAB and its affiliates also hold investments in a number of other companies that have commercial relationships with the Company, including Peet's, Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc.

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

INVESTMENTS IN BRAND OWNERSHIP 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.

On July 15, 2021, KDP issued a convertible promissory note for $15 million to Bedford at an interest rate of 0.12% per year. The outstanding principal and any unpaid accrued interest will automatically convert to equity interests in Bedford during the fourth quarter of 2021.

Refer to Note 12 for additional information about KDP's investments in brand ownership companies.

17. Subsequent Event

On October 25, 2021, the Company acquired an ownership interest in Vita Coco for $20 million. The investment in equity securities will be recorded within the Other non-current assets caption of the unaudited Condensed Consolidated Balance Sheets, and unrealized gains and losses related to the investment will be recorded in Other non-operating expense (income, net).

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