filings.toolsItem 1. Financial Statements (Unaudited)
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Item 1. Financial Statements (Unaudited)
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| First Quarter | |||||||||||||||||||||||
| (in millions, except per share data) | 2022 | 2021 | |||||||||||||||||||||
| Net sales | $ | 3,078 | $ | 2,902 | |||||||||||||||||||
| Cost of sales | 1,428 | 1,302 | |||||||||||||||||||||
| Gross profit | 1,650 | 1,600 | |||||||||||||||||||||
| Selling, general and administrative expenses | 1,018 | 961 | |||||||||||||||||||||
| Gain on litigation settlement | (299) | — | |||||||||||||||||||||
| Other operating income, net | (35) | (1) | |||||||||||||||||||||
| Income from operations | 966 | 640 | |||||||||||||||||||||
| Interest expense | 188 | 140 | |||||||||||||||||||||
| Loss on early extinguishment of debt | 48 | 105 | |||||||||||||||||||||
| Gain on sale of equity method investment | (50) | — | |||||||||||||||||||||
| Impairment of investments and note receivable | 6 | — | |||||||||||||||||||||
| Other expense (income), net | 9 | (3) | |||||||||||||||||||||
| Income before provision for income taxes | 765 | 398 | |||||||||||||||||||||
| Provision for income taxes | 180 | 73 | |||||||||||||||||||||
| Net income including non-controlling interest | 585 | 325 | |||||||||||||||||||||
| Less: Net loss attributable to non-controlling interest | — | — | |||||||||||||||||||||
| Net income attributable to KDP | $ | 585 | $ | 325 | |||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Basic | $ | 0.41 | $ | 0.23 | |||||||||||||||||||
| Diluted | 0.41 | 0.23 | |||||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | 1,418.2 | 1,409.2 | |||||||||||||||||||||
| Diluted | 1,429.7 | 1,425.6 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| First Quarter | |||||||||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||||||||
| Net income including non-controlling interest | $ | 585 | $ | 325 | |||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||
| Foreign currency translation adjustments | 99 | 16 | |||||||||||||||||||||
| Net change in cash flow hedges, net of tax of $48 and $22, respectively | 142 | 71 | |||||||||||||||||||||
| Total other comprehensive income | 241 | 87 | |||||||||||||||||||||
| Comprehensive income including non-controlling interest | 826 | 412 | |||||||||||||||||||||
| Less: Comprehensive income attributable to non-controlling interest | — | — | |||||||||||||||||||||
| Comprehensive income attributable to KDP | $ | 826 | $ | 412 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| March 31, | December 31, | |||||||||||||
| (in millions, except share and per share data) | 2022 | 2021 | ||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 592 | $ | 567 | ||||||||||
| Restricted cash and cash equivalents | 2 | 1 | ||||||||||||
| Trade accounts receivable, net | 1,214 | 1,148 | ||||||||||||
| Inventories | 1,045 | 894 | ||||||||||||
| Prepaid expenses and other current assets | 637 | 447 | ||||||||||||
| Total current assets | 3,490 | 3,057 | ||||||||||||
| Property, plant and equipment, net | 2,436 | 2,494 | ||||||||||||
| Investments in unconsolidated affiliates | 29 | 30 | ||||||||||||
| Goodwill | 20,243 | 20,182 | ||||||||||||
| Other intangible assets, net | 23,889 | 23,856 | ||||||||||||
| Other non-current assets | 1,119 | 937 | ||||||||||||
| Deferred tax assets | 38 | 42 | ||||||||||||
| Total assets | $ | 51,244 | $ | 50,598 | ||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 4,510 | $ | 4,316 | ||||||||||
| Accrued expenses | 1,028 | 1,110 | ||||||||||||
| Structured payables | 143 | 142 | ||||||||||||
| Short-term borrowings and current portion of long-term obligations | — | 304 | ||||||||||||
| Other current liabilities | 767 | 613 | ||||||||||||
| Total current liabilities | 6,448 | 6,485 | ||||||||||||
| Long-term obligations | 11,584 | 11,578 | ||||||||||||
| Deferred tax liabilities | 6,054 | 5,986 | ||||||||||||
| Other non-current liabilities | 1,647 | 1,577 | ||||||||||||
| Total liabilities | 25,733 | 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, 1,418,462,239 and 1,418,119,197 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 14 | 14 | ||||||||||||
| Additional paid-in capital | 21,764 | 21,785 | ||||||||||||
| Retained earnings | 3,518 | 3,199 | ||||||||||||
| Accumulated other comprehensive income (loss) | 215 | (26) | ||||||||||||
| Total stockholders' equity | 25,511 | 24,972 | ||||||||||||
| Non-controlling interest | — | — | ||||||||||||
| Total equity | 25,511 | 24,972 | ||||||||||||
| Total liabilities and equity | $ | 51,244 | $ | 50,598 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| First Quarter | |||||||||||
| (in millions) | 2022 | 2021 | |||||||||
| Operating activities: | |||||||||||
| Net income attributable to KDP | $ | 585 | $ | 325 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation expense | 106 | 102 | |||||||||
| Amortization of intangibles | 34 | 33 | |||||||||
| Other amortization expense | 42 | 40 | |||||||||
| Provision for sales returns | 12 | 19 | |||||||||
| Deferred income taxes | 8 | 11 | |||||||||
| Employee stock-based compensation expense | (15) | 25 | |||||||||
| Loss on early extinguishment of debt | 48 | 105 | |||||||||
| Gain on sale of equity method investment | (50) | — | |||||||||
| Gain on disposal of property, plant and equipment | (38) | (1) | |||||||||
| Unrealized gain on foreign currency | (11) | (10) | |||||||||
| Unrealized gain on derivatives | — | (41) | |||||||||
| Equity in loss of unconsolidated affiliates | 3 | — | |||||||||
| Impairment on investments and note receivable of unconsolidated affiliate | 6 | — | |||||||||
| Other, net | 13 | 15 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Trade accounts receivable | (73) | (37) | |||||||||
| Inventories | (147) | (77) | |||||||||
| Income taxes receivable and payables, net | 135 | 25 | |||||||||
| Other current and non-current assets | (284) | (295) | |||||||||
| Accounts payable and accrued expenses | 151 | 121 | |||||||||
| Other current and non-current liabilities | 138 | 186 | |||||||||
| Net change in operating assets and liabilities | (80) | (77) | |||||||||
| Net cash provided by operating activities | 663 | 546 | |||||||||
| Investing activities: | |||||||||||
| Proceeds from sale of investment in unconsolidated affiliates | 50 | — | |||||||||
| Purchases of property, plant and equipment | (109) | (95) | |||||||||
| Proceeds from sales of property, plant and equipment | 78 | 7 | |||||||||
| Purchases of intangibles | (10) | (12) | |||||||||
| Issuance of related party note receivable | (6) | — | |||||||||
| Investments in unconsolidated affiliates | (3) | — | |||||||||
| Other, net | 3 | 1 | |||||||||
| Net cash provided by (used in) investing activities | $ | 3 | $ | (99) | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
**(**UNAUDITED, CONTINUED)
| First Quarter | |||||||||||
| (in millions) | 2022 | 2021 | |||||||||
| Financing activities: | |||||||||||
| Proceeds from issuance of Notes | $ | — | $ | 2,150 | |||||||
| Repayments of Notes | (201) | (1,845) | |||||||||
| Proceeds from issuance of commercial paper | — | 120 | |||||||||
| Repayments of commercial paper | (149) | (120) | |||||||||
| Repayments of 2019 KDP Term Loan | — | (425) | |||||||||
| Proceeds from structured payables | 38 | 35 | |||||||||
| Repayments of structured payables | (37) | (41) | |||||||||
| Cash dividends paid | (265) | (192) | |||||||||
| Proceeds from issuance of common stock | — | 140 | |||||||||
| Tax withholdings related to net share settlements | (5) | (125) | |||||||||
| Payments on finance leases | (20) | (15) | |||||||||
| Other, net | (5) | (37) | |||||||||
| Net cash used in financing activities | (644) | (355) | |||||||||
| Cash, cash equivalents, and restricted cash and cash equivalents: | |||||||||||
| Net change from operating, investing and financing activities | 22 | 92 | |||||||||
| Effect of exchange rate changes | 4 | 2 | |||||||||
| Beginning balance | 568 | 255 | |||||||||
| Ending balance | $ | 594 | $ | 349 | |||||||
| Supplemental cash flow disclosures of non-cash investing activities: | |||||||||||
| Capital expenditures included in accounts payable and accrued expenses | $ | 139 | $ | 259 | |||||||
| Supplemental cash flow disclosures of non-cash financing activities: | |||||||||||
| Dividends declared but not yet paid | 266 | 232 | |||||||||
| Supplemental cash flow disclosures: | |||||||||||
| Cash paid for interest | 27 | 29 | |||||||||
| Cash paid for income taxes | 37 | 31 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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, 2022 | 1,418.1 | $ | 14 | $ | 21,785 | $ | 3,199 | $ | (26) | $ | 24,972 | $ | — | $ | 24,972 | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | 585 | — | 585 | — | 585 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 241 | 241 | — | 241 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared, $0.1875 per share | — | — | — | (266) | — | (266) | — | (266) | |||||||||||||||||||||||||||||||||||||||
| Shares issued under employee stock-based compensation plans and other | 0.4 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Tax withholdings related to net share settlements | — | — | (5) | — | — | (5) | — | (5) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation and stock options exercised | — | — | (16) | — | — | (16) | — | (16) | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | 1,418.5 | $ | 14 | $ | 21,764 | $ | 3,518 | $ | 215 | $ | 25,511 | $ | — | $ | 25,511 | ||||||||||||||||||||||||||||||||
| 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 loss | — | — | — | — | 87 | 87 | — | 87 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared, $0.15 per share | — | — | — | (212) | — | (212) | — | (212) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 4.3 | — | 140 | — | — | 140 | — | 140 | |||||||||||||||||||||||||||||||||||||||
| Shares issued under stock-based compensation plans and other | 5.7 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Tax withholdings related to net share settlements | — | — | (125) | — | — | (125) | — | (125) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation and stock options exercised | — | — | 26 | — | — | 26 | — | 26 | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 1,417.3 | $ | 14 | $ | 21,718 | $ | 2,174 | $ | 164 | $ | 24,070 | $ | 1 | $ | 24,071 | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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.
References to the "first quarter" indicate the Company's quarterly periods ended March 31, 2022 and 2021.
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 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 whether 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. 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 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 reported amounts. 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 POLICY CHANGES
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. The impact of forfeitures on stock-based compensation has historically been insignificant to the Company.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
RECLASSIFICATIONS
KDP reclassified amounts in the unaudited condensed consolidated financial statements for the first quarter of 2021 in order to conform to current year presentation, as follows:
Statement of Cash Flows
| (in millions) | First Quarter | |||||||||||||
| Current Presentation | Prior Presentation | 2021 | ||||||||||||
| Proceeds from issuance of commercial paper | Net payment of commercial paper | $ | 120 | |||||||||||
| Repayments of commercial paper | Net payment of commercial paper | (120) |
Statement of Changes in Stockholders’ Equity
| (in millions) | First Quarter | |||||||||||||
| Current Presentation | Prior Presentation | 2021 | ||||||||||||
| Tax withholdings related to net share settlements | Stock-based compensation and stock options exercised | $ | (125) | |||||||||||
| Stock-based compensation and stock options exercised | Stock-based compensation and stock options exercised | 26 |
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 6 for current year presentation. The following table summarizes the revised and prior presentations of income from operations at the segment level:
| (in millions) | First Quarter 2021 | |||||||||||||
| Segment Results – Income from operations | Current Presentation | Prior Presentation | ||||||||||||
| Coffee Systems | $ | 368 | $ | 336 | ||||||||||
| Packaged Beverages | 179 | 175 | ||||||||||||
| Beverage Concentrates | 238 | 238 | ||||||||||||
| Latin America Beverages | 22 | 22 | ||||||||||||
| Unallocated corporate costs | (167) | (131) | ||||||||||||
| Income from operations | $ | 640 | $ | 640 |
2. Long-term Obligations and Borrowing Arrangements
The following table summarizes the Company's long-term obligations:
| (in millions) | March 31, 2022 | December 31, 2021 | |||||||||
| Notes | $ | 11,584 | $ | 11,733 | |||||||
| Less: current portion of long-term obligations | — | (155) | |||||||||
| Long-term obligations | $ | 11,584 | $ | 11,578 |
The following table summarizes the Company's short-term borrowings and current portion of long-term obligations:
| (in millions) | March 31, 2022 | December 31, 2021 | |||||||||
| Commercial paper notes | $ | — | $ | 149 | |||||||
| Current portion of long-term obligations | — | 155 | |||||||||
| Short-term borrowings and current portion of long-term obligations | $ | — | $ | 304 |
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 | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| 2023 Merger Notes(3) | May 25, 2023 | 4.057% | $ | 1,000 | $ | 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(3) | 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(3) | 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 | 500 | ||||||||||||||||||||||
| 2038 Notes(1) | May 1, 2038 | 7.450% | — | 125 | ||||||||||||||||||||||
| 2038 Merger Notes(3) | 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(3) | May 25, 2048 | 5.085% | 750 | 750 | ||||||||||||||||||||||
| 2050 Notes | May 1, 2050 | 3.800% | 750 | 750 | ||||||||||||||||||||||
| 2051 Notes | March 15, 2051 | 3.350% | 500 | 500 | ||||||||||||||||||||||
| Principal amount | 11,750 | 11,875 | ||||||||||||||||||||||||
| Adjustment from principal amount to carrying amount(2) | (166) | (142) | ||||||||||||||||||||||||
| Carrying amount | $ | 11,584 | $ | 11,733 |
(1)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.
(2)The carrying amount includes unamortized discounts, debt issuance costs and fair value adjustments related to the DPS Merger.
(3)Subsequent to March 31, 2022, KDP undertook a strategic refinancing and issued approximately $3 billion of Notes. The proceeds from the issuance were used to voluntarily prepay and retire several tranches of our existing Notes. Refer to Note 17 for additional information.
VARIABLE-RATE BORROWING ARRANGEMENTS
The following table summarizes information about the 2022 Revolving Credit Agreement:
| (in millions) | March 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 March 31, 2022.
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 2022 Revolving Credit Agreement provides for a $4 billion revolving credit facility, including a letter of credit sub-facility in an aggregate principal amount of up to $200 million. The Company incurred approximately $4 million in deferred financing fees related to the issuance. The 2022 Revolving Credit Agreement will mature in February 2027.
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.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
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 March 31, 2022, KDP was in compliance with its minimum interest coverage ratio relating to the 2022 Revolving Credit Agreement.
Commercial Paper Program
The following table provides information about the Company's borrowings under its commercial paper program:
| First Quarter | |||||||||||||||||||||||
| (in millions, except %) | 2022 | 2021 | |||||||||||||||||||||
| Weighted average commercial paper borrowings | $ | 45 | $ | 22 | |||||||||||||||||||
| Weighted average borrowing rates | 0.30 | % | 0.18 | % |
Letter of Credit Facility
In addition to the portion of the 2022 Revolving Credit Agreement reserved for issuance of letters of credit, KDP has an incremental letter of credit facility. Under this facility, $150 million is available for the issuance of letters of credit, $96 million of which was utilized as of March 31, 2022 and $54 million of which remains available for use.
FAIR VALUE DISCLOSURES
The fair value of KDP's commercial paper approximates 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 $11,868 million and $13,078 million as of March 31, 2022 and December 31, 2021, respectively.
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, 2022 | $ | 9,800 | $ | 5,319 | $ | 4,539 | $ | 524 | $ | 20,182 | |||||||||||||||||||||||||
| Foreign currency translation | 31 | 8 | 5 | 17 | 61 | ||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | 9,831 | $ | 5,327 | $ | 4,544 | $ | 541 | $ | 20,243 |
INTANGIBLE ASSETS OTHER THAN GOODWILL
The net carrying amounts of intangible assets other than goodwill with indefinite lives are as follows:
| (in millions) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Brands(1) | $ | 19,920 | $ | 19,865 | ||||||||||
| Trade names | 2,480 | 2,480 | ||||||||||||
| Contractual arrangements | 123 | 123 | ||||||||||||
| Distribution rights(2) | 95 | 85 | ||||||||||||
| Total | $ | 22,618 | $ | 22,553 |
(1)The increase of $55 million in brands with indefinite lives was due to foreign currency translation during the first quarter of 2022.
(2)The Company executed three agreements to acquire distribution rights during the first quarter of 2022, which resulted in an increase of approximately $10 million.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
The net carrying amounts of intangible assets other than goodwill with definite lives are as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| (in millions) | Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||||||||||||
| Acquired technology | $ | 1,146 | $ | (419) | $ | 727 | $ | 1,146 | $ | (401) | $ | 745 | |||||||||||||||||||||||
| Customer relationships | 639 | (178) | 461 | 638 | (169) | 469 | |||||||||||||||||||||||||||||
| Trade names | 128 | (90) | 38 | 128 | (86) | 42 | |||||||||||||||||||||||||||||
| Contractual arrangements | 24 | (8) | 16 | 24 | (8) | 16 | |||||||||||||||||||||||||||||
| Brands | 22 | (10) | 12 | 21 | (8) | 13 | |||||||||||||||||||||||||||||
| Distribution rights | 30 | (13) | 17 | 29 | (11) | 18 | |||||||||||||||||||||||||||||
| Total | $ | 1,989 | $ | (718) | $ | 1,271 | $ | 1,986 | $ | (683) | $ | 1,303 |
Amortization expense for intangible assets with definite lives was as follows:
| First Quarter | |||||||||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||||||||
| Amortization expense | $ | 34 | $ | 33 |
Amortization expense of these intangible assets over the remainder of 2022 and the next five years is expected to be as follows:
| Remainder of 2022 | For the Years Ending December 31, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||||||||||||||||||||||
| Expected amortization expense | $ | 101 | $ | 132 | $ | 124 | $ | 110 | $ | 105 | $ | 91 |
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. The Company performed an analysis as of March 31, 2022 to ensure that there were no triggering events which occurred during the quarter. As a result of this analysis, management did not identify any indications that the carrying amount of any goodwill or any intangible assets may not be recoverable.
4. 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.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
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 March 31, 2022, economic interest rate derivative instruments have maturities ranging from January 2027 to April 2032.
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 March 31, 2022, 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 first quarter of 2022 and 2021, 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 March 31, 2022, these FX contracts have maturities ranging from April 2022 to September 2024.
Cash Flow Hedges
KDP designates 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 March 31, 2022, these FX contracts have maturities ranging from April 2022 to August 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 first quarter of 2022 and 2021, 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 March 31, 2022, these commodity contracts have maturities ranging from April 2022 to November 2023.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS
The following table presents the notional amounts of KDP's outstanding derivative instruments by type:
| (in millions) | March 31, 2022 | December 31, 2021 | |||||||||
| Interest rate contracts | |||||||||||
| Forward starting swaps, designated as cash flow hedges | $ | 2,500 | $ | 2,500 | |||||||
| Receive-fixed, pay-variable interest rate swaps, not designated as hedging instruments | 1,900 | 400 | |||||||||
| FX contracts | |||||||||||
| Forward contracts, not designated as hedging instruments | 481 | 463 | |||||||||
| Forward contracts, designated as cash flow hedges | 462 | 385 | |||||||||
| Commodity contracts, not designated as hedging instruments | 483 | 529 |
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. 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.
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 considered level 2 within the fair value hierarchy.
| (in millions) | Balance Sheet Location | March 31, 2022 | December 31, 2021 | ||||||||||||||
| Assets: | |||||||||||||||||
| Interest rate contracts | Prepaid expenses and other current assets | $ | — | $ | 2 | ||||||||||||
| FX contracts | Prepaid expenses and other current assets | — | 3 | ||||||||||||||
| Commodity contracts | Prepaid expenses and other current assets | 204 | 133 | ||||||||||||||
| Commodity contracts | Other non-current assets | — | 2 | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Interest rate contracts | Other current liabilities | $ | 6 | $ | — | ||||||||||||
| FX contracts | Other current liabilities | 4 | 2 | ||||||||||||||
| Commodity contracts | Other current liabilities | 14 | 28 | ||||||||||||||
| Interest rate contracts | Other non-current liabilities | 68 | 5 | ||||||||||||||
| FX contracts | Other non-current liabilities | 17 | 9 | ||||||||||||||
| Commodity contracts | Other non-current liabilities | — | 1 |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
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 | March 31, 2022 | December 31, 2021 | ||||||||||||||
| Assets: | |||||||||||||||||
| FX contracts | Prepaid expenses and other current assets | $ | 1 | $ | 6 | ||||||||||||
| FX contracts | Other non-current assets | — | 1 | ||||||||||||||
| Interest rate contracts | Prepaid expenses and other current assets | 12 | — | ||||||||||||||
| Interest rate contracts | Other non-current assets | $ | 59 | $ | — | ||||||||||||
| Liabilities: | |||||||||||||||||
| FX contracts | Other current liabilities | $ | 7 | $ | 1 | ||||||||||||
| Interest rate contracts | Other current liabilities | — | 8 | ||||||||||||||
| Interest rate contracts | Other non-current liabilities | 10 | 128 |
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.
| First Quarter | |||||||||||||||||||||||||||||
| (in millions) | Income Statement Location | 2022 | 2021 | ||||||||||||||||||||||||||
| Interest rate contracts | Interest expense | $ | 67 | $ | (8) | ||||||||||||||||||||||||
| FX contracts | Cost of sales | 5 | 4 | ||||||||||||||||||||||||||
| FX contracts | Other expense (income), net | 8 | 5 | ||||||||||||||||||||||||||
| Commodity contracts | Cost of sales | (97) | (17) | ||||||||||||||||||||||||||
| Commodity contracts | SG&A expenses | (37) | (29) | ||||||||||||||||||||||||||
IMPACT OF CASH FLOW HEDGES
The following table presents the amount of 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:
| First Quarter | |||||||||||||||||||||||||||||
| (in millions) | Income Statement Location | 2022 | 2021 | ||||||||||||||||||||||||||
| Interest rate contracts | Interest expense | $ | — | $ | — | ||||||||||||||||||||||||
| FX contracts | Cost of sales | 3 | 5 |
KDP expects to reclassify approximately $5 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 $5 million of pre-tax net gains from AOCI into net income during the next twelve months related to its interest rate contracts.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
5. Leases
The following table presents the components of lease cost:
| First Quarter | |||||||||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||||||||
| Operating lease cost | $ | 32 | $ | 30 | |||||||||||||||||||
| Finance lease cost | |||||||||||||||||||||||
| Amortization of right-of-use assets | 18 | 13 | |||||||||||||||||||||
| Interest on lease liabilities | 6 | 3 | |||||||||||||||||||||
| Variable lease cost(1) | 9 | 8 | |||||||||||||||||||||
| Total lease cost | $ | 65 | $ | 54 |
(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:
| First Quarter | |||||||||||
| (in millions) | 2022 | 2021 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 29 | $ | 28 | |||||||
| Operating cash flows from finance leases | 6 | 3 | |||||||||
| Financing cash flows from finance leases | 20 | 15 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | 168 | 208 | |||||||||
| Finance leases | 23 | 89 |
The following table presents information about the Company's weighted average discount rate and remaining lease term:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Weighted average discount rate | |||||||||||
| Operating leases | 4.3 | % | 4.3 | % | |||||||
| Finance leases | 3.5 | % | 3.6 | % | |||||||
| Weighted average remaining lease term | |||||||||||
| Operating leases | 11 years | 12 years | |||||||||
| Finance leases | 10 years | 10 years |
Future minimum lease payments for non-cancellable leases that have commenced and are reflected on the unaudited Condensed Consolidated Balance Sheets as of March 31, 2022 were as follows:
| (in millions) | Operating Leases | Finance Leases | |||||||||
| Remainder of 2022 | $ | 82 | $ | 83 | |||||||
| 2023 | 119 | 109 | |||||||||
| 2024 | 113 | 103 | |||||||||
| 2025 | 106 | 98 | |||||||||
| 2026 | 97 | 133 | |||||||||
| 2027 | 79 | 51 | |||||||||
| Thereafter | 448 | 256 | |||||||||
| Total future minimum lease payments | 1,044 | 833 | |||||||||
| Less: imputed interest | (222) | (131) | |||||||||
| Present value of minimum lease payments | $ | 822 | $ | 702 |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED
As of March 31, 2022, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $186 million. These leases are expected to commence in 2022 and 2023, with initial lease terms ranging from 5 years to 7 years.
ASSET SALE-LEASEBACK TRANSACTION
On March 31, 2022, the Company closed on an asset sale-leaseback transaction with Veyron SPEs on one manufacturing property and one distribution property. The Company received proceeds of approximately $77 million, net of selling costs for the properties, which had a carrying value of $39 million, and resulted in an approximately $38 million gain on the sale transaction. The leaseback is accounted for as an operating lease.
The initial term of the 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. The leaseback has a RVG. Refer to Note 16 for additional information about the RVG associated with the asset sale-leaseback transaction.
6. 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 single-serve brewers, K-Cup pods and other coffee products.
-
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.
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.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
Information about the Company's operations by reportable segment is as follows:
| First Quarter | |||||||||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||||||||
| Segment Results – Net sales | |||||||||||||||||||||||
| Coffee Systems | $ | 1,093 | $ | 1,142 | |||||||||||||||||||
| Packaged Beverages | 1,480 | 1,307 | |||||||||||||||||||||
| Beverage Concentrates | 359 | 328 | |||||||||||||||||||||
| Latin America Beverages | 146 | 125 | |||||||||||||||||||||
| Net sales | $ | 3,078 | $ | 2,902 | |||||||||||||||||||
| Segment Results – Income from operations | |||||||||||||||||||||||
| Coffee Systems | $ | 268 | $ | 368 | |||||||||||||||||||
| Packaged Beverages | 486 | 179 | |||||||||||||||||||||
| Beverage Concentrates | 244 | 238 | |||||||||||||||||||||
| Latin America Beverages | 25 | 22 | |||||||||||||||||||||
| Unallocated corporate costs | (57) | (167) | |||||||||||||||||||||
| Income from operations | $ | 966 | $ | 640 |
7. 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.
| First Quarter | |||||||||||||||||||||||
| (in millions, except per share data) | 2022 | 2021 | |||||||||||||||||||||
| Net income attributable to KDP | $ | 585 | $ | 325 | |||||||||||||||||||
| Weighted average common shares outstanding | 1,418.2 | 1,409.2 | |||||||||||||||||||||
| Dilutive effect of stock-based awards | 11.5 | 16.4 | |||||||||||||||||||||
| Weighted average common shares outstanding and common stock equivalents | 1,429.7 | 1,425.6 | |||||||||||||||||||||
| Basic EPS | $ | 0.41 | $ | 0.23 | |||||||||||||||||||
| Diluted EPS | 0.41 | 0.23 |
8. 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:
| First Quarter | |||||||||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||||||||
| Total stock-based compensation expense(1) | $ | (15) | $ | 25 | |||||||||||||||||||
| Income tax expense (benefit) | 4 | (4) | |||||||||||||||||||||
| Stock-based compensation expense, net of tax | $ | (11) | $ | 21 |
(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 1 for additional information.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
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, 2021 | 18,808,491 | $ | 25.74 | 2.2 | $ | 693 | |||||||||||||||||
| Granted | 2,804,755 | 38.62 | |||||||||||||||||||||
| Vested and released | (574,816) | 22.77 | 21 | ||||||||||||||||||||
| Forfeited | (296,255) | 26.15 | |||||||||||||||||||||
| Outstanding as of March 31, 2022 | 20,742,175 | $ | 27.55 | 2.2 | $ | 786 |
As of March 31, 2022, there was $257 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.5 years.
9. 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. Although the program was initially expected to be completed in 2021, as a result of delays due to COVID-19, KDP will continue to recognize expenditures for certain initiatives which began during the integration period and are expected to be completed in 2022. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $826 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through March 31, 2022. Restructuring and integration charges on the DPS Integration Program were as follows:
| First Quarter | |||||||||||||||||||||||
| (in millions) | 2022 | 2021 | |||||||||||||||||||||
| Restructuring and integration charges | $ | 36 | $ | 43 |
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, 2022 | $ | 19 | |||||||||||||||
| Charges to expense | 6 | ||||||||||||||||
| Cash payments | (9) | ||||||||||||||||
| Balance as of March 31, 2022 | $ | 16 |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
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 first quarter of 2022: | |||||||||||||||||||||||||||||
| CSD(1) | $ | — | $ | 704 | $ | 354 | $ | 100 | $ | 1,158 | |||||||||||||||||||
| NCB(1) | — | 672 | 2 | 46 | 720 | ||||||||||||||||||||||||
| K-Cup pods(2) | 855 | — | — | — | 855 | ||||||||||||||||||||||||
| Appliances | 178 | — | — | — | 178 | ||||||||||||||||||||||||
| Other | 60 | 104 | 3 | — | 167 | ||||||||||||||||||||||||
| Net sales | $ | 1,093 | $ | 1,480 | $ | 359 | $ | 146 | $ | 3,078 | |||||||||||||||||||
| For the first quarter of 2021: | |||||||||||||||||||||||||||||
| CSD(1) | $ | — | $ | 624 | $ | 323 | $ | 87 | $ | 1,034 | |||||||||||||||||||
| NCB(1) | — | 581 | 3 | 38 | 622 | ||||||||||||||||||||||||
| K-Cup pods(2) | 903 | — | — | — | 903 | ||||||||||||||||||||||||
| Appliances | 174 | — | — | — | 174 | ||||||||||||||||||||||||
| Other | 65 | 102 | 2 | — | 169 | ||||||||||||||||||||||||
| Net sales | $ | 1,142 | $ | 1,307 | $ | 328 | $ | 125 | $ | 2,902 |
(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.
11. Income Taxes
The Company’s effective tax rates were as follows:
| First Quarter | ||||||||||||||||||||||||||
| (in millions) | 2022 | 2021 | ||||||||||||||||||||||||
| Effective tax rate | 23.5 | % | 18.3 | % |
For the first quarter of 2022, the provision for income taxes was higher than the first quarter of 2021, which was primarily driven by the unfavorable comparison to the tax benefit received from excess tax deductions that were generated from the vesting of RSUs during the first quarter of 2021, partially offset by the Company’s incremental income in low tax jurisdictions during the first quarter of 2022.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
12. Investments
The following table summarizes investments in unconsolidated affiliates as of March 31, 2022 and December 31, 2021:
| (in millions) | Ownership Interest | March 31, 2022 | December 31, 2021 | |||||||||||||||||
| Bedford | 30.0 | % | — | — | ||||||||||||||||
| Dyla LLC | 12.4 | % | 12 | 12 | ||||||||||||||||
| Force Holdings LLC(1) | 33.3 | % | 4 | 5 | ||||||||||||||||
| Beverage startup companies(2) | (various) | 8 | 8 | |||||||||||||||||
| Other | (various) | 5 | 5 | |||||||||||||||||
| Investments in unconsolidated affiliates | $ | 29 | $ | 30 |
(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.
BEDFORD INVESTMENT
In December 2021, Bedford began 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 $8 million of the Company’s responsibility under this credit agreement has been funded as of March 31, 2022. The Company recorded impairment losses related to this credit agreement of $6 million in the first quarter of 2022.
BODYARMOR INVESTMENT
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.
13. 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 first quarter of 2022: | |||||||||||||||||||||||
| Beginning balance | $ | 81 | $ | (4) | $ | (103) | $ | (26) | |||||||||||||||
| Other comprehensive income | 99 | — | 140 | 239 | |||||||||||||||||||
| Amounts reclassified from AOCI | — | — | 2 | 2 | |||||||||||||||||||
| Other comprehensive income, net | 99 | — | 142 | 241 | |||||||||||||||||||
| Balance as of March 31, 2022 | $ | 180 | $ | (4) | $ | 39 | $ | 215 | |||||||||||||||
| For the first quarter of 2021: | |||||||||||||||||||||||
| Beginning balance | $ | 95 | $ | (4) | $ | (14) | $ | 77 | |||||||||||||||
| Other comprehensive income | 16 | — | 68 | 84 | |||||||||||||||||||
| Amounts reclassified from AOCI | — | — | 3 | 3 | |||||||||||||||||||
| Other comprehensive income, net | 16 | — | 71 | 87 | |||||||||||||||||||
| Balance as of March 31, 2021 | $ | 111 | $ | (4) | $ | 57 | $ | 164 |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
The following table presents the amount of losses reclassified from AOCI into the unaudited Condensed Consolidated Statements of Income:
| First Quarter | |||||||||||||||||||||||||||||
| (in millions) | Income Statement Caption | 2022 | 2021 | ||||||||||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||||||||
| Interest rate contracts | Interest expense | $ | — | $ | — | ||||||||||||||||||||||||
| FX contracts | Cost of sales | 3 | 5 | ||||||||||||||||||||||||||
| Total | 3 | 5 | |||||||||||||||||||||||||||
| Income tax benefit | (1) | (2) | |||||||||||||||||||||||||||
| Total, net of tax | $ | 2 | $ | 3 |
14. Other Financial Information
SELECTED BALANCE SHEET INFORMATION
The tables below provide selected financial information from the unaudited Condensed Consolidated Balance Sheets:
| March 31, | December 31, | ||||||||||
| (in millions) | 2022 | 2021 | |||||||||
| Inventories: | |||||||||||
| Raw materials | $ | 363 | $ | 330 | |||||||
| Work-in-progress | 8 | 6 | |||||||||
| Finished goods | 701 | 577 | |||||||||
| Total | 1,072 | 913 | |||||||||
| Allowance for excess and obsolete inventories | (27) | (19) | |||||||||
| Total Inventories | $ | 1,045 | $ | 894 | |||||||
| Prepaid expenses and other current assets: | |||||||||||
| Other receivables | $ | 128 | $ | 112 | |||||||
| Customer incentive programs | 103 | 21 | |||||||||
| Derivative instruments | 217 | 144 | |||||||||
| Prepaid marketing | 20 | 12 | |||||||||
| Spare parts | 74 | 72 | |||||||||
| Income tax receivable | 16 | 14 | |||||||||
| Other | 79 | 72 | |||||||||
| Total prepaid expenses and other current assets | $ | 637 | $ | 447 | |||||||
| Other non-current assets: | |||||||||||
| Operating lease right-of-use assets | $ | 809 | $ | 673 | |||||||
| Customer incentive programs | 58 | 59 | |||||||||
| Derivative instruments | 59 | 3 | |||||||||
| Equity securities(1) | 50 | 58 | |||||||||
| Equity securities without readily determinable fair values | 1 | 1 | |||||||||
| Other | 142 | 143 | |||||||||
| Total other non-current assets | $ | 1,119 | $ | 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. 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.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
| March 31, | December 31, | ||||||||||
| (in millions) | 2022 | 2021 | |||||||||
| Accrued expenses: | |||||||||||
| Customer rebates & incentives | $ | 353 | $ | 446 | |||||||
| Accrued compensation | 152 | 227 | |||||||||
| Insurance reserve | 39 | 33 | |||||||||
| Accrued interest | 138 | 55 | |||||||||
| Accrued professional fees | 16 | 19 | |||||||||
| Other accrued expenses | 330 | 330 | |||||||||
| Total accrued expenses | $ | 1,028 | $ | 1,110 | |||||||
| Other current liabilities: | |||||||||||
| Dividends payable | $ | 266 | $ | 265 | |||||||
| Income taxes payable | 282 | 144 | |||||||||
| Operating lease liability | 87 | 76 | |||||||||
| Finance lease liability | 87 | 79 | |||||||||
| Derivative instruments | 31 | 39 | |||||||||
| Other | 14 | 10 | |||||||||
| Total other current liabilities | $ | 767 | $ | 613 | |||||||
| Other non-current liabilities: | |||||||||||
| Operating lease liability | 735 | 608 | |||||||||
| Finance lease liability | 615 | 621 | |||||||||
| Pension and post-retirement liability | $ | 41 | $ | 40 | |||||||
| Insurance reserves | 67 | 75 | |||||||||
| Derivative instruments | 95 | 143 | |||||||||
| Deferred compensation liability | 38 | 43 | |||||||||
| Other | 56 | 47 | |||||||||
| Total other non-current liabilities | $ | 1,647 | $ | 1,577 |
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 March 31, 2022 and December 31, 2021, $3,409 million and $3,194 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.
15. 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 March 31, 2022 and December 31, 2021, the Company had litigation reserves of $11 million and $14 million, respectively. 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.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
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. These cases remain in the early stages of discovery.
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.
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 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.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
16. Transactions with Variable Interest Entities
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.
LEASING ARRANGEMENTS
As of March 31, 2022, the Company has entered into twelve lease transactions with the Veyron SPEs, eleven of which were associated with asset sale-leaseback transactions. Refer to Note 5 for additional information about the current period asset sale-leaseback transactions. Each lease has a RVG based on a percentage of Veyron SPEs’s 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 March 31, 2022 and December 31, 2021 were $602 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 March 31, 2022 and December 31, 2021.
| (in millions) | March 31, 2022**(1)** | December 31, 2021**(2)** | ||||||||||||
| Current assets | $ | 21 | $ | 19 | ||||||||||
| Non-current assets | 357 | 312 | ||||||||||||
| Current liabilities | 18 | 13 | ||||||||||||
| Non-current liabilities | 369 | 323 |
(1)The leasing agreements included as of March 31, 2022 include eight manufacturing sites, three distribution centers 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 March 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 March 31, 2022, KDP had $106 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:
| Remainder of 2022 | For the Years Ending December 31, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||||||||||||||||||||||
| Fixed service fees | $ | 6 | $ | 8 | $ | 8 | $ | 8 | $ | 8 | $ | 8 |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, CONTINUED)
17. Subsequent Events
On April 22, 2022, KDP undertook a strategic refinancing and issued $3 billion aggregate face value of Notes, consisting of $1,000 million of 2029 Notes, $850 million of 2032 Notes, and $1,150 million of 2052 Notes. The discount associated with these notes was approximately $16 million, and KDP incurred approximately $23 million of debt issuance costs.
In association with the aforementioned issuance of Notes, KDP unwound approximately $1,500 million of notional amount of the Company’s forward starting swaps, which were designated as cash flow hedges. 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. As of April 28, 2022, KDP had $1,000 million of notional amount of forward starting swaps outstanding, which continue to be designated as cash flow hedges.
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 following table presents KDP’s revised schedule of Notes maturities after the aforementioned transactions:
| (in millions, except %) | ||||||||||||||||||||||||||
| Issuance | Maturity Date | Rate | April 28, 2022 | March 31, 2022 | ||||||||||||||||||||||
| 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 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 | $ | 11,750 | ||||||||||||||||||||||
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