Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto in our Annual Report.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, in particular, statements about the impact of the global COVID-19 pandemic, inflation, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters, supply chain issues and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as “outlook,” “guidance,” “anticipate,” “expect,” “believe,” “could,” “estimate,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar words, phrases or expressions and variations or negatives of these words in this Quarterly Report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report, as well as our subsequent filings with the SEC. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them, after the date of this Quarterly Report on Form 10-Q, except to the extent required by applicable securities laws.

This Quarterly Report on Form 10-Q contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands. All of the product names included in this Quarterly Report on Form 10-Q are either our registered trademarks or those of our licensors.

OVERVIEW

KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including water (enhanced and flavored), ready-to-drink tea and coffee, juice, juice drinks, mixers and specialty coffee, and is a leading producer of innovative single serve brewing systems. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountain and The Original Donut Shop. KDP has some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. KDP offers more than 125 owned, licensed, and partner brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S., according to IRi, which are available nearly everywhere people shop and consume beverages.

KDP operates as an integrated brand owner, manufacturer and distributor. We believe our integrated business model strengthens our route-to-market and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our DSD and our WD systems. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, e-commerce retailers, office superstores, vending machines, grocery and drug stores, and convenience stores; to restaurants, hotel chains, office product and coffee distributors, and partner brand owners; and directly to consumers through its websites. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.

Our 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 our 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 our own brands and third-party brands, through both the DSD and WD systems.

• The Beverage Concentrates segment reflects sales of our 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.

• The Latin America Beverages segment reflects sales primarily in Mexico and the Caribbean from the manufacture and distribution of concentrates, syrup and finished beverages.

COMPARABLE RESULTS OF OPERATIONS

Management believes that there are certain non-GAAP financial measures that allow management to evaluate our results, trends and ongoing performance on a comparable basis. In order to derive the adjusted financial information, we adjust certain financial statement captions and metrics prepared under U.S. GAAP for certain items affecting comparability and the impact of foreign currency. See Non-GAAP Financial Measures for further information.

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EXECUTIVE SUMMARY

Financial Overview - First Quarter of 2022 as compared to First Quarter of 2021

As Reported, in millions (except EPS)

As Adjusted, in millions (except EPS)

Key Events During and Subsequent to the First Quarter of 2022

During the first quarter of 2022, we made net repayments of our Notes, our commercial paper and our other credit agreements of $350 million, which includes a make-whole premium on our 2038 Notes of $76 million.

In January 2022, we agreed to and received a $350 million settlement payment from BodyArmor. Refer to Note 12 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

In February 2022, we terminated our 2021 364-Day Credit Agreement and our KDP Revolver and entered into the 2022 Revolving Credit Agreement. Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

In April 2022, we chose to undertake a strategic refinancing initiative, reducing our weighted average coupon rate on our Notes from 3.671% at March 31, 2022 to 3.595% after the refinancing. Refer to Note 17 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

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Uncertainties and Trends Affecting Our Business

We believe the North American beverage market is influenced by certain key trends and uncertainties. Refer to Item 1A, "Risk Factors", of our Annual Report, for more information about risks and uncertainties facing us.

Some of these items, such as the ongoing COVID-19 pandemic and the invasion of Ukraine by Russia, and the resulting impacts on the global economy, including supply chain constraints and labor shortages, have led to inflation in input costs, logistics, manufacturing and labor costs. During the first quarter of 2022, we have experienced supply chain disruptions and a significant inflationary impact compared to the prior year period. These impacts have created headwinds for our products that we expect to continue throughout 2022.

As a result of these inflationary pressures, we have increased the pricing on a number of our products. Consequently, we may incur a reduction of volume or net sales, which, combined with the inflationary pressures, could impact our margins and operating results.

Refer to Note 4 of the Notes to our Unaudited Condensed Consolidated Financial Statements for our discussion of how we manage our exposure to commodity risk.

Impact of COVID-19 on our Financial Statements

The following table sets forth our reconciliation of significant COVID-19-related expenses. Employee compensation expense and employee protection costs, which impact our SG&A expenses and cost of sales, are included as the COVID-19 item affecting comparability and are excluded in our Adjusted financial measures. In addition, reported amounts under U.S. GAAP also include additional costs, not included as the COVID-19 item affecting comparability, as presented in tables below.

			Items Affecting Comparability**(1)**
(in millions)			Employee Compensation Expense**(2)**						Employee Protection Costs**(3)**																		Total
For the first quarter of 2022:
Coffee Systems			$	1					$	2																	$	3
Packaged Beverages			1						1																		2
Beverage Concentrates			—						—																		—
Latin America Beverages			—						—																		—
Total			$	2					$	3																	$	5
For the first quarter of 2021:
Coffee Systems			$	1					$	9																	$	10
Packaged Beverages			3						2																		5
Beverage Concentrates			—						—																		—
Latin America Beverages			—						1																		1
Total			$	4					$	12																	$	16

(1)Employee compensation expense and employee protection costs are both included as the COVID-19 items affecting comparability in the reconciliation of our Adjusted Non-GAAP financial measures.

(2)Amounts include pay for temporary employees, including the associated taxes, as well as incremental benefits provided to frontline workers such as extended sick leave, in order to maintain essential operations during the COVID-19 pandemic.

(3)Includes costs associated with personal protective equipment, temperature scans, cleaning and other sanitization services. Impacts both cost of sales and SG&A expenses.

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RESULTS OF OPERATIONS

We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees.

References in the financial tables to percentage changes that are not meaningful are denoted by "NM".

Consolidated Operations

The following table sets forth our unaudited condensed consolidated results of operations for the first quarter of 2022 and 2021:

			First Quarter												Dollar						Percentage
($ in millions, except per share amounts)			2022						2021						Change						Change
Net sales			$	3,078					$	2,902					$	176					6.1		%
Cost of sales			1,428						1,302						126						9.7
Gross profit			1,650						1,600						50						3.1
Selling, general and administrative expenses			1,018						961						57						5.9
Gain on litigation settlement			(299)						—						(299)						NM
Other operating income, net			(35)						(1)						(34)						NM
Income from operations			966						640						326						50.9
Interest expense			188						140						48						34.3
Loss on early extinguishment of debt			48						105						(57)						NM
Gain on sale of equity method investment			(50)						—						(50)						NM
Impairment of investments and note receivable			6						—						6						NM
Other expense (income), net			9						(3)						12						NM
Income before provision for income taxes			765						398						367						92.2
Provision for income taxes			180						73						107						146.6
Net income including non-controlling interest			585						325						260						80.0
Less: Net loss attributable to non-controlling interest			—						—						—						NM
Net income attributable to KDP			$	585					$	325					260						80.0
Earnings per common share:
Basic			$	0.41					$	0.23					$	0.18					78.3		%
Diluted			0.41						0.23						0.18						78.3
Gross margin			53.6		%				55.1		%										(150) bps
Operating margin			31.4		%				22.1		%										930 bps
Effective tax rate			23.5		%				18.3		%										520 bps

Sales Volume. The following table provides the percentage increase in sales volumes compared to the prior year period:

						Percentage Change
K-Cup pods						(5.2)		%
Brewers						(5.2)
CSDs						3.8
NCBs						(0.4)

Net Sales. Net sales increased $176 million, or 6.1%, to $3,078 million for the first quarter of 2022 compared to $2,902 million in the prior year period. This performance reflected favorable net price realization of 6.3% across all segments, slightly offset by reduced volume/mix of 0.2%, as expected reductions in our Coffee Systems segment more than offset volume gains in our other segments.

Gross Profit. Gross profit increased $50 million, or 3.1%, to $1,650 million for the first quarter of 2022 compared to $1,600 million in the prior year period. This performance primarily reflected strong growth in net sales and a favorable change in unrealized commodity mark-to-market impacts. These benefits were partially offset by higher manufacturing costs driven by broad-based inflation. Gross margin decreased 150 bps versus the year ago period to 53.6%.

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Selling, General and Administrative Expenses. SG&A expenses increased $57 million, or 5.9%, to $1,018 million for the first quarter of 2022 compared to $961 million in the prior year period. The increase was driven by higher logistics costs, driven by both inflation and product mix. These drivers were partially offset by the impact of a change in our accounting policy related to the recognition of forfeitures for our stock awards of $40 million.

Gain on litigation settlement. Gain on litigation settlement reflects the portion of the settlement payment from BodyArmor which was allocated to the gain on the full settlement of the existing claims against BodyArmor. Refer to Note 12 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Other Operating Income, net. Other operating income, net increased $34 million for the first quarter of 2022 compared to the prior year period, primarily driven by a $38 million gain on an asset sale-leaseback transaction related to our strategic asset investment program in the current period.

Income from Operations. Income from operations increased $326 million, or 50.9%, to $966 million for the first quarter of 2022 compared to $640 million in the prior year period, primarily driven by the gain on the litigation settlement and the gain related to our strategic asset investment program. Operating margin increased 930 bps versus the year ago period to 31.4%.

Interest Expense. Interest expense increased $48 million, or 34.3%, to $188 million for the first quarter of 2022 compared to $140 million for the prior year period. This change was primarily driven by unfavorable unrealized mark-to-market losses of $79 million on interest rate contracts, which was partially offset by reduced interest expense on our senior unsecured notes as a result of our 2021 strategic refinancing and continued deleveraging.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt reflected a favorable change of $57 million, with a loss of $48 million during the first quarter of 2022 related to our early repayment of the 2038 Notes and our replacement of the KDP Revolver and the 2021 364-Day Credit Agreement with the 2022 Revolving Credit Agreement, as compared to a loss of $105 million in the prior year period associated with our 2021 strategic refinancing.

Gain on sale of equity method investment. Gain on sale of equity method investment reflects the portion of the settlement payment from BodyArmor which was allocated to the satisfaction of the holdback amount owed to us in association with the sale of our equity interest in BodyArmor in 2021. Refer to Note 12 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Impairment of Investments and Note Receivable. Impairment on investments and note receivable reflected an impairment charge of $6 million in the first quarter of 2022 associated with the wind-down of Bedford. Refer to Note 12 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Effective Tax Rate. The effective tax rate increased 520 bps to 23.5% for the first quarter of 2022, compared to 18.3% in the prior year period, 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 our incremental income in low tax jurisdictions during the first quarter of 2022.

Net Income Attributable to KDP. Net income attributable to KDP increased $260 million, or 80.0%, to $585 million for the first quarter of 2022 as compared to $325 million in the prior year period, driven by the gain on the sale of our investment in BodyArmor, higher income from operations, and the favorable comparison to the loss on early extinguishment of debt in the first quarter of 2022, partially offset by the increase in our effective tax rate and increased interest expense.

Diluted EPS. Diluted EPS increased 78.3% to $0.41 per diluted share as compared to $0.23 in the prior year period.

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Results of Operations by Segment

The following tables provide net sales and income from operations for our reportable segments for the first quarter of 2022 and 2021, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP.

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.

(in millions)			First Quarter
Net sales			2022						2021
Coffee Systems			$	1,093					$	1,142
Packaged Beverages			1,480						1,307
Beverage Concentrates			359						328
Latin America Beverages			146						125
Total net sales			$	3,078					$	2,902
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)
Total income from operations			$	966					$	640

COFFEE SYSTEMS

The following table provides selected information about our Coffee Systems segment's results:

			First Quarter												Dollar						Percent
(in millions)			2022						2021						Change						Change
Net sales			$	1,093					$	1,142					$	(49)					(4.3)		%
Income from operations			268						368						(100)						(27.2)
Operating margin			24.5		%				32.2		%										(770) bps

Sales Volume. K-Cup pod volume declined 5.2%, driven by the unfavorable comparison to growth of 13.7% in the prior year period and continued capacity constraints, as we prioritized production to rebuild inventory. Brewer volume decreased 5.2% in the first quarter of 2022, driven by the unfavorable comparison to significant brewer shipment growth of 61.4% in the prior year period.

Net Sales. Net sales decreased 4.3% to $1,093 million for the first quarter of 2022 compared to $1,142 million in the prior year period, driven by volume/mix declines of 7.5%, partially offset by favorable net price realization of 3.2%.

Income from Operations. Income from operations decreased $100 million, or 27.2%, to $268 million for the first quarter of 2022, compared to $368 million in the prior year period, as a result of broad-based inflation and lower volume/mix. These decreases were partially offset by the benefits of pricing actions, primarily on owned and licensed pods, productivity, and reduced costs related to COVID-19. Operating margin declined 770 bps versus the year ago period to 24.5%.

PACKAGED BEVERAGES

The following table provides selected information about our Packaged Beverages segment's results:

			First Quarter												Dollar						Percent
(in millions)			2022						2021						Change						Change
Net sales			$	1,480					$	1,307					$	173					13.2		%
Income from operations			486						179						307						171.5
Operating margin			32.8		%				13.7		%										NM

Sales Volume. Sales volume for the first quarter of 2022 increased 3.1% compared to the prior year period, due primarily to strength in CSDs, Motts, Snapple, Core and Polar, which was partially offset by reductions in contract manufacturing.

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Net Sales. Net sales increased 13.2% to $1,480 million in the first quarter of 2022, compared to $1,307 million in the prior year period, driven by favorable net price realization of 8.3% and volume/mix growth of 4.9%.

Income from Operations. Income from operations increased $307 million, or 171.5%, to $486 million for the first quarter of 2022 compared to $179 million for the prior year period, driven by the gain on the settlement of litigation with BodyArmor of $271 million and the benefits of net sales growth, asset sale-leaseback activity in the current period relating to our strategic asset initiative, and productivity. These increases were partially offset by the increased costs due to the impacts of broad-based inflation.

BEVERAGE CONCENTRATES

The following table provides selected information about our Beverage Concentrates segment's results:

			First Quarter												Dollar						Percent
(in millions)			2022						2021						Change						Change
Net sales			$	359					$	328					$	31					9.5		%
Income from operations			244						238						6						2.5
Operating margin			68.0		%				72.6		%										(460) bps

Sales Volume. Sales volume for the first quarter of 2022 increased 1.9% compared to the prior year period, reflecting improving trends in our fountain foodservice component of the business, which services restaurants and hospitality, driven by increasing levels of consumer mobility during the first quarter of 2022 compared to the year-ago period.

Net Sales. Net sales increased 9.5% to $359 million in the first quarter of 2022, compared to $328 million in the prior year period, reflecting higher net price realization of 7.6% and volume/mix growth of 1.9%.

Income from Operations. Income from operations increased $6 million, or 2.5%, to $244 million for the first quarter of 2022 compared to $238 million in the prior year period. This performance reflected the impact of net sales growth, partially offset by the impacts of broad-based inflation, higher marketing expense, and costs associated with productivity initiatives. Operating margin decreased 460 bps versus the year ago period to 68.0%.

LATIN AMERICA BEVERAGES

The following table provides selected information about our Latin America Beverages segment's results:

			First Quarter												Dollar						Percent
(in millions)			2022						2021						Change						Change
Net sales			$	146					$	125					$	21					16.8		%
Income from operations			25						22						3						13.6
Operating margin			17.1		%				17.6		%										(50) bps

Sales Volume. Sales volume for the first quarter of 2022 as compared to the prior year period increased 5.4%, driven by improving consumer mobility.

Net Sales. Net sales grew 16.8% to $146 million for the first quarter of 2022, compared to $125 million in the prior year period, reflecting favorable net price realization of 9.6% and volume/mix growth of 8.0%, slightly offset by unfavorable FX translation of 0.8%,

Income from Operations. Income from operations increased $3 million, or 13.6%, to $25 million for the first quarter of 2022 compared to $22 million in the prior year period, driven by higher net price realization and favorable volume/mix, partially offset by the impacts of broad-based inflation and higher marketing expense. Operating margin decreased 50 bps versus the year ago period to 17.1%.

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NON-GAAP FINANCIAL MEASURES

To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented for certain constant currency adjusted or adjusted financial measures for the first quarter of 2022 and 2021, which are considered non-GAAP financial measures. The non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. The non-GAAP financial measures are not substitutes for their comparable U.S. GAAP financial measures, such as income from operations, net income, diluted EPS or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures. We use these non-GAAP financial measures, in addition to U.S. GAAP financial measures, to evaluate our operating and financial performance and to compare such performance to that of prior periods and to the performance of our competitors. Additionally, we use these non-GAAP financial measures in making operational and financial decisions and in our budgeting and planning process. We believe that providing these non-GAAP financial measures to investors helps investors evaluate our operating performance, profitability and business trends in a way that is consistent with how management evaluates such performance and consistent with guidance previously provided by us. The non-GAAP measures are defined as follows:

Adjusted: Defined as certain financial statement captions and metrics adjusted for certain items affecting comparability.

Items affecting comparability: Defined as certain items that are excluded for comparison to prior year periods, adjusted for the tax impact as applicable. Tax impact is determined based upon an approximate rate for each item. For each period, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S. GAAP and do not have an offsetting risk reflected within the financial results; (ii) the amortization associated with definite-lived intangible assets; (iii) the amortization of the deferred financing costs associated with the DPS Merger; (iv) the amortization of the fair value adjustment of the senior unsecured notes obtained as a result of the DPS Merger; (v) stock compensation expense and the associated windfall tax benefit attributable to the matching awards made to employees who made an initial investment in KDP; (vi) non-cash changes in deferred tax liabilities related to goodwill and other intangible assets as a result of tax rate or apportionment changes; and (vii) other certain items that are excluded for comparison purposes to prior year periods.

For the first quarter of 2022, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant non-routine legal matters; (iv) the loss on early extinguishment of debt related to the redemption of debt; (v) incremental costs to our operations related to risks associated with the COVID-19 pandemic; (vi) the gain on the sale of our investment in BodyArmor as a result of the settlement of the associated holdback liability; (vii) the gain on the settlement of our prior litigation with BodyArmor, excluding recoveries of previously incurred litigation expenses which were included in our adjusted results and (viii) losses recognized with respect to our equity method investment in Bedford as a result of funding our share of their wind-down costs.

For the first quarter of 2021, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant non-routine legal matters; (iv) the loss on early extinguishment of debt related to the redemption of debt; (v) incremental costs to our operations related to risks associated with the COVID-19 pandemic; and (vi) gains from insurance recoveries related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment.

Costs related to significant non-routine legal matters relate to the antitrust litigation. Incremental costs to our operations related to risks associated with the COVID-19 pandemic include incremental expenses incurred to either maintain the health and safety of our front-line employees or temporarily increase compensation to such employees to ensure essential operations continue during the pandemic. We believe removing these costs reflects how management views our business results on a consistent basis. See Impact of COVID-19 on our Financial Statements for further information.

Constant currency adjusted: Defined as certain financial statement captions and metrics adjusted for certain items affecting comparability, calculated on a constant currency basis by converting our current period local currency financial results using the prior period foreign currency exchange rates.

For the first quarter of 2022 and 2021, the supplemental financial data set forth below includes reconciliations of adjusted and constant currency adjusted financial measures to the applicable financial measure presented in the unaudited condensed consolidated financial statements for the same period.

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KEURIG DR PEPPER INC.

RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS

(Unaudited, in millions, except per share and percentages)

									Cost of sales						Gross profit						Gross margin						Selling, general and administrative expenses												Gain on litigation settlement						Other operating (expense) income, net						Income from operations						Operating margin
For the First Quarter of 2022
Reported									$	1,428					$	1,650					53.6		%				$	1,018											$	(299)					$	(35)					$	966					31.4		%
Items Affecting Comparability:
Mark to market									59						(59)												26												—						—						(85)
Amortization of intangibles									—						—												(34)												—						—						34
Stock compensation									—						—												7												—						—						(7)
Restructuring and integration costs									—						—												(33)												—						(3)						36
Productivity									(28)						28												(22)												—						—						50
Non-routine legal matters									—						—												(4)												—						—						4
COVID-19									(4)						4												(1)												—						—						5
Gain on litigation									—						—												—												271						—						(271)
Adjusted									$	1,455					$	1,623					52.7		%				$	957											$	(28)					$	(38)					$	732					23.8		%
Impact of foreign currency																					—		%																																		—		%
Constant currency adjusted																					52.7		%																																		23.8		%
For the First Quarter of 2021
Reported									$	1,302					$	1,600					55.1		%				$	961											$	—					$	(1)					$	640					22.1		%
Items Affecting Comparability:
Mark to market									9						(9)												29												—						—						(38)
Amortization of intangibles									—						—												(33)												—						—						33
Stock compensation									—						—												(6)												—						—						6
Restructuring and integration costs									—						—												(43)												—						—						43
Productivity									(8)						8												(25)												—						—						33
Non-routine legal matters									—						—												(10)												—						—						10
COVID-19									(12)						12												(4)												—						—						16
Malware incident									—						—												2												—						—						(2)
Adjusted									$	1,291					$	1,611					55.5		%				$	871											$	—					$	(1)					$	741					25.5		%

Refer to page 36 for reconciliations of reported net sales to constant currency net sales and adjusted income from operations to constant currency adjusted income from operations.

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KEURIG DR PEPPER INC.

RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS

(Unaudited, in millions, except per share and percentages)

			Interest expense						Loss on early extinguishment of debt						Gain on sale of equity-method investment						Impairment of investments and note receivable						Other (income) expense, net						Income before provision for income taxes						Provision for income taxes						Effective tax rate						Net income attributable to KDP						Diluted earnings per share
For the First Quarter of 2022
Reported			$	188					$	48					$	(50)					$	6					$	9					$	765					$	180					23.5		%				$	585					$	0.41
Items Affecting Comparability:
Mark to market			(71)						—						—						—						(3)						(11)						(2)												(9)						(0.01)
Amortization of intangibles			—						—						—						—						—						34						9												25						0.02
Amortization of deferred financing costs			(1)						—						—						—						—						1						—												1						—
Amortization of fair value debt adjustment			(5)						—						—						—						—						5						1												4						—
Stock compensation			—						—						—						—						—						(7)						(1)												(6)						—
Restructuring and integration costs			—						—						—						—						—						36						9												27						0.02
Productivity			—						—						—						—						—						50						12												38						0.03
Impairment of investment			—						—						—						(6)												6						—												6						—
Loss on early extinguishment of debt			—						(48)						—						—						—						48						11												37						0.03
Non-routine legal matters			—						—						—						—						—						4						1												3						—
COVID-19			—						—						—						—						—						5						1												4						—
Gain on litigation			—						—						—						—						—						(271)						(68)												(203)						(0.14)
Gain on sale of equity-method investment			—						—						50						—						—						(50)						(12)												(38)						(0.03)
Adjusted			$	111					$	—					$	—					$	—					$	6					$	615					$	141					22.9		%				$	474					$	0.33
Impact of foreign currency																																													—		%
Constant currency adjusted																																													22.9		%
For the First Quarter of 2021
Reported			$	140					$	105					$	—					$	—					$	(3)					$	398					$	73					18.3		%				$	325					$	0.23
Items Affecting Comparability:
Mark to market			8						—						—						—						—						(46)						(11)												(35)						(0.02)
Amortization of intangibles			—						—						—						—						—						33						8												25						0.02
Amortization of deferred financing costs			(3)						—						—						—						—						3						—												3						—
Amortization of fair value of debt adjustment			(6)						—						—						—						—						6						2												4						—
Stock compensation			—						—						—						—						—						6						12												(6)						—
Restructuring and integration costs			—						—						—						—						—						43						11												32						0.02
Productivity			—						—						—						—						—						33						8												25						0.02
Loss on early extinguishment of debt			—						(105)						—						—						—						105						25												80						0.06
Non-routine legal matters			—						—						—						—						—						10						2												8						0.01
COVID-19			—						—						—						—						—						16						4												12						0.01
Malware incident			—						—						—						—						—						(2)						—												(2)						—
Adjusted			$	139					$	—					$	—					$	—					$	(3)					$	605					$	134					22.1		%				$	471					$	0.33
Change - adjusted			(20.1)		%																																														0.6		%				—		%
Impact of foreign currency			—		%																																														0.2		%				—		%
Change - constant currency adjusted			(20.1)		%																																														0.8		%				—		%

Diluted earnings per common share may not foot due to rounding.

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KEURIG DR PEPPER INC.

RECONCILIATION OF CERTAIN REPORTED SEGMENT MEASURES

TO CERTAIN NON-GAAP ADJUSTED AND CURRENCY NEUTRAL ADJUSTED SEGMENT MEASURES

(Unaudited)

(in millions)			Reported						Items Affecting Comparability						Adjusted
For the first quarter of 2022:
Income from operations
Coffee Systems			$	268					$	51					$	319
Packaged Beverages			486						(251)						235
Beverage Concentrates			244						3						247
Latin America Beverages			25						1						26
Unallocated corporate costs			(57)						(38)						(95)
Total income from operations			$	966					$	(234)					$	732
For the first quarter of 2021:
Income from operations
Coffee Systems			$	368					$	53					$	421
Packaged Beverages			179						22						201
Beverage Concentrates			238						1						239
Latin America Beverages			22						1						23
Unallocated corporate costs			(167)						24						(143)
Total income from operations			$	640					$	101					$	741

						Reported						Impact of Foreign Currency						Constant Currency
For the first quarter of 2022:
Net sales
Coffee Systems						(4.3)		%				—		%				(4.3)		%
Packaged Beverages						13.2						—						13.2
Beverage Concentrates						9.5						—						9.5
Latin America Beverages						16.8						0.8						17.6
Total net sales						6.1						—						6.1

						Adjusted						Impact of Foreign Currency						Constant Currency Adjusted
For the first quarter of 2022:
Income from operations
Coffee Systems						(24.2)		%				—		%				(24.2)		%
Packaged Beverages						16.9						—						16.9
Beverage Concentrates						3.3						—						3.3
Latin America Beverages						13.0						—						13.0
Total income from operations						(1.2)						—						(1.2)

						Reported						Items Affecting Comparability						Adjusted						Impact of Foreign Currency						Constant Currency Adjusted
For the first quarter of 2022:
Operating margin
Coffee Systems						24.5		%				4.7		%				29.2		%				—		%				29.2		%
Packaged Beverages						32.8						(16.9)						15.9						—						15.9
Beverage Concentrates						68.0						0.8						68.8						—						68.8
Latin America Beverages						17.1						0.7						17.8						(0.1)						17.7
Total operating margin						31.4						(7.6)						23.8						—						23.8

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CONSTANT CURRENCY ADJUSTED RESULTS OF OPERATIONS

The following discussion of our results is presented on a constant currency adjusted basis. These adjusted financial results are calculated on a constant currency basis by converting our current-period local currency financial results using the prior-period foreign currency exchange rates

Consolidated Operations

Constant Currency Net Sales. Constant currency net sales increased 6.1% in the first quarter of 2022 compared to the prior year period, driven by favorable net price realization of 6.3%, partially offset by lower volume/mix of 0.2%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations decreased 1.2% compared to the prior year period, primarily driven by the impact of broad-based inflation and increases in other operating costs, partially offset by the strong growth in net sales. Other drivers of the change included a $38 million gain on an asset sale-leaseback transaction related to our strategic asset investment program, the benefit of productivity, a $28 million recovery of litigation expenses included in our gain on litigation settlement with BodyArmor, and $28 million of the impact of the change in our accounting policy related to the recognition of forfeitures for our stock awards not associated with matching awards made to employees who made an initial investment in KDP.

Constant Currency Adjusted Interest Expense. Constant currency adjusted interest expense decreased 20.1% compared to the prior year period, driven by reduced interest expense on our senior unsecured notes as a result of our 2021 strategic refinancing and continued deleveraging.

Constant Currency Adjusted Effective Tax Rate. The constant currency adjusted effective tax rate was 22.9% for the first quarter of 2022 compared to 22.1% for the prior year period, 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 our incremental income in low tax jurisdictions during the first quarter of 2022.

Constant Currency Adjusted Net Income Attributable to KDP. Constant currency adjusted net income attributable to KDP increased 0.8% compared to the prior year period, as lower interest expense was partially offset by the decline in income from operations and the increase in our effective tax rate.

Constant Currency Adjusted Diluted EPS. Constant currency adjusted diluted EPS was even with the prior year period.

Results of Operations by Segment

Coffee Systems

Constant currency net sales decreased 4.3%, driven by unfavorable volume/mix of 7.5%, which was partially offset by higher net price realization of 3.2%.

Constant currency adjusted income from operations for the first quarter of 2022 decreased 24.2% compared to the prior year period, driven by increased costs due to the impacts of broad-based inflation and volume/mix declines as we prioritized production to rebuild inventory levels. These decreases were partially offset by the benefit of pricing actions, primarily on owned and licensed pods, and the benefit of productivity.

Packaged Beverages

Constant currency net sales increased 13.2%, reflecting favorable net price realization of 8.3% and volume/mix growth of 4.9%.

Constant currency adjusted income from operations for the first quarter of 2022 increased 16.9% compared to the prior year period, driven primarily by the impact of net sales growth, the benefit of asset sale-leaseback activity in the current period relating to our strategic asset initiative, and the benefit of productivity. These increases were partially offset by the impacts of broad-based inflation.

Beverage Concentrates

Constant currency net sales increased 9.5%, reflecting higher net price realization of 7.6% and volume/mix growth of 1.9%.

Constant currency adjusted income from operations for the first quarter of 2022 increased 3.3% compared to the prior year period. This performance reflected the impact of net sales growth, partially offset by the impacts of broad-based inflation and higher marketing expense.

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Latin America Beverages

Constant currency net sales increased 17.6%, driven by favorable net price realization of 9.6% and volume/mix growth of 8.0%.

Constant currency adjusted income from operations for the first quarter of 2022 increased 13.0% compared to the prior year period, driven by higher net price realization and favorable volume/mix, partially offset by broad-based inflation and higher marketing expense.

CRITICAL ACCOUNTING ESTIMATES

The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. These critical accounting estimates are discussed in greater detail in Part II, Item 7 of our Annual Report.

LIQUIDITY AND CAPITAL RESOURCES

Overview

We believe our financial condition and liquidity remain strong. We continue to manage all aspects of our business, including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies through our integration and productivity initiatives, and developing new opportunities for growth such as innovation and agreements with partners to distribute brands that are accretive to our portfolio.

The following summarizes our cash activity for the first quarter of 2022 and 2021:

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $26 million from December 31, 2021 to March 31, 2022 primarily as a result of proceeds from the cash settlement with BodyArmor, which was used to continue to de-lever.

Cash generated by our foreign operations is generally repatriated to the U.S. periodically, as working capital funding requirements in those jurisdictions allow. Foreign cash balances were $214 million and $216 million as of March 31, 2022 and December 31, 2021, respectively.

Additionally, in April 2022, we chose to undertake a strategic refinancing initiative, issuing approximately $3 billion of senior unsecured notes and using the net proceeds to voluntarily prepay and retire several tranches of existing senior unsecured notes with higher interest rates, which reduced our overall interest payments and our annual cash requirements. As part of this transaction, we additionally unwound approximately $1.5 billion of our outstanding designated forward starting swaps and received cash proceeds of approximately $125 million. Refer to Note 17 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information about the 2022 strategic refinancing initiative.

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Principal Sources of Capital Resources

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from our operations and borrowing capacity currently available under our 2022 Revolving Credit Agreement. Additionally, we have an uncommitted commercial paper program where we can issue unsecured commercial paper notes on a private placement basis. Based on our current and anticipated level of operations, we believe that our operating cash flows will be sufficient to meet our anticipated obligations for the next twelve months. To the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may utilize cash on hand or amounts available under our financing arrangements, if necessary.

Sources of Liquidity - Operations

Net cash provided by operating activities increased $117 million for the first quarter of 2022, as compared to the first quarter of 2021, driven by the increase in net income adjusted for non-cash items, led by the $349 million gain from BodyArmor, partially offset by a decline in working capital.

Cash Conversion Cycle

Our cash conversion cycle is defined as DIO and DSO less DPO. The calculation of each component of the cash conversion cycle is provided below:

Component						Calculation (on a trailing twelve month basis)
DIO						(Average inventory divided by cost of sales) * Number of days in the period
DSO						(Accounts receivable divided by net sales) * Number of days in the period
DPO						(Accounts payable * Number of days in the period) divided by cost of sales and SG&A expenses

The following table summarizes our cash conversion cycle:

						March 31,
						2022						2021
DIO						60						55
DSO						34						33
DPO						164						154
Cash conversion cycle						(70)						(66)

Accounts Payable Program

As part of our ongoing efforts to improve our cash flow and related liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. Excluding our suppliers who require cash at date of purchase or sale, our current payment terms with our suppliers generally range from 10 to 360 days. We also entered into agreements with third party administrators to allow participating suppliers to track payment obligations from us, and if voluntarily elected by the supplier, sell payment obligations from us to financial institutions. Suppliers can sell one or more of our payment obligations at their sole discretion and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship through this program with the financial institutions. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. We have 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 our outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions. The amounts settled through the program and paid to the financial institutions were $876 million and $698 million for the first quarter of 2022 and 2021, respectively.

Impact of the CARES Act

Beginning in the second quarter of 2020, we deferred payments of employer-related payroll taxes as allowed under the CARES Act. Payment of at least 50% of the deferred amount was due on January 3, 2022, with the remainder due by January 3, 2023. We deferred a total of $59 million in such payments since the CARES Act was implemented, and we timely paid approximately $30 million as of January 3, 2022.

Sources of Liquidity - Financing

In February 2022, we terminated our 2021 364-Day Credit Agreement and our KDP Revolver and replaced them with the 2022 Revolving Credit Agreement, which provides for a $4 billion revolving credit facility.

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Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of our financing arrangements.

We also have an active shelf registration statement, filed with the SEC on August 27, 2019, which allows us to issue an indeterminate number or amount of common stock, preferred stock, debt securities and warrants from time to time in one or more offerings at the direction of our Board of Directors.

Principal Uses of Capital Resources

Over the past several years, our principal uses of our capital resources were deleveraging, providing shareholder return to our investors through regular quarterly dividends, and investing in KDP to capture market share and drive growth through innovation and routes to market.

Now that we have met our post-merger goals, we plan to invest in inorganic value creation through M&A, including portfolio expansion, distribution scale, geographic expansion, and new capabilities. In addition to M&A, we may consider share repurchases and special dividends to our investors. Our Board of Directors authorized a four-year share repurchase program of up to $4 billion of our outstanding common stock potentially enabling us to return value to shareholders.

Deleveraging and Other Debt Repayments

During the first quarter of 2022, we made debt repayments of $350 million, which includes the redemption and retirement of the remainder of our 2038 Notes.

Regular Quarterly Dividends

For the first quarter of 2022, we have declared total dividends of $0.1875 per share.

Capital Expenditures

We are investing in state-of-the-art manufacturing and warehousing facilities, including expansive investments in facilities in Newbridge, Ireland; Spartanburg, South Carolina; and Allentown, Pennsylvania, in 2022 and 2021, in order to optimize our supply chain network through integration and productivity projects and to mitigate risk of business interruption.

Purchases of property, plant and equipment were $109 million and $95 million for the first quarter of 2022 and 2021, respectively.

Capital expenditures, which includes both purchases of property, plant and equipment and amounts included in accounts payable and accrued expenses, for the first quarter of 2022 and 2021 primarily related to the manufacturing and warehousing facilities discussed above. Capital expenditures included in accounts payable and accrued expenses were $139 million and $259 million for the first quarter of 2022 and 2021, respectively, which primarily related to these investments.

Purchases of Intangible Assets

We have invested in the expansion of our DSD network through transactions with strategic independent bottlers to ensure competitive distribution scale for our brands. These transactions are generally accounted for as an asset acquisition, as the majority of the transaction price represents the reacquisition of our distribution rights. Purchases of intangible assets were $10 million and $12 million for the first quarter of 2022 and 2021, respectively.

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Uncertainties and Trends Affecting Liquidity

Disruptions in global financial and credit markets, including those caused by the ongoing COVID-19 pandemic and Russia’s invasion of Ukraine, may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials.

Customer and consumer demand for our products may also be impacted by the risk factors discussed under "Risk Factors" in Part 1, Item 1A of our Annual Report, as well as subsequent filings with the SEC, that could have a material effect on production, delivery and consumption of our products, which could result in a reduction in our sales volume.

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The Notes are fully and unconditionally guaranteed by certain of our direct and indirect subsidiaries (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by us and jointly and severally guarantee, subject to the release provisions described below, our obligations under the Notes. None of our subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries held by Maple Parent Holdings Corp. prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of our other indebtedness, our exercise of the legal defeasance option with respect to the Notes and the discharge of our obligations under the applicable indenture.

The following schedules present the summarized financial information for Keurig Dr Pepper Inc. (the “Parent”) and the Guarantors on a combined basis after intercompany eliminations; the Parent and the Guarantors' amounts due from and amounts due to Non-Guarantors are disclosed separately. The consolidating schedules are provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.

The summarized financial information for the Parent and Guarantors were as follows:

(in millions)			For the First Quarter of 2022
Net sales			$	1,822
Income from operations			678
Net income attributable to KDP			585

(in millions)			March 31, 2022						December 31, 2021
Current assets			$	1,910					$	1,594
Non-current assets			44,303						43,972
Total assets(1)			$	46,213					$	45,566
Current liabilities			$	3,681					$	3,470
Non-current liabilities			17,021						17,125
Total liabilities(2)			$	20,702					$	20,595

(1)Includes $173 million and $209 million of intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of March 31, 2022 and December 31, 2021, respectively.

(2)Includes $43 million and $40 million of intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of March 31, 2022 and December 31, 2021, respectively.