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

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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, our key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountain and The Original Donut Shop. We have 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. We offer 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 primarily in the U.S. and Canada of our branded concentrates to third-party bottlers and our syrup to fountain foodservice customers. 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.

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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.

EXECUTIVE SUMMARY

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

As Reported, in millions (except EPS)

As Adjusted, in millions (except EPS)

Key Events During the Second Quarter of 2022

In April 2022, we announced a succession plan where Robert J. Gamgort will transition from his position as President and Chief Executive Officer, remaining as our Executive Chairman of our Board. Our Board appointed Ozan Dokmecioglu, currently Chief Financial Officer & President of International, as the Company's next President and Chief Executive Officer, effective July 29, 2022.

In connection with this leadership transition, George Lagoudakis, currently our Senior Vice President of Finance for Cold Beverages, was appointed to serve as our interim Chief Financial Officer, effective July 29, 2022, while we continue our external search for our permanent Chief Financial Officer.

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 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

During the second quarter of 2022, we repurchased and retired $88 million of common stock.

We were added to the S&P 500 Index, effective prior to the open of trading on June 21, 2022.

During the second quarter, we acquired equity interests in Tractor Beverage and entered into an exclusive sales agreement, which leverages the strength of our fountain foodservice business and expands our FFS portfolio. We also announced an agreement to acquire the global rights to the non-alcoholic, ready-to-drink cocktail brand Atypique, which is expected to close during the second half of 2022.

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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 six months 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 through the remainder of 2022.

As a result of these inflationary pressures, we have increased the pricing on a number of our products across our portfolio. 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)		Allowances for Expected Credit Losses(4)		Total
For the second quarter of 2022:
Coffee Systems	$	—	$	1	$	—	$	1
Packaged Beverages	1		1		—		2
Beverage Concentrates	—		—		—		—
Latin America Beverages	—		1		—		1
Total	$	1	$	3	$	—	$	4

For the second quarter of 2021:
Coffee Systems	$	1	$	4	$	(2)	$	3
Packaged Beverages	3		3		(8)		(2)
Beverage Concentrates	—		—		(3)		(3)
Latin America Beverages	—		—		—		—
Total	$	4	$	7	$	(13)	$	(2)

For the first six months of 2022:
Coffee Systems	$	1	$	3	$	—	$	4
Packaged Beverages	2		2		—		4
Beverage Concentrates	—		—		—		—
Latin America Beverages	—		1		—		1
Total	$	3	$	6	$	—	$	9

For the first six months of 2021:
Coffee Systems	$	2	$	13	$	(2)	$	13
Packaged Beverages	6		5		(8)		3
Beverage Concentrates	—		—		(3)		(3)
Latin America Beverages	—		1		—		1
Total	$	8	$	19	$	(13)	$	14

(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.

(4)Reflects reversal of allowances initially recorded in 2020 specifically related to the COVID-19 pandemic, driven by improving economic conditions during 2021.

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RESULTS OF OPERATIONS

We eliminate from our financial results all applicable 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".

Second Quarter of 2022 Compared to Second Quarter of 2021

Consolidated Operations

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


	Second Quarter						Dollar		Percentage
($ in millions, except per share amounts)	2022			2021			Change		Change
Net sales	$	3,554		$	3,140		$	414	13.2	%
Cost of sales	1,778			1,370			408		29.8
Gross profit	1,776			1,770			6		0.3
Selling, general and administrative expenses	1,204			1,039			165		15.9
Other operating income, net	—			(3)			3		NM
Income from operations	572			734			(162)		(22.1)
Interest expense	175			125			50		40.0
Loss on early extinguishment of debt	169			—			169		NM
Impairment of investments and note receivable	6			—			6		NM
Other expense (income), net	9			(4)			13		NM
Income before provision for income taxes	213			613			(400)		(65.3)
(Benefit) provision for income taxes	(5)			165			(170)		NM
Net income including non-controlling interest	218			448			(230)		(51.3)
Less: Net loss attributable to non-controlling interest	—			—			—		NM
Net income attributable to KDP	$	218		$	448		(230)		(51.3)

Earnings per common share:
Basic	$	0.15		$	0.32		$	(0.17)	(53.1)	%
Diluted	0.15			0.31			(0.16)		(51.6)

Gross margin	50.0		%	56.4		%			(640) bps
Operating margin	16.1		%	23.4		%			(730) bps
Effective tax rate	(2.3)		%	26.9		%			NM

Sales Volume. The following table provides the percentage change in sales volumes for the second quarter of 2022 compared to the prior year period:


	Percentage Change
K-Cup pod volume	4.7	%
Brewer volume	(4.2)
CSD sales volume	2.8
NCB sales volume	3.7

Net Sales. Net sales increased $414 million, or 13.2%, to $3,554 million for the second quarter of 2022 compared to $3,140 million in the prior year period. This performance reflected favorable net price realization of 10.4%, across all segments, and favorable volume/mix of 3.1%, slightly offset by unfavorable FX translation of 0.3%.

Gross Profit. Gross profit increased $6 million, or 0.3%, to $1,776 million for the second quarter of 2022 compared to $1,770 million in the prior year period. This performance primarily reflected strong growth in net sales, the benefit of productivity, and reduced costs associated with COVID-19. These benefits were partially offset by higher costs driven significantly by broad-based inflation, an unfavorable change in unrealized commodity mark-to-market impacts, and increased costs associated with productivity projects. Gross margin decreased 640 bps versus the year ago period to 50.0%.

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Selling, General and Administrative Expenses. SG&A expenses increased $165 million, or 15.9%, to $1,204 million for the second quarter of 2022 compared to $1,039 million in the prior year period. The increase was driven by higher logistics costs, driven by both inflation and product mix, and an unfavorable change in unrealized commodity mark-to-market impacts.

Income from Operations. Income from operations decreased $162 million, or 22.1%, to $572 million for the second quarter of 2022 compared to $734 million in the prior year period, primarily driven by increased SG&A expenses. Operating margin decreased 730 bps versus the year ago period to 16.1%.

Interest Expense. Interest expense increased $50 million, or 40.0%, to $175 million for the second quarter of 2022 compared with $125 million in the prior year period. This change was primarily driven by unfavorable unrealized mark-to-market losses of $62 million on interest rate contracts and the unfavorable comparison to realized gains on certain interest rate contracts in the prior year period, which was partially offset by reduced interest expense on our senior unsecured notes as a result of deleveraging and our strategic refinancing initiatives.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt reflected a loss of $169 million during the second quarter of 2022 related to our 2022 Strategic Refinancing. There was no loss on early extinguishment of debt during the prior year period.

Impairment of Investments and Note Receivable. Impairment of investments and note receivable reflected an impairment charge of $6 million in the second 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 was (2.3)% for the second quarter of 2022, compared to 26.9% in the prior year period, primarily driven by the revaluation of state deferred tax liabilities due to state legislative changes.

Net Income Attributable to KDP. Net income decreased $230 million, or 51.3%, to $218 million for the second quarter of 2022 as compared to $448 million in the prior year period, driven by the loss on early extinguishment of debt, lower income from operations and increased interest expense, partially offset by the decrease in our effective tax rate.

Diluted EPS. Diluted EPS decreased 51.6% to $0.15 per diluted share for the second quarter of 2022 as compared to $0.31 in the prior year period.

Results of Operations by Segment

The following tables set forth net sales and income from operations for our segments for the second quarter of 2022 and 2021, as well as other amounts necessary to reconcile our 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.


	Second Quarter
(in millions)	2022		2021
Segment Results — Net sales
Coffee Systems	$	1,195	$	1,101
Packaged Beverages	1,689		1,498
Beverage Concentrates	460		375
Latin America Beverages	210		166
Net sales	$	3,554	$	3,140

	Second Quarter
(in millions)	2022		2021
Segment Results — Income from operations
Coffee Systems	$	315	$	355
Packaged Beverages	232		261
Beverage Concentrates	324		255
Latin America Beverages	50		36
Unallocated corporate costs	(349)		(173)
Income from operations	$	572	$	734

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COFFEE SYSTEMS

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


	Second Quarter						Dollar		Percent
(in millions)	2022			2021			Change		Change
Net sales	$	1,195		$	1,101		$	94	8.5	%
Income from operations	315			355			(40)		(11.3)
Operating margin	26.4		%	32.2		%			(580) bps

Sales Volume. K-Cup pod volume grew 4.7% in the second quarter of 2022 compared to 0.2% in the year ago period, driven by the early completion of our coffee recovery program, which enabled us to rebuild retailer and partner inventories and restore customer service levels. Brewer volume decreased 4.2% in the quarter, driven by the unfavorable comparison to significant brewer shipment growth of 29.0% in the year ago period.

Net Sales. Net sales increased 8.5% to $1,195 million for the second quarter of 2022 compared to net sales of $1,101 million in the prior year period, reflecting favorable net price realization of 5.8% and volume/mix growth of 3.3%, driving growth in net sales for both K-cup pods and brewers. These benefits were slightly offset by unfavorable FX translation of 0.6%.

Income from Operations. Income from operations decreased $40 million, or 11.3%, to $315 million for the second quarter of 2022, compared to $355 million for the prior year period, as a result of broad-based inflation, investments to accelerate coffee recovery, increases in other operating costs, and increased expenses associated with productivity projects, partially offset by the benefits of pricing actions and the benefit of productivity. Operating margin declined 580 bps versus the year ago period to 26.4%.

PACKAGED BEVERAGES

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


	Second Quarter						Dollar		Percent
(in millions)	2022			2021			Change		Change
Net sales	$	1,689		$	1,498		$	191	12.8	%
Income from operations	232			261			(29)		(11.1)
Operating margin	13.7		%	17.4		%			(370) bps

Sales Volume. Sales volume for the second quarter of 2022 increased 1.0% compared to the prior year period, due primarily to strength in CSDs, Core, Motts, Hawaiian Punch, and Polar, which was partially offset by reductions in contract manufacturing and Bai.

Net Sales. Net sales increased 12.8% to $1,689 million for the second quarter of 2022, compared to $1,498 million in the prior year period, driven by favorable net price realization of 11.0%, primarily driven by price increases, and volume/mix growth of 1.9%, slightly offset by unfavorable FX translation of 0.1%.

Income from Operations. Income from operations decreased $29 million, or 11.1%, to $232 million for the second quarter of 2022, compared to $261 million for the prior year period, driven by broad-based inflation, higher costs associated with increased volume and increases in other operating costs, partially offset by the impact of net sales growth and productivity. Operating margin declined 370 bps versus the year ago period to 13.7%.

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BEVERAGE CONCENTRATES

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


	Second Quarter						Dollar		Percent
(in millions)	2022			2021			Change		Change
Net sales	$	460		$	375		$	85	22.7	%
Income from operations	324			255			69		27.1
Operating margin	70.4		%	68.0		%			240 bps

Sales volume. Sales volume for the second quarter of 2022 increased 3.5% compared to the prior year period, driven primarily by Canada Dry and Dr Pepper, partially offset by Schweppes.

Net Sales. Net sales increased 22.7% to $460 million in the second quarter of 2022, compared to $375 million for the prior year period, reflecting higher net price realization of 19.2%, largely driven by the favorable comparison to our prior year customer trade accrual, as well as price increases, and volume/mix growth of 3.7%. These benefits were slightly offset by unfavorable FX translation impacts of 0.2%.

Income from Operations. Income from operations increased $69 million, or 27.1%, to $324 million for the second quarter of 2022 compared to $255 million in the prior year period. This performance reflected the impact of net sales growth, partially offset by the impacts of broad-based inflation. Operating margin increased 240 bps versus the year ago period to 70.4% primarily due to the favorable comparison to our prior year customer trade accrual.

LATIN AMERICA BEVERAGES

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


	Second Quarter						Dollar		Percent
(in millions)	2022			2021			Change		Change
Net sales	$	210		$	166		$	44	26.5	%
Income from operations	50			36			14		38.9
Operating margin	23.8		%	21.7		%			210 bps

Sales Volume. Sales volume for the second quarter of 2022 as compared to the prior year period increased 7.5%, led by Peñafiel, Squirt and Clamato, driven by strong in-market execution and improvements in consumer mobility.

Net Sales. Net sales grew 26.5% to $210 million for the second quarter of 2022, compared to $166 million in the prior year period, reflecting favorable net price realization of 14.5% and volume/mix growth of 12.0%.

Income from Operations. Income from operations increased $14 million, or 38.9%, to $50 million for the second quarter of 2022 compared to $36 million in the prior year period, reflecting the benefit of net sales growth and productivity, partially offset by the impacts of broad-based inflation and higher costs associated with increased volumes. Operating margin increased 210 bps versus the year ago period to 23.8% despite inflationary headwinds.

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First Six Months of 2022 Compared to First Six Months of 2021

Consolidated Operations

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


	First Six Months						Dollar		Percentage
($ in millions, except per share amounts)	2022			2021			Change		Change
Net sales	$	6,632		$	6,042		$	590	9.8	%
Cost of sales	3,206			2,672			534		20.0
Gross profit	3,426			3,370			56		1.7
Selling, general and administrative expenses	2,222			2,000			222		11.1
Gain on litigation settlement	(299)			—			(299)		NM
Other operating income, net	(35)			(4)			(31)		NM
Income from operations	1,538			1,374			164		11.9
Interest expense	363			265			98		37.0
Loss on early extinguishment of debt	217			105			112		NM
Gain on sale of equity method investment	(50)			—			(50)		NM
Impairment of investments and note receivable	12			—			12		NM
Other expense (income), net	18			(7)			25		NM
Income before provision for income taxes	978			1,011			(33)		(3.3)
Provision for income taxes	175			238			(63)		(26.5)
Net income including non-controlling interest	803			773			30		3.9
Less: Net loss attributable to non-controlling interest	—			—			—		NM
Net income attributable to KDP	$	803		$	773		30		3.9

Earnings per common share:
Basic	$	0.57		$	0.55		$	0.02	3.6	%
Diluted	0.56			0.54			0.02		3.7

Gross margin	51.7		%	55.8		%			(410) bps
Operating margin	23.2		%	22.7		%			50 bps
Effective tax rate	17.9		%	23.5		%			(560) bps

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


	Percentage Change
K-Cup pods	(0.4)	%
Brewers	(4.6)
CSDs	3.3
NCBs	1.9

Net Sales. Net sales increased $590 million, or 9.8%, to $6,632 million for the first six months of 2022 compared to $6,042 million in the prior year period. This performance reflected favorable net price realization of 8.4% across all segments and volume/mix growth of 1.5%, as expected reductions in our Coffee Systems segment during the first quarter of 2022 moderated volume gains in our other segments. These benefits were slightly offset by unfavorable FX translation of 0.1%.

Gross Profit. Gross profit increased $56 million, or 1.7%, to $3,426 million for the first six months of 2022 compared to $3,370 million in the prior year period. This performance primarily reflected strong growth in net sales, partially offset by higher costs significantly driven by broad-based inflation and an unfavorable change in unrealized commodity mark-to-market impacts. Gross margin decreased 410 bps versus the year ago period to 51.7%.

Selling, General and Administrative Expenses. SG&A expenses increased $222 million, or 11.1%, to $2,222 million for the first six months of 2022 compared to $2,000 million in the prior year period. The increase was driven by higher logistics costs, driven by both inflation and product mix, and increases in other operating costs. 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 during the first quarter of 2022.

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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 $31 million for the first six months 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 $164 million, or 11.9%, to $1,538 million for the first six months of 2022 compared to $1,374 million in the prior year period, primarily driven by the gain on the litigation settlement, increased gross profit and the gain related to our strategic asset investment program, partially offset by increased SG&A expenses. Operating margin increased 50 bps versus the year ago period to 23.2%.

Interest Expense. Interest expense increased $98 million, or 37.0%, to $363 million for the first six months of 2022 compared to $265 million for the prior year period. This change was primarily driven by unfavorable unrealized mark-to-market losses of $141 million on interest rate contracts, which was partially offset by reduced interest expense on our senior unsecured notes as a result of deleveraging and our strategic refinancing initiatives.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt reflected an unfavorable change of $112 million, with a loss of $217 million during the first six months of 2022 related to our 2022 Strategic Refinancing and our early retirement of our 2038 Notes, the 2021 364-Day Credit Agreement and the KDP Revolver, 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 $12 million in the first six months 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 decreased 560 bps to 17.9% for the first six months of 2022, compared to 23.5% in the prior year period, primarily driven by the revaluation of state deferred tax liabilities due to state legislative changes and the favorable mix of the Company’s incremental income in low tax jurisdictions in the current period, partially offset by the unfavorable comparison to the excess tax deductions that were generated from the vesting of RSUs during the first six months of 2021.

Net Income Attributable to KDP. Net income attributable to KDP increased $30 million, or 3.9%, to $803 million for the first six months of 2022 as compared to $773 million in the prior year period, driven by higher income from operations, the decrease in our effective tax rate in the first six months of 2022 and the gain on the sale of our investment in BodyArmor, partially offset by the unfavorable comparison to the loss on early extinguishment of debt, increased interest expense and the impairment on the investments and note receivable associated with the wind-down of Bedford.

Diluted EPS. Diluted EPS increased 3.7% to $0.56 per diluted share as compared to $0.54 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 six months 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.


(in millions)	First Six Months
Net sales	2022		2021
Coffee Systems	$	2,288	$	2,243
Packaged Beverages	3,169		2,805
Beverage Concentrates	819		703
Latin America Beverages	356		291
Total net sales	$	6,632	$	6,042

Income from operations
Coffee Systems	$	583	$	723
Packaged Beverages	718		440
Beverage Concentrates	568		493
Latin America Beverages	75		58
Unallocated corporate costs	(406)		(340)
Total income from operations	$	1,538	$	1,374

COFFEE SYSTEMS

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


	First Six Months						Dollar		Percent
(in millions)	2022			2021			Change		Change
Net sales	$	2,288		$	2,243		$	45	2.0	%
Income from operations	583			723			(140)		(19.4)
Operating margin	25.5		%	32.2		%			(670) bps

Sales Volume. K-Cup pod volume was relatively flat for the first six months of 2022 compared to the prior year period, as gains in volume during the second quarter of 2022 offset negative volume comparisons in the first quarter of 2021, reflecting the early completion of our coffee recovery program, which enabled us to rebuild retailer and partner inventories and restore customer service levels through the first half of the year. Brewer volume decreased 4.6% in the first six months of 2022, driven by the unfavorable comparison to significant brewer shipment growth of 41.3% in the prior year period.

Net Sales. Net sales increased 2.0% to $2,288 million for the first six months of 2022 compared to $2,243 million in the prior year period, driven by favorable net price realization of 4.5%, partially offset by volume/mix declines of 2.2% and unfavorable FX translation effects of 0.3%.

Income from Operations. Income from operations decreased $140 million, or 19.4%, to $583 million for the first six months of 2022, compared to $723 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, productivity, and reduced costs related to COVID-19. Operating margin declined 670 bps versus the year ago period to 25.5% due to these inflationary and volume headwinds.

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PACKAGED BEVERAGES

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


	First Six Months						Dollar		Percent
(in millions)	2022			2021			Change		Change
Net sales	$	3,169		$	2,805		$	364	13.0	%
Income from operations	718			440			278		63.2
Operating margin	22.7		%	15.7		%			NM

Sales Volume. Sales volume for the first six months of 2022 increased 2.0% compared to the prior year period, due primarily to strength in CSDs, Motts, Core, Polar and Hawaiian Punch, which were partially offset by reductions in contract manufacturing and Bai.

Net Sales. Net sales increased 13.0% to $3,169 million in the first six months of 2022, compared to $2,805 million in the prior year period, driven by favorable net price realization of 9.7% and volume/mix growth of 3.3%.

Income from Operations. Income from operations increased $278 million, or 63.2%, to $718 million for the first six months of 2022 compared to $440 million for the prior year period, driven by the benefits of net sales growth, the gain on the settlement of litigation with BodyArmor of $271 million, asset sale-leaseback activity in the first six months of 2022 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 and higher costs associated with higher volumes.

BEVERAGE CONCENTRATES

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


	First Six Months						Dollar		Percent
(in millions)	2022			2021			Change		Change
Net sales	$	819		$	703		$	116	16.5	%
Income from operations	568			493			75		15.2
Operating margin	69.4		%	70.1		%			(70) bps

Sales Volume. Sales volume for the first six months of 2022 increased 2.8% compared to the prior year period, primarily driven by Dr Pepper and Canada Dry, partially offset by Crush and Schweppes.

Net Sales. Net sales increased 16.5% to $819 million in the first six months of 2022, compared to $703 million in the prior year period, reflecting higher net price realization of 13.8%, driven by price increases, as well as the favorable comparison to our prior year customer trade accrual, and volume/mix growth of 2.8%, slightly offset by unfavorable FX translation effects of 0.1%.

Income from Operations. Income from operations increased $75 million, or 15.2%, to $568 million for the first six months of 2022 compared to $493 million in the prior year period. This performance reflected the impact of net sales growth, partially offset by the impacts of broad-based inflation and costs associated with productivity initiatives. Operating margin decreased 70 bps versus the year ago period to 69.4%.

LATIN AMERICA BEVERAGES

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


	First Six Months						Dollar		Percent
(in millions)	2022			2021			Change		Change
Net sales	$	356		$	291		$	65	22.3	%
Income from operations	75			58			17		29.3
Operating margin	21.1		%	19.9		%			120 bps

Sales Volume. Sales volume for the first six months of 2022 as compared to the prior year period increased 6.6%, led by Squirt and Peñafiel, driven by strong in-market execution and improvements in consumer mobility.

Net Sales. Net sales grew 22.3% to $356 million for the first six months of 2022, compared to $291 million in the prior year period, reflecting favorable net price realization of 12.4% and volume/mix growth of 10.3%, slightly offset by unfavorable FX translation of 0.4%.

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Income from Operations. Income from operations increased $17 million, or 29.3%, to $75 million for the first six months of 2022 compared to $58 million in the prior year period, driven by the benefit of net sales growth, partially offset by the impacts of broad-based inflation, higher costs associated with higher volumes and higher marketing expense. Operating margin increased 120 bps versus the year ago period to 21.1% despite inflationary headwinds.

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 second quarter and first six months 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 that 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 second quarter and first six months 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; (viii) losses recognized with respect to our equity method investment in Bedford as a result of funding our share of their wind-down costs; (ix) transaction costs for significant business combinations (completed or abandoned) excluding the DPS Merger; and (x) foundational projects, which are transformative and non-recurring in nature.

For the second quarter and first six months 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 second quarter and first six months 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		Other operating income, net		Income from operations		Operating margin
For the Second Quarter of 2022
Reported	$	1,778	$	1,776	50.0	%	$	1,204	$	—	$	572	16.1	%
Items Affecting Comparability:
Mark to market	(138)		138				—		—		138
Amortization of intangibles	—		—				(33)		—		33


Stock compensation	—		—				(5)		—		5
Restructuring and integration costs	—		—				(23)		1		22
Productivity	(28)		28				(24)		—		52



Non-routine legal matters	—		—				(3)		—		3
COVID-19	(3)		3				(1)		—		4


Transaction costs	—		—				(1)		—		1

Foundational projects	—		—				(2)		—		2

Adjusted	$	1,609	$	1,945	54.7	%	$	1,112	$	1	$	832	23.4	%
Impact of foreign currency					—	%							—	%
Constant currency adjusted					54.7	%							23.4	%

For the Second Quarter of 2021
Reported	$	1,370	$	1,770	56.4	%	$	1,039	$	(3)	$	734	23.4	%
Items Affecting Comparability:
Mark to market	17		(17)				21		—		(38)
Amortization of intangibles	—		—				(34)		—		34


Stock compensation	—		—				(5)		—		5
Restructuring and integration costs	—		—				(49)		—		49
Productivity	(14)		14				(24)		—		38



Non-routine legal matters	—		—				(6)		—		6
COVID-19	(7)		7				(4)		—		11






Adjusted	$	1,366	$	1,774	56.5	%	$	938	$	(3)	$	839	26.7	%

Refer to page 43 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		Impairment of investments and note receivable		Other expense (income), net		Income before provision for income taxes		(Benefit) provision for income taxes		Effective tax rate		Net income attributable to KDP			Diluted earnings per share
For the Second Quarter of 2022
Reported	$	175		$	169	$	6	$	9	$	213	$	(5)	(2.3)	%	$	218		$	0.15
Items Affecting Comparability:
Mark to market	(63)			—		—		1		200		49				151			0.11
Amortization of intangibles	—			—		—		—		33		8				25			0.02
Amortization of deferred financing costs	(1)			—		—		—		1		—				1			—
Amortization of fair value debt adjustment	(4)			—		—		—		4		1				3			—
Stock compensation	—			—		—		—		5		(2)				7			—
Restructuring and integration costs	—			—		—		—		22		5				17			0.01
Productivity	—			—		—		—		52		10				42			0.03

Impairment of investment	—			—		(6)		—		6		—				6			—
Loss on early extinguishment of debt	—			(169)		—		—		169		43				126			0.09
Non-routine legal matters	—			—		—		—		3		1				2			—
COVID-19	—			—		—		—		4		1				3			—


Transaction costs	—			—		—		—		1		—				1			—

Foundational projects	—			—		—		—		2		—				2			—
Change in deferred tax liabilities related to goodwill and other intangible assets	—			—		—		—		—		50				(50)			(0.03)
Adjusted	$	107		$	—	$	—	$	10	$	715	$	161	22.5	%	$	554		$	0.39
Impact of foreign currency														0.1	%
Constant currency adjusted														22.6	%

For the Second Quarter of 2021
Reported	$	125		$	—	$	—	$	(4)	$	613	$	165	26.9	%	$	448		$	0.31
Items Affecting Comparability:
Mark to market	(1)			—		—		—		(37)		(9)				(28)			(0.02)
Amortization of intangibles	—			—		—		—		34		9				25			0.02
Amortization of deferred financing costs	(1)			—		—		—		1		—				1			—
Amortization of fair value of debt adjustment	(4)			—		—		—		4		—				4			—
Stock compensation	—			—		—		—		5		2				3			—
Restructuring and integration costs	—			—		—		—		49		11				38			0.03
Productivity	—			—		—		—		38		10				28			0.02



Non-routine legal matters	—			—		—		—		6		1				5			—
COVID-19	—			—		—		—		11		3				8			0.01





Change in deferred tax liabilities related to goodwill and other intangible assets	—			—		—		—		—		(6)				6			—
Adjusted	$	119		$	—	$	—	$	(4)	$	724	$	186	25.7	%	$	538		$	0.38

Change - adjusted	(10.1)		%													3.0		%	2.6		%
Impact of foreign currency	—		%													0.3		%	—		%
Change - constant currency adjusted	(10.1)		%													3.3		%	2.6		%

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 second quarter of 2022:
Income from operations
Coffee Systems	$	315	$	54	$	369
Packaged Beverages	232		15		247
Beverage Concentrates	324		3		327
Latin America Beverages	50		—		50
Unallocated corporate costs	(349)		188		(161)
Total income from operations	$	572	$	260	$	832

For the second quarter of 2021:
Income from operations
Coffee Systems	$	355	$	49	$	404
Packaged Beverages	261		28		289
Beverage Concentrates	255		2		257
Latin America Beverages	36		1		37
Unallocated corporate costs	(173)		25		(148)
Total income from operations	$	734	$	105	$	839


	Reported		Impact of Foreign Currency		Constant Currency
For the second quarter of 2022:
Net sales
Coffee Systems	8.5	%	0.6	%	9.1	%
Packaged Beverages	12.8		0.1		12.9
Beverage Concentrates	22.7		0.2		22.9
Latin America Beverages	26.5		—		26.5
Total net sales	13.2		0.3		13.5


	Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the second quarter of 2022:
Income from operations
Coffee Systems	(8.7)	%	0.3	%	(8.4)	%
Packaged Beverages	(14.5)		—		(14.5)
Beverage Concentrates	27.2		0.4		27.6
Latin America Beverages	35.1		—		35.1
Total income from operations	(0.8)		0.2		(0.6)


	Reported		Items Affecting Comparability		Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the second quarter of 2022:
Operating margin
Coffee Systems	26.4	%	4.5	%	30.9	%	(0.1)	%	30.8	%
Packaged Beverages	13.7		0.9		14.6		—		14.6
Beverage Concentrates	70.4		0.7		71.1		—		71.1
Latin America Beverages	23.8		—		23.8		—		23.8
Total operating margin	16.1		7.3		23.4		—		23.4

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CONSTANT CURRENCY ADJUSTED RESULTS OF OPERATIONS

Second Quarter of 2022 Compared to Second Quarter of 2021

The following discussion of our results for the second quarter of 2022 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 13.5% in the second quarter of 2022 compared to the prior year period, driven by favorable net price realization of 10.4% and volume/mix growth of 3.1%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations decreased 0.6% compared to the prior year period, primarily driven by the impact of broad-based inflation, higher costs due to higher volumes, and increases in other operating costs, partially offset by the strong growth in net sales and the benefit of productivity.

Constant Currency Adjusted Interest Expense. Constant currency adjusted interest expense decreased 10.1% compared to the prior year period, driven by reduced interest expense on our senior unsecured notes as a result of deleveraging and our strategic refinancing initiatives, partially offset by the unfavorable comparison to realized gains on certain interest rate contracts in the prior year period.

Constant Currency Adjusted Effective Tax Rate. The constant currency adjusted effective tax rate was 22.6% for the second quarter of 2022 compared to 25.7% for the prior year period, primarily driven by our incremental income in low tax jurisdictions and the revaluation of state deferred tax liabilities due to state legislative changes.

Constant Currency Adjusted Net Income Attributable to KDP. Constant currency adjusted net income attributable to KDP increased 3.3% compared to the prior year period, as the impacts of lower interest expense and our reduced effective tax rate were slightly offset by the decline in income from operations.

Constant Currency Adjusted Diluted EPS*.* Constant currency adjusted diluted EPS increased 2.6% in the current period.

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Results of Operations by Segment

COFFEE SYSTEMS

Constant Currency Net Sales. Constant currency net sales increased 9.1%, reflecting higher net price realization of 5.8% and volume/mix growth of 3.3%, driving growth in net sales for both K-cup pods and brewers.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the second quarter of 2022 decreased 8.4% compared to the prior year period, driven by increased costs due to the impacts of broad-based inflation, investments to accelerate coffee recovery and increases in other operating costs. These decreases were partially offset by the benefit of pricing actions and the benefit of productivity.

PACKAGED BEVERAGES

Constant Currency Net Sales. Constant currency net sales increased 12.9%, reflecting favorable net price realization of 11.0%, primarily driven by price increases, and volume/mix growth of 1.9%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the second quarter of 2022 decreased 14.5% compared to the prior year period, driven primarily by broad-based inflation, higher costs associated with increased volume and increases in other operating costs, partially offset by the impact of net sales growth and productivity.

BEVERAGE CONCENTRATES

Constant Currency Net Sales. Constant currency net sales increased 22.9%, reflecting higher net price realization of 19.2%, predominantly driven by the favorable comparison to our prior year customer trade accrual, as well as price increases, and volume/mix growth of 3.7%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the second quarter of 2022 increased 27.6% compared to the prior year period. This performance reflected the impact of net sales growth, partially offset by the impacts of broad-based inflation.

LATIN AMERICA BEVERAGES

Constant Currency Net Sales. Constant currency net sales increased 26.5%, driven by favorable net price realization of 14.5% and volume/mix growth of 12.0%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the second quarter of 2022 increased 35.1% compared to the prior year period, reflecting the benefit of net sales growth and productivity, partially offset by the impacts of broad-based inflation and higher costs associated with increased volumes.

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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 income, net		Income from operations		Operating margin
For the First Six Months of 2022
Reported	$	3,206	$	3,426	51.7	%	$	2,222	$	(299)	$	(35)	$	1,538	23.2	%
Items Affecting Comparability:
Mark to market	(79)		79				26		—		—		53
Amortization of intangibles	—		—				(67)		—		—		67


Stock compensation	—		—				2		—		—		(2)
Restructuring and integration costs	—		—				(56)		—		(2)		58
Productivity	(56)		56				(46)		—		—		102



Non-routine legal matters	—		—				(7)		—		—		7
COVID-19	(7)		7				(2)		—		—		9
Gain on litigation	—		—				—		271		—		(271)

Transaction costs	—		—				(1)		—		—		1

Foundational projects	—		—				(2)		—		—		2

Adjusted	$	3,064	$	3,568	53.8	%	$	2,069	$	(28)	$	(37)	$	1,564	23.6	%
Impact of foreign currency					(1.1)	%									0.2	%
Constant currency adjusted					52.7	%									23.8	%

For the First Six Months of 2021
Reported	$	2,672	$	3,370	55.8	%	$	2,000	$	—	$	(4)	$	1,374	22.7	%
Items Affecting Comparability:
Mark to market	26		(26)				50		—		—		(76)
Amortization of intangibles	—		—				(67)		—		—		67


Stock compensation	—		—				(11)		—		—		11
Restructuring and integration costs	—		—				(92)		—		—		92
Productivity	(22)		22				(49)		—		—		71



Non-routine legal matters	—		—				(16)		—		—		16
COVID-19	(19)		19				(8)		—		—		27



Malware incident	—		—				2		—		—		(2)


Adjusted	$	2,657	$	3,385	56.0	%	$	1,809	$	—	$	(4)	$	1,580	26.2	%

Refer to page 49 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 expense (income), net		Income before provision for income taxes		(Benefit) provision for income taxes		Effective tax rate		Net income attributable to KDP		Diluted earnings per share
For the First Six Months of 2022
Reported	$	363	$	217	$	(50)	$	12	$	18	$	978	$	175	17.9	%	$	803	$	0.56
Items Affecting Comparability:
Mark to market	(134)		—		—		—		(2)		189		47				142		0.10
Amortization of intangibles	—		—		—		—		—		67		17				50		0.04
Amortization of deferred financing costs	(2)		—		—		—		—		2		—				2		—
Amortization of fair value debt adjustment	(9)		—		—		—		—		9		2				7		—
Stock compensation	—		—		—		—		—		(2)		(3)				1		—
Restructuring and integration costs	—		—		—		—		—		58		14				44		0.03
Productivity	—		—		—		—		—		102		22				80		0.06

Impairment of investment	—		—		—		(12)				12		—				12		—
Loss on early extinguishment of debt	—		(217)		—		—		—		217		54				163		0.12
Non-routine legal matters	—		—		—		—		—		7		2				5		—
COVID-19	—		—		—		—		—		9		2				7		—
Gain on litigation	—		—		—		—		—		(271)		(68)				(203)		(0.14)
Gain on sale of equity-method investment	—		—		50		—		—		(50)		(12)				(38)		(0.03)
Transaction costs	—		—		—		—		—		1		—				1		—

Foundational projects	—		—		—		—		—		2		—				2		—
Change in deferred tax liabilities related to goodwill and other intangible assets	—		—		—		—		—		—		50				(50)		(0.03)
Adjusted	$	218	$	—	$	—	$	—	$	16	$	1,330	$	302	22.7	%	$	1,028	$	0.72
Impact of foreign currency															—	%
Constant currency adjusted															22.7	%

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

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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 expense (income), net		Income before provision for income taxes		(Benefit) provision for income taxes		Effective tax rate		Net income attributable to KDP			Diluted earnings per share
For the First Six Months of 2021
Reported	$	265		$	105	$	—	$	—	$	(7)	$	1,011	$	238	23.5	%	$	773		$	0.54
Items Affecting Comparability:
Mark to market	7			—		—		—		—		(83)		(20)				(63)			(0.04)
Amortization of intangibles	—			—		—		—		—		67		17				50			0.04
Amortization of deferred financing costs	(4)			—		—		—		—		4		—				4			—
Amortization of fair value of debt adjustment	(10)			—		—		—		—		10		2				8			—
Stock compensation	—			—		—		—		—		11		14				(3)			—
Restructuring and integration costs	—			—		—		—		—		92		22				70			0.05
Productivity	—			—		—		—		—		71		18				53			0.04


Loss on early extinguishment of debt	—			(105)		—		—		—		105		25				80			0.06
Non-routine legal matters	—			—		—		—		—		16		3				13			0.01
COVID-19	—			—		—		—		—		27		7				20			0.01



Malware incident	—			—		—		—		—		(2)		—				(2)			—

Change in deferred tax liabilities related to goodwill and other intangible assets	—			—		—		—		—		—		(6)				6			—
Adjusted	$	258		$	—	$	—	$	—	$	(7)	$	1,329	$	320	24.1	%	$	1,009		$	0.71

Change - adjusted	(15.5)		%															1.9		%	1.4		%
Impact of foreign currency	—		%															0.3		%	—		%
Change - constant currency adjusted	(15.5)		%															2.2		%	1.4		%

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 six months of 2022:
Income from operations
Coffee Systems	$	583	$	105	$	688
Packaged Beverages	718		(236)		482
Beverage Concentrates	568		6		574
Latin America Beverages	75		1		76
Unallocated corporate costs	(406)		150		(256)
Total income from operations	$	1,538	$	26	$	1,564

For the first six months of 2021:
Income from operations
Coffee Systems	$	723	$	102	$	825
Packaged Beverages	440		50		490
Beverage Concentrates	493		3		496
Latin America Beverages	58		2		60
Unallocated corporate costs	(340)		49		(291)
Total income from operations	$	1,374	$	206	$	1,580


	Reported		Impact of Foreign Currency		Constant Currency
For the first six months of 2022:
Net sales
Coffee Systems	2.0	%	0.3	%	2.3	%
Packaged Beverages	13.0		—		13.0
Beverage Concentrates	16.5		0.1		16.6
Latin America Beverages	22.3		0.4		22.7
Total net sales	9.8		0.1		9.9


	Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the first six months of 2022:
Income from operations
Coffee Systems	(16.6)	%	0.1	%	(16.5)	%
Packaged Beverages	(1.6)		—		(1.6)
Beverage Concentrates	15.7		0.2		15.9
Latin America Beverages	26.7		—		26.7
Total income from operations	(1.0)		0.1		(0.9)


	Reported		Items Affecting Comparability		Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the first six months of 2022:
Operating margin
Coffee Systems	25.5	%	4.6	%	30.1	%	(0.1)	%	30.0	%
Packaged Beverages	22.7		(7.5)		15.2		—		15.2
Beverage Concentrates	69.4		0.7		70.1		—		70.1
Latin America Beverages	21.1		0.2		21.3		—		21.3
Total operating margin	23.2		0.4		23.6		—		23.6

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CONSTANT CURRENCY ADJUSTED RESULTS OF OPERATIONS

First Six Months of 2022 Compared to First Six Months of 2021

The following discussion of our results for the first six months of 2022 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 9.9% in the first six months of 2022 compared to the prior year period, driven by favorable net price realization of 8.4% and volume/mix growth of 1.5%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations decreased 0.9% 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 the benefit of productivity and a $38 million gain on an asset sale-leaseback transaction related to our strategic asset investment program.

Constant Currency Adjusted Interest Expense. Constant currency adjusted interest expense decreased 15.5% compared to the prior year period, driven by reduced interest expense on our senior unsecured notes as a result of our strategic refinancing initiatives and continued deleveraging.

Constant Currency Adjusted Effective Tax Rate. The constant currency adjusted effective tax rate was 22.7% for the first six months of 2022 compared to 24.1% for the prior year period, primarily driven by our incremental income in low tax jurisdictions during the first six months of 2022.

Constant Currency Adjusted Net Income Attributable to KDP. Constant currency adjusted net income attributable to KDP increased 2.2% compared to the prior year period, as the impacts of lower interest expense and the decrease in our effective tax rate were partially offset by the decline in income from operations.

Constant Currency Adjusted Diluted EPS. Constant currency adjusted diluted EPS increased approximately 1.4% over the prior year period.

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Results of Operations by Segment

COFFEE SYSTEMS

Constant Currency Net Sales. Constant currency net sales increased 2.3%, driven by higher net price realization of 4.5%, partially offset by unfavorable volume/mix of 2.2%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the first six months of 2022 decreased 16.5% compared to 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 and increased productivity.

PACKAGED BEVERAGES

Constant Currency Net Sales. Constant currency net sales increased 13.0%, reflecting favorable net price realization of 9.7% and volume/mix growth of 3.3%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the first six months of 2022 decreased 1.6% compared to the prior year period, driven by increased costs due to the impacts of broad-based inflation, higher costs associated with higher volumes and increases in other operating costs. These declines were partially offset by the benefits of net sales growth, asset sale-leaseback activity in the first six months of 2022 relating to our strategic asset initiative, and increased productivity.

BEVERAGE CONCENTRATES

Constant Currency Net Sales. Constant currency net sales increased 16.6%, reflecting higher net price realization of 13.8%, driven by price increases, as well as the favorable comparison to our prior year customer trade accrual, and volume/mix growth of 2.8%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the first six months of 2022 increased 15.9% compared to the prior year period. This performance reflected the impact of net sales growth, partially offset by the impacts of broad-based inflation.

LATIN AMERICA BEVERAGES

Constant Currency Net Sales. Constant currency net sales increased 22.7%, driven by favorable net price realization of 12.4% and volume/mix growth of 10.3%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the first six months of 2022 increased 26.7% compared to the prior year period, driven by higher net price realization and favorable volume/mix, partially offset by broad-based inflation, higher costs associated with higher volumes, 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.

As of the date of our annual impairment test, performed as of October 1, 2021, certain brands were considered at risk of future impairment in the event of significant unfavorable changes in assumptions including forecasted cash flows along with macro-economic risks such as the continued prolonged weakening of economic conditions and cost inflation or significant unfavorable changes in long-term growth rates and discount rates utilized in the discounted cash flows analyses. Cost inflation for certain inputs could put pressure on achieving cash flow projections and rising interest rates could cause unfavorable changes in the discount rates utilized in the discounted cash flow analyses. As of June 30, 2022, we did not identify any indications that the carrying amount of any goodwill or any intangible assets may not be recoverable.

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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 six months of 2022 and 2021:

Cash, cash equivalents, restricted cash and restricted cash equivalents decreased $14 million from December 31, 2021 to June 30, 2022 primarily as a result of deleveraging, offset by proceeds from the cash settlement with BodyArmor.

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 $255 million and $216 million as of June 30, 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 notional amount of our outstanding designated forward starting swaps and received cash proceeds of approximately $125 million. Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information about the 2022 strategic refinancing initiative.

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 $200 million for the first six months of 2022, as compared to the first six months 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.

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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:


	June 30,
	2022	2021
DIO	61	57
DSO	36	32
DPO	170	156
Cash conversion cycle	(73)	(67)

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 June 30, 2022 and December 31, 2021, $3,698 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 $1,808 million and $1,572 million for the first six months 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.

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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.

In April 2022, we undertook a strategic refinancing and issued a $3 billion aggregate face value of Notes, consisting of the 2029 Notes, the 2032 Notes, and the 2052 Notes. 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.

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.

Sources of Liquidity - Asset Sale-Leaseback Transactions

We have leveraged our strategic asset investment program to create value from certain assets to enable reinvestment in KDP. These transactions are accounted for as sale-leaseback transactions. Proceeds from sales of property, plant and equipment were $78 million and $15 million for the first six months of 2022 and 2021, respectively.

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 special dividends to our investors and have repurchased shares of our outstanding common stock, as described below.

Deleveraging and Other Debt Repayments

During the first six months of 2022, we made net debt repayments of $514 million, which includes the redemption and retirement of the remainder of our 2023 Merger Notes and 2038 Notes, as well as the tender of portions of the 2025 Merger Notes, the 2028 Merger Notes, the 2038 Merger Notes, and the 2048 Merger Notes.

Regular Quarterly Dividends

For the first six months of 2022, we have declared total dividends of $0.375 per share.

Repurchases of Common Stock

Our Board 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. We repurchased and retired $88 million of common stock during the first six months of 2022.

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 $186 million and $204 million for the first six months of 2022 and 2021, respectively.

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Capital expenditures, which includes both purchases of property, plant and equipment and amounts included in accounts payable and accrued expenses, for the first six months of 2022 and 2021 primarily related to the manufacturing and warehousing facilities discussed above. Capital expenditures included in accounts payable and accrued expenses were $138 million and $213 million for the first six months of 2022 and 2021, respectively, which primarily related to these investments.

Investments in Unconsolidated Affiliates

From time to time, we expect to acquire businesses or brands, invest in emerging companies, or enter into various licensing and distribution agreements to expand our product portfolio. Our investments in emerging companies generally involve acquiring a minority interest in equity securities of a company with a protected path to ownership at our future option. In the second quarter of 2022, we invested $50 million in Tractor for a 19.2% equity interest.

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 acquisition of an intangible asset. Purchases of intangible assets were $10 million and $12 million for the first six months of 2022 and 2021, respectively.

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.

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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 Six Months of 2022
Net sales	$	3,947

Income from operations	871
Net income attributable to KDP	803


(in millions)	June 30, 2022		December 31, 2021
Current assets	$	1,975	$	1,594
Non-current assets	44,556		43,972
Total assets(1)	$	46,531	$	45,566

Current liabilities	$	3,682	$	3,470
Non-current liabilities	17,458		17,125
Total liabilities(2)	$	21,140	$	20,595

(1)Includes $2 million and $209 million of intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of June 30, 2022 and December 31, 2021, respectively.

(2)Includes $62 million and $40 million of intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of June 30, 2022 and December 31, 2021, respectively.

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