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

128K characters. Original on sec.gov · Markdown

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 beverages, including flavored (non-cola) CSDs, 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, Mott's, Clamato, Core, Green Mountain Coffee Roasters 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.

Table of Contents

Effective January 1, 2023, the Company revised its segment structure to align with how the Company’s Chief Operating Decision Maker manages the business, assesses performance and allocates resources. The Company's reportable segments consist of the following:

The U.S. Refreshment Beverages segment reflects sales in the U.S. from the manufacture and distribution of branded concentrates, syrup and finished beverages, including the sales of the Company's own brands and third-party brands, to third-party bottlers, distributors and retailers.
The U.S. Coffee segment reflects sales in the U.S. from the manufacture and distribution of finished goods relating to the Company's K-Cup pods, single-serve brewers and other coffee products to partners, retailers and directly to consumers through our Keurig.com website.
The International segment reflects sales in international markets, including the following:

◦Sales in Canada, Mexico, the Caribbean and other international markets from the manufacture and distribution of branded concentrates, syrup and finished beverages, including sales of the Company's own brands and third-party brands, to third-party bottlers, distributors and retailers.

◦Sales in Canada from the manufacture and distribution of finished goods relating to the Company’s single-serve brewers, K-Cup pods and other coffee products.

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.

Table of Contents

EXECUTIVE SUMMARY

Financial Overview - Second Quarter of 2023 as compared to Second Quarter of 2022

As Reported, in millions (except EPS)

As Adjusted, in millions (except EPS)

135 136 138

Key Events Subsequent to the Second Quarter of 2023

In July 2023, we executed definitive agreements with La Colombe to invest $300 million in exchange for 33.3% ownership in La Colombe. The equity investment, which is subject to regulatory approval, is expected to close in the third quarter of 2023.

Simultaneously, we entered into a sales and distribution agreement for La Colombe RTD coffee and a licensing, manufacturing and distribution agreement for La Colombe branded K-Cup pods. The transition of La Colombe RTD coffee distribution to KDP will begin in late 2023, while the launch of La Colombe branded K-Cup pods will occur during 2024.

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 tables below to percentage changes that are not meaningful are denoted by "NM".

Table of Contents

Second Quarter of 2023 Compared to Second Quarter of 2022

Consolidated Operations

The following table sets forth our unaudited condensed consolidated results of operations for the second quarter of 2023 and 2022:


	Second Quarter						Dollar		Percentage
($ in millions, except per share amounts)	2023			2022			Change		Change
Net sales	$	3,789		$	3,554		$	235	6.6	%
Cost of sales	1,748			1,778			(30)		(1.7)
Gross profit	2,041			1,776			265		14.9
Selling, general and administrative expenses	1,272			1,204			68		5.6

Other operating income, net	—			—			—		NM
Income from operations	769			572			197		34.4
Interest expense	172			175			(3)		(1.7)
Loss on early extinguishment of debt	—			169			(169)		NM
Impairment of investments and note receivable	—			6			(6)		NM
Other (income) expense, net	(16)			9			(25)		NM
Income before provision for income taxes	613			213			400		187.8
Provision (benefit) for income taxes	110			(5)			115		NM
Net income including non-controlling interest	503			218			285		130.7
Less: Net loss attributable to non-controlling interest	—			—			—		NM
Net income attributable to KDP	$	503		$	218		285		130.7

Earnings per common share:
Basic	$	0.36		$	0.15		$	0.21	140.0	%
Diluted	0.36			0.15			0.21		140.0

Gross margin	53.9		%	50.0		%			390 bps
Operating margin	20.3		%	16.1		%			420 bps
Effective tax rate	17.9		%	(2.3)		%			NM

Sales Volume. The following table provides the percentage change in sales volumes for the second quarter of 2023 compared to the prior year period:


	Percentage Change
LRB	(0.1)	%
K-Cup pods	(7.0)
Brewers	(10.3)

Table of Contents

Net Sales. Net sales increased $235 million, or 6.6%, to $3,789 million for the second quarter of 2023 compared to $3,554 million in the prior year period. This performance reflected favorable net price realization across all segments totaling 8.2% and favorable FX translation of 0.5%, partially offset by unfavorable volume/mix of 2.1%.

Gross Profit. Gross profit increased $265 million, or 14.9%, to $2,041 million for the second quarter of 2023 compared to $1,776 million in the prior year period. This performance primarily reflected the benefits of net sales growth, a favorable change in unrealized commodity mark-to-market activity of $129 million, and productivity, partially offset by broad-based inflation. Gross margin increased 390 bps versus the year ago period to 53.9%.

Selling, General and Administrative Expenses. SG&A expenses increased $68 million, or 5.6%, to $1,272 million for the second quarter of 2023 compared to $1,204 million in the prior year period. The increase was driven by higher marketing expense, broad-based inflation, and increases in other operating costs, partially offset by the favorable comparison to costs associated with restructuring and integration projects in the prior year period, as well as productivity savings.

Income from Operations. Income from operations increased $197 million, or 34.4%, to $769 million for the second quarter of 2023 compared to $572 million in the prior year period, primarily driven by the increase in gross profit.

Interest Expense. Interest expense decreased $3 million, or 1.7%, to $172 million for the second quarter of 2023 compared with $175 million in the prior year period. This change was primarily driven by net realized gains on certain interest rate contracts and the favorable comparison of unrealized mark-to-market activity on interest rate contracts, partially offset by increased use of our commercial paper facility in the current year period.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt reflected a loss of $169 million in the prior year period associated with our 2022 Strategic Refinancing.

Impairment of Investments and Note Receivable. Impairment of investments and note receivable reflected an impairment charge of $6 million in the prior year period associated with the wind-down of Bedford.

Effective Tax Rate. The effective tax rate was 17.9% for the second quarter of 2023, compared to (2.3)% in the prior year period, primarily driven by the revaluation of state deferred tax liabilities due to state legislative changes in the prior year period, slightly offset by the benefit from an immaterial non-cash true-up during the second quarter of 2023 related to the valuation of foreign tax liabilities. Refer to Note 11 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Net Income Attributable to KDP. Net income increased $285 million, or 130.7%, to $503 million for the second quarter of 2023 as compared to $218 million in the prior year period, driven primarily by increased income from operations and the favorable comparison to loss on early extinguishment of debt in the prior year period, partially offset by the increase in our effective tax rate.

Diluted EPS. Diluted EPS increased 140.0% to $0.36 per diluted share for the second quarter of 2023 as compared to $0.15 in the prior year period.

Table of Contents

Results of Operations by Segment

The following tables set forth net sales and income from operations for our segments for the second quarter of 2023 and 2022, as well as other amounts necessary to reconcile our segment results to our consolidated results presented in accordance with U.S. GAAP.


	Second Quarter
(in millions)	2023		2022
Segment Results — Net sales
U.S. Refreshment Beverages	$	2,330	$	2,084
U.S. Coffee	970		1,029
International	489		441
Net sales	$	3,789	$	3,554

	Second Quarter
(in millions)	2023		2022
Segment Results — Income from operations
U.S. Refreshment Beverages	$	629	$	528
U.S. Coffee	250		295
International	112		98
Unallocated corporate costs	(222)		(349)
Income from operations	$	769	$	572

U.S. REFRESHMENT BEVERAGES

The following table provides selected information about our U.S. Refreshment Beverages segment's results:


	Second Quarter						Dollar Change		Percentage Change
(in millions)	2023			2022
Net sales	$	2,330		$	2,084		$	246	11.8	%
Income from operations	629			528			101		19.1
Operating margin	27.0		%	25.3		%			170 bps

Sales Volume. Sales volume for the second quarter of 2023 decreased 0.4% compared to the prior year period. Growth in Dr Pepper, driven by our Strawberries & Cream innovation, and C4 Energy as a result of our sales and distribution partnership, was more than offset by softness in our still portfolio.

Net Sales. Net sales increased 11.8% to $2,330 million for the second quarter of 2023, compared to $2,084 million in the prior year period, driven by favorable net price realization of 12.0%, partially offset by unfavorable volume/mix of 0.2%.

Income from Operations. Income from operations increased $101 million, or 19.1%, to $629 million for the second quarter of 2023, compared to $528 million for the prior year period, primarily driven by the benefits of strong net sales growth and productivity, partially offset by broad-based inflation and increased marketing expenses. Operating margin increased 170 bps versus the year ago period to 27.0%.

Table of Contents

U.S. COFFEE

The following table provides selected information about our U.S. Coffee segment's results:


	Second Quarter						Dollar Change		Percentage Change
(in millions)	2023			2022
Net sales	$	970		$	1,029		$	(59)	(5.7)	%
Income from operations	250			295			(45)		(15.3)
Operating margin	25.8		%	28.7		%			(290) bps

Sales Volume. K-Cup pod volume declined 7.7% in the second quarter of 2023 compared to the prior year period, primarily reflecting at-home coffee category trends, which continued to be impacted by greater consumer mobility versus the prior year, as well as the exit of certain private-label contracts and an unfavorable comparison to the prior year when we rebuilt partner and retailer inventories following supply chain constraints. Brewer volume decreased 10.9% compared to the prior year period, driven by category softness in small appliances and retailer inventory shifts.

Net Sales. Net sales decreased 5.7% to $970 million for the second quarter of 2023 compared to net sales of $1,029 million in the prior year period, reflecting volume/mix declines of 7.3%, partially offset by favorable net price realization of 1.6%.

Income from Operations. Income from operations decreased $45 million, or 15.3%, to $250 million for the second quarter of 2023, compared to $295 million for the prior year period, reflecting broad-based inflation, unfavorable volume/mix, increased marketing expenses and costs associated with productivity projects, partially offset by the benefits of productivity and pricing actions. Operating margin declined 290 bps versus the year ago period to 25.8%.

INTERNATIONAL

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


	Second Quarter						Dollar Change		Percentage Change
(in millions)	2023			2022
Net sales	$	489		$	441		$	48	10.9	%
Income from operations	112			98			14		14.3
Operating margin	22.9		%	22.2		%			70 bps

Sales volume. The following table provides the percentage change in sales volumes for the International segment compared to the prior year period:


	Percentage Change
LRB	1.1	%
K-Cup pods	(1.6)
Brewers	(3.7)

Net Sales. Net sales increased 10.9% to $489 million in the second quarter of 2023, compared to $441 million for the prior year period, reflecting higher net price realization of 6.1%, favorable FX translation impacts of 3.9% and volume/mix growth of 0.9%.

Income from Operations. Income from operations increased $14 million, or 14.3%, to $112 million for the second quarter of 2023 compared to $98 million in the prior year period. This performance reflected the benefits of strong net sales growth and productivity, partially offset by broad-based inflation, unfavorable translation impacts in cost of sales and SG&A and increased marketing expense. Operating margin increased 70 bps versus the year ago period to 22.9%.

Table of Contents

First Six Months of 2023 Compared to First Six Months of 2022

Consolidated Operations

The following table sets forth our unaudited condensed consolidated results of operations for the first six months of 2023 and 2022:


	First Six Months						Dollar Change		Percentage Change
($ in millions, except per share amounts)	2023			2022
Net sales	$	7,142		$	6,632		$	510	7.7	%
Cost of sales	3,357			3,206			151		4.7
Gross profit	3,785			3,426			359		10.5
Selling, general and administrative expenses	2,437			2,222			215		9.7

Gain on litigation settlement	—			(299)			299		NM
Other operating income, net	(5)			(35)			30		NM
Income from operations	1,353			1,538			(185)		(12.0)
Interest expense	195			363			(168)		(46.3)
Loss on early extinguishment of debt	—			217			(217)		NM
Gain on sale of equity method investment	—			(50)			50		NM
Impairment of investments and note receivable	—			12			(12)		NM
Other (income) expense, net	(36)			18			(54)		NM
Income before provision for income taxes	1,194			978			216		22.1
Provision for income taxes	224			175			49		28.0
Net income including non-controlling interest	970			803			167		20.8
Less: Net loss attributable to non-controlling interest	—			—			—		NM
Net income attributable to KDP	$	970		$	803		167		20.8

Earnings per common share:
Basic	$	0.69		$	0.57		$	0.12	21.1	%
Diluted	0.69			0.56			0.13		23.2

Gross margin	53.0		%	51.7		%			130 bps
Operating margin	18.9		%	23.2		%			NM
Effective tax rate	18.8		%	17.9		%			90 bps

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


	Percentage Change
LRB	0.3	%
K-Cup pods	(3.9)
Brewers	(17.0)

Table of Contents

Net Sales. Net sales increased $510 million, or 7.7%, to $7,142 million for the first six months of 2023 compared to $6,632 million in the prior year period. This performance reflected favorable net price realization across all segments totaling 9.0% and favorable FX translation impacts of 0.3%, slightly offset by unfavorable volume/mix of 1.6%.

Gross Profit. Gross profit increased $359 million, or 10.5%, to $3,785 million for the first six months of 2023 compared to $3,426 million in the prior year period. This performance primarily reflected the benefits of net sales growth, productivity and a favorable change in unrealized commodity mark-to-market activity, partially offset by broad-based inflation. Gross margin increased 130 bps versus the year ago period to 53.0%.

Selling, General and Administrative Expenses. SG&A expenses increased $215 million, or 9.7%, to $2,437 million for the first six months of 2023 compared to $2,222 million in the prior year period. The increase was driven by broad-based inflation, higher marketing expense, an unfavorable comparison to the stock award forfeiture accounting policy change in the prior year period of $40 million, and increases in other operating costs, partially offset by the favorable comparison to restructuring and integration expenses in the prior year period.

Gain on Litigation Settlement. Gain on litigation settlement reflected the portion of the settlement payment from BodyArmor which was allocated to the gain on the full settlement of the existing claims against BodyArmor in the first quarter of 2022.

Other Operating Income, net. Other operating income, net decreased $30 million for the first six months of 2023 compared to the prior year period, primarily driven by a $32 million reduction in year-over-year asset sale-leaseback activity relating to our strategic asset investment program.

Income from Operations. Income from operations decreased $185 million, or 12.0%, to $1,353 million for the first six months of 2023 compared to $1,538 million in the prior year period, primarily driven by unfavorable comparison to the gain on the litigation settlement and on the reduction in asset sale-leaseback activity. Other factors include higher SG&A expenses, partially offset by increased gross profit.

Interest Expense. Interest expense decreased $168 million, or 46.3%, to $195 million for the first six months of 2023 compared to $363 million for the prior year period, primarily driven by the favorable change in unrealized mark-to-market activity of $174 million on interest rate contracts and realized gains on certain interest rate contracts, partially offset by increased use of our commercial paper facility during the current period.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt reflected a loss of $217 million in the prior year period associated with our 2022 Strategic Refinancing and our early retirement of our 2038 Notes, the 2021 364-Day Credit Agreement and the KDP Revolver.

Gain on Sale of Equity Method Investment. Gain on sale of equity method investment reflected the portion of the settlement payment from BodyArmor in the first quarter of 2022 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.

Impairment of Investments and Note Receivable. Impairment on investments and note receivable reflected a non-cash impairment charge of $12 million in the first six months of 2022 associated with the wind-down of Bedford.

Other Non-operating (Income) Expense, net. Other (income) expense, net reflected a favorable change of $54 million from the prior year period, driven by gains on the Company’s investments in equity securities, primarily led by Nutrabolt’s preferred dividend and mark-to-market on our Vita Coco investment.

Effective Tax Rate. The effective tax rate increased 90 bps to 18.8% for the first six months of 2023, compared to 17.9% in the prior year period, as the benefit from our incremental income in low tax jurisdictions and the immaterial non-cash true-up during the second quarter of 2023 was more than offset by the unfavorable comparison to the benefit from the revaluation of state deferred tax liabilities due to state legislative changes in the prior year period. Refer to Note 11 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Net Income Attributable to KDP. Net income attributable to KDP increased $167 million, or 20.8%, to $970 million for the first six months of 2023 as compared to $803 million in the prior year period, primarily driven by the favorable comparison to the loss on extinguishment of debt in the prior year, reduced interest expense, and gains on our investments in equity securities, partially offset by lower income from operations, the unfavorable comparison to the gain in the prior year period for the sale of our equity method investment in BodyArmor, and the increase in our effective tax rate.

Diluted EPS. Diluted EPS increased 23.2% to $0.69 per diluted share as compared to $0.56 in the prior year period.

Table of Contents

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 2023 and 2022, 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	2023		2022
U.S. Refreshment Beverages	$	4,337	$	3,865
U.S. Coffee	1,901		1,972
International	904		795
Total net sales	$	7,142	$	6,632

Income from operations
U.S. Refreshment Beverages	$	1,119	$	1,232
U.S. Coffee	482		550
International	192		162
Unallocated corporate costs	(440)		(406)
Total income from operations	$	1,353	$	1,538

U.S. REFRESHMENT BEVERAGES

The following table provides selected information about our U.S. Refreshment Beverages segment's results:


	First Six Months						Dollar Change		Percentage Change
(in millions)	2023			2022
Net sales	$	4,337		$	3,865		$	472	12.2	%
Income from operations	1,119			1,232			(113)		(9.2)
Operating margin	25.8		%	31.9		%			NM

Sales Volume. Sales volumes for the first six months of 2023 were relatively flat compared to the prior year period. Growth in Dr Pepper, driven by our Strawberries & Cream innovation, and C4 Energy as a result of our sales and distribution partnership, was fully offset by softness in our still portfolio.

Net Sales. Net sales increased 12.2% to $4,337 million in the first six months of 2023, compared to $3,865 million in the prior year period, driven by favorable net price realization of 12.2%.

Income from Operations. Income from operations decreased $113 million, or 9.2%, to $1,119 million for the first six months of 2023 compared to $1,232 million for the prior year period, primarily driven by the unfavorable comparison to the gains on the settlement of litigation with BodyArmor of $271 million and a reduction in year-over-year asset sale-leaseback activity of $32 million for our strategic asset investment program. Other drivers included the benefits of net sales growth and productivity, partially offset by broad-based inflation, higher marketing expense, and increases in other operating costs.

Table of Contents

U.S. COFFEE

The following table provides selected information about our U.S. Coffee segment's results:


	First Six Months						Dollar Change		Percentage Change
(in millions)	2023			2022
Net sales	$	1,901		$	1,972		$	(71)	(3.6)	%
Income from operations	482			550			(68)		(12.4)
Operating margin	25.4		%	27.9		%			(250) bps

Sales Volume. K-Cup pod volume decreased 4.8% for the first six months of 2023 compared to the prior year period, reflecting at-home coffee category trends, which continued to be impacted by greater consumer mobility versus the prior year period. Brewer volume decreased 18.6% in the first six months of 2023, driven by category softness in small appliances and retailer inventory shifts.

Net Sales. Net sales decreased 3.6% to $1,901 million for the first six months of 2023 compared to $1,972 million in the prior year period, driven by volume/mix declines of 6.9% partially offset by favorable net price realization of 3.3%.

Income from Operations. Income from operations decreased $68 million, or 12.4%, to $482 million for the first six months of 2023, compared to $550 million in the prior year period, as a result of broad-based inflation, declines in volume/mix, higher marketing expense and increases in other operating costs. These decreases were partially offset by the benefits of pricing actions and productivity. Operating margin declined 250 bps versus the year ago period to 25.4%.

INTERNATIONAL

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


	First Six Months						Dollar Change		Percentage Change
(in millions)	2023			2022
Net sales	$	904		$	795		$	109	13.7	%
Income from operations	192			162			30		18.5
Operating margin	21.2		%	20.4		%			80 bps

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


	Percentage Change
LRB	3.2	%
K-Cup pods	3.8
Brewers	(0.5)

Net Sales. Net sales increased 13.7% to $904 million in the first six months of 2023, compared to $795 million in the prior year period, reflecting higher net price realization of 7.4%, volume/mix growth of 3.9%, and favorable FX translation effects of 2.4%.

Income from Operations. Income from operations increased $30 million, or 18.5%, to $192 million for the first six months of 2023 compared to $162 million in the prior year period. This performance reflected the benefits of net sales growth, productivity, and favorable unrealized mark-to-market activity compared to the prior year period, partially offset by broad-based inflation, FX translation impacts in cost of sales and SG&A, higher logistics costs associated with higher volumes and increased marketing expense. Operating margin increased 80 bps versus the year ago period to 21.2%.

Table of Contents

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 2023 and 2022, 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, as well as the unrealized mark-to-market impact of our Vita Coco investment; (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 2023, the other certain items excluded for comparison purposes include (i) productivity expenses and (ii) costs related to significant non-routine legal matters, specifically the antitrust litigation. Additionally, the non-cash changes in deferred tax liabilities related to goodwill and other intangible assets during the second quarter of 2023 included an immaterial non-cash true-up of the valuation of foreign deferred tax liabilities related to a prior period.

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, specifically the antitrust litigation; (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, which were 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; (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); and (x) foundational projects, which are transformative and non-recurring in nature.

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 2023 and 2022, 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.

Table of Contents

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 2023
Reported	$	1,748	$	2,041	53.9	%	$	1,272	$	—	$	769	20.3	%
Items Affecting Comparability:
Mark to market	(9)		9				5		—		4
Amortization of intangibles	—		—				(35)		—		35


Stock compensation	—		—				(4)		—		4

Productivity	(26)		26				(32)		—		58



Non-routine legal matters	—		—				(3)		—		3








Adjusted	$	1,713	$	2,076	54.8	%	$	1,203	$	—	$	873	23.0	%
Impact of foreign currency					(0.1)	%							—	%
Constant currency adjusted					54.7	%							23.0	%

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	%

Refer to page 42 for reconciliations of reported net sales to constant currency net sales and adjusted income from operations to constant currency adjusted income from operations.

Table of Contents

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 (income) expense, net		Income before provision for income taxes		Provision (benefit) for income taxes		Effective tax rate		Net income attributable to KDP			Diluted earnings per share
For the Second Quarter of 2023
Reported	$	172		$	—	$	—	$	(16)	$	613	$	110	17.9	%	$	503		$	0.36
Items Affecting Comparability:
Mark to market	(53)			—		—		9		48		15				33			0.02
Amortization of intangibles	—			—		—		—		35		6				29			0.02
Amortization of deferred financing costs	(1)			—		—		—		1		—				1			—
Amortization of fair value debt adjustment	(5)			—		—		—		5		1				4			—
Stock compensation	—			—		—		—		4		1				3			—

Productivity	—			—		—		—		58		12				46			0.03



Non-routine legal matters	—			—		—		—		3		1				2			—







Change in deferred tax liabilities related to goodwill and other intangible assets	—			—		—		—		—		25				(25)			(0.02)
Adjusted	$	113		$	—	$	—	$	(7)	$	767	$	171	22.3	%	$	596		$	0.42
Impact of foreign currency														(0.2)	%
Constant currency adjusted														22.1	%

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 of 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

Change - adjusted	5.6		%													7.6		%	7.7		%
Impact of foreign currency	—		%													(0.6)		%	—		%
Change - constant currency adjusted	5.6		%													7.0		%	7.7		%

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

Table of Contents

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 2023:
Income from operations
U.S. Refreshment Beverages	$	629	$	17	$	646
U.S. Coffee	250		42		292
International	112		4		116
Unallocated corporate costs	(222)		41		(181)
Total income from operations	$	769	$	104	$	873

For the second quarter of 2022:
Income from operations
U.S. Refreshment Beverages	$	528	$	19	$	547
U.S. Coffee	295		47		342
International	98		6		104
Unallocated corporate costs	(349)		188		(161)
Total income from operations	$	572	$	260	$	832


	Reported		Impact of Foreign Currency		Constant Currency
For the second quarter of 2023:
Net sales
U.S. Refreshment Beverages	11.8	%	—	%	11.8	%
U.S. Coffee	(5.7)		—		(5.7)
International	10.9		(3.9)		7.0
Total net sales	6.6		(0.5)		6.1


	Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the second quarter of 2023:
Income from operations
U.S. Refreshment Beverages	18.1	%	—	%	18.1	%
U.S. Coffee	(14.6)		—		(14.6)
International	11.5		(3.8)		7.7
Total income from operations	4.9		(0.5)		4.4


	Reported		Items Affecting Comparability		Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the second quarter of 2023:
Operating margin
U.S. Refreshment Beverages	27.0	%	0.7	%	27.7	%	—	%	27.7	%
U.S. Coffee	25.8		4.3		30.1		—		30.1
International	22.9		0.8		23.7		—		23.7
Total operating margin	20.3		2.7		23.0		—		23.0

Table of Contents

CONSTANT CURRENCY ADJUSTED RESULTS OF OPERATIONS

Second Quarter of 2023 Compared to Second Quarter of 2022

The following discussion of our results for the second quarter of 2023 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 second quarter of 2023 compared to the prior year period, driven by favorable net price realization of 8.2%, partially offset by decreased volume/mix of 2.1%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations increased 4.4% compared to the prior year period. This increase primarily resulted from the benefits of strong net sales growth and productivity, partially offset by the impacts of broad-based inflation, higher marketing expense, and increases in other operating costs.

Constant Currency Adjusted Interest Expense. Constant currency adjusted interest expense increased 5.6% compared to the prior year period, primarily driven by increased use of our commercial paper facility in the current period, partially offset by realized gains on certain interest rate contracts during the current period.

Constant Currency Adjusted Effective Tax Rate. The constant currency adjusted effective tax rate was relatively flat, with a rate of 22.1% for the second quarter of 2023 compared to 22.5% for the prior year period.

Constant Currency Adjusted Net Income Attributable to KDP. Constant currency adjusted net income attributable to KDP increased 7.0% compared to the prior year period, driven primarily by the increase in constant currency adjusted income from operations, the decrease in our effective tax rate and gains from our investments in equity securities, partially offset by increased constant currency adjusted interest expense.

Constant Currency Adjusted Diluted EPS*.* Constant currency adjusted diluted EPS increased 7.7% in the current period.

Results of Operations by Segment

U.S. REFRESHMENT BEVERAGES

Constant Currency Net Sales. Constant currency net sales increased 11.8%, reflecting higher net price realization of 12.0%, partially offset by unfavorable volume/mix of 0.2%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the second quarter of 2023 increased 18.1% compared to the prior year period, primarily driven by the benefits of strong net sales growth and productivity, partially offset by broad-based inflation and increased marketing expenses.

U.S. COFFEE

Constant Currency Net Sales. Constant currency net sales decreased 5.7%, reflecting unfavorable volume/mix of 7.3%, partially offset by favorable net price realization of 1.6%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the second quarter of 2023 decreased 14.6% compared to the prior year period, reflecting broad-based inflation, unfavorable volume/mix, and increased marketing expenses, partially offset by the benefits of productivity and pricing actions.

INTERNATIONAL

Constant Currency Net Sales. Constant currency net sales increased 7.0%, reflecting higher net price realization of 6.1% and volume/mix growth of 0.9%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the second quarter of 2023 increased 7.7% compared to the prior year period. This performance reflected the benefits of strong net sales growth and productivity, partially offset by broad-based inflation and increased marketing expense.

Table of Contents

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 2023
Reported	$	3,357	$	3,785	53.0	%	$	2,437	$	—	$	(5)	$	1,353	18.9	%
Items Affecting Comparability:
Mark to market	5		(5)				(7)		—		—		2
Amortization of intangibles	—		—				(69)		—		—		69


Stock compensation	—		—				(9)		—		—		9

Productivity	(64)		64				(72)		—		—		136



Non-routine legal matters	—		—				(3)		—		—		3








Adjusted	$	3,298	$	3,844	53.8	%	$	2,277	$	—	$	(5)	$	1,572	22.0	%
Impact of foreign currency					—	%									—	%
Constant currency adjusted					53.8	%									22.0	%

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	%

Refer to page 46 for reconciliations of reported net sales to constant currency net sales and adjusted income from operations to constant currency adjusted income from operations.

Table of Contents

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 (benefit) for income taxes		Effective tax rate		Net income attributable to KDP			Diluted earnings per share
For the First Six Months of 2023
Reported	$	195		$	—	$	—	$	—	$	(36)	$	1,194	$	224	18.8	%	$	970		$	0.69
Items Affecting Comparability:
Mark to market	40			—		—		—		18		(56)		(14)				(42)			(0.03)
Amortization of intangibles	—			—		—		—		—		69		16				53			0.04
Amortization of deferred financing costs	(1)			—		—		—		—		1		—				1			—
Amortization of fair value debt adjustment	(9)			—		—		—		—		9		2				7			0.01
Stock compensation	—			—		—		—		—		9		3				6			—

Productivity	—			—		—		—		—		136		33				103			0.07



Non-routine legal matters	—			—		—		—		—		3		1				2			—







Change in deferred tax liabilities related to goodwill and other intangible assets	—			—		—		—		—		—		25				(25)			(0.02)
Adjusted	$	225		$	—	$	—	$	—	$	(18)	$	1,365	$	290	21.2	%	$	1,075		$	0.76
Impact of foreign currency																0.1	%
Constant currency adjusted																21.3	%


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 of 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

Change - adjusted	3.2		%															4.6		%	5.6		%
Impact of foreign currency	—		%															(0.5)		%	—		%
Change - constant currency adjusted	3.2		%															4.1		%	5.6		%

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

Table of Contents

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 2023:
Income from operations
U.S. Refreshment Beverages	$	1,119	$	35	$	1,154
U.S. Coffee	482		95		577
International	192		8		200
Unallocated corporate costs	(440)		81		(359)
Total income from operations	$	1,353	$	219	$	1,572

For the first six months of 2022:
Income from operations
U.S. Refreshment Beverages	$	1,232	$	(230)	$	1,002
U.S. Coffee	550		93		643
International	162		13		175
Unallocated corporate costs	(406)		150		(256)
Total income from operations	$	1,538	$	26	$	1,564


	Reported		Impact of Foreign Currency		Constant Currency
For the first six months of 2023:
Net sales
U.S. Refreshment Beverages	12.2	%	—	%	12.2	%
U.S. Coffee	(3.6)		—		(3.6)
International	13.7		(2.4)		11.3
Total net sales	7.7		(0.3)		7.4


	Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the first six months of 2023:
Income from operations
U.S. Refreshment Beverages	15.2	%	—	%	15.2	%
U.S. Coffee	(10.3)		—		(10.3)
International	14.3		(2.3)		12.0
Total income from operations	0.5		(0.2)		0.3


	Reported		Items Affecting Comparability		Adjusted		Impact of Foreign Currency		Constant Currency Adjusted
For the first six months of 2023:
Operating margin
U.S. Refreshment Beverages	25.8	%	0.8	%	26.6	%	—	%	26.6	%
U.S. Coffee	25.4		5.0		30.4		—		30.4
International	21.2		0.9		22.1		—		22.1
Total operating margin	18.9		3.1		22.0		—		22.0

Table of Contents

CONSTANT CURRENCY ADJUSTED RESULTS OF OPERATIONS

First Six Months of 2023 Compared to First Six Months of 2022

The following discussion of our results for the first six months of 2023 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 7.4% in the first six months of 2023 compared to the prior year period, driven by favorable net price realization of 9.0%, partially offset by lower volume/mix of 1.6%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations increased 0.3% compared to the prior year period. This increase primarily resulted from the benefits of strong net sales growth and productivity, partially offset by the impacts of broad-based inflation, higher marketing expense, increases in other operating costs, and the unfavorable comparison of a number of prior year benefits. Such prior year benefits included the change in our accounting policy related to the recognition of forfeitures for our stock awards, the asset sale-leaseback activity related to our strategic asset investment program, and the portion of the settlement payment from BodyArmor for the reimbursement of attorney fees.

Constant Currency Adjusted Interest Expense. Constant currency adjusted interest expense increased 3.2% compared to the prior year period, primarily driven by increased use of our commercial paper facility in the current year period, partially offset by net realized gains on certain interest rate contracts and reduced interest on senior unsecured notes as a result of our 2022 Strategic Refinancing.

Constant Currency Adjusted Effective Tax Rate. The constant currency adjusted effective tax rate was 21.3% for the first six months of 2023 compared to 22.7% for the prior year period, primarily driven by the tax benefit received from favorable adjustments upon foreign tax return filing and excess tax deductions that were generated from the vesting of RSUs during the first quarter of 2023.

Constant Currency Adjusted Net Income Attributable to KDP. Constant currency adjusted net income attributable to KDP increased 4.1% compared to the prior year period, as the decrease in our effective tax rate and increased constant currency adjusted income from operations were partially offset by increased constant currency adjusted interest expense.

Constant Currency Adjusted Diluted EPS. Constant currency adjusted diluted EPS increased approximately 5.6% over the prior year period, driven by lower weighted average shares outstanding compared to the prior year period and the increase in constant currency adjusted net income attributable to KDP.

Results of Operations by Segment

U.S. REFRESHMENT BEVERAGES

Constant Currency Net Sales. Constant currency net sales increased 12.2%, reflecting favorable net price realization of 12.2% and flat volume/mix.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations for the first six months of 2023 increased 15.2% compared to the prior year period, driven by the benefits of net sales growth and productivity, partially offset by broad-based inflation, higher marketing expense, the unfavorable comparison to asset sale-leaseback activity relating to our strategic asset initiative in the prior year period, and increases in other operating costs.

U.S. COFFEE

Constant Currency Net Sales. Constant currency net sales decreased 3.6%, driven by unfavorable volume/mix of 6.9%, partially offset by higher net price realization of 3.3%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations decreased 10.3% compared to the prior year period, as a result of inflation in input costs, declines in volume/mix and increases in other operating costs. These decreases were partially offset by the benefits of pricing actions and productivity.

Table of Contents

INTERNATIONAL

Constant Currency Net Sales. Constant currency net sales increased 11.3%, driven by favorable net price realization of 7.4% and volume/mix growth of 3.9%.

Constant Currency Adjusted Income from Operations. Constant currency adjusted income from operations increased 12.0% compared to the prior year period, driven by the benefits of net sales growth and productivity, partially offset by broad-based inflation, higher costs associated with higher volumes and increased 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 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 2023 and 2022:

580

Cash, cash equivalents, restricted cash and restricted cash equivalents decreased $257 million from December 31, 2022 to June 30, 2023, primarily driven by the reduction in cash provided by operating activities, which was largely impacted by the reduction in accounts payable during the six months ended June 30, 2023, as well as dividend payments and share repurchases, partially offset by net issuances of commercial paper.

Cash generated by our foreign operations is generally repatriated to the U.S. periodically as working capital funding requirements, where allowed. We do not expect restrictions or taxes on repatriation of cash held outside the U.S. to have a material effect on our overall business, liquidity, financial condition or results of operations for the foreseeable future.

Table of Contents

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 decreased $887 million for the first six months of 2023, as compared to the first six months of 2022, driven by the decrease in net income adjusted for non-cash items, led by the unfavorable year-over-year impact of the $349 million gain from BodyArmor in the first six months of 2022 and a reduction in our cash conversion cycle.

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,
	2023	2022
DIO	73	61
DSO	33	36
DPO	143	170
Cash conversion cycle	(37)	(73)

Our cash conversion cycle increased 36 days to approximately (37) days as of June 30, 2023 as compared to (73) days as of June 30, 2022. The increase in DIO reflects our efforts to restore inventory to meet customer service levels and the build up of our inventory of C4, and the decrease in DPO was driven by the reduction of payment terms for certain suppliers.

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 enter 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 with the financial institutions. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. Refer to Note 13 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information on our obligations to participating suppliers.

Table of Contents

Sources of Liquidity - Financing

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 19, 2022, 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. We received $7 million and $77 million of net cash proceeds from our strategic asset investment program during the first six months of 2023 and 2022, respectively, which are included in Proceeds from sales of property, plant and equipment in the unaudited Condensed Consolidated Statements of Cash Flows.

Debt Ratings

Our credit ratings are as follows:


Rating Agency	Long-Term Debt Rating	Commercial Paper Rating	Outlook
Moody's	Baa1	P-2	Stable
S&P	BBB	A-2	Stable

These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.

As of June 30, 2023, we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.

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 further reduce our leverage ratio. We also plan to invest in inorganic value creation through mergers or acquisitions, which may include portfolio expansion, distribution scale, geographic expansion, and new capabilities. In addition, we have repurchased shares of our outstanding common stock, as described below.

Table of Contents

Regular Quarterly Dividends

For the first six months of 2023, we have declared total dividends of $0.40 per share.

Repurchases of Common Stock

Our Board authorized a four-year share repurchase program, ending December 31, 2025, of up to $4 billion of our outstanding common stock, potentially enabling us to return value to shareholders. We repurchased and retired $457 million of common stock during the first six months of 2023. As of June 30, 2023, $3,164 million remained available for repurchase under the authorized share repurchase program.

Capital Expenditures

We are investing in state-of-the-art manufacturing and warehousing facilities, including expansive investments in facilities in Spartanburg, South Carolina; and Allentown, Pennsylvania, in 2023 and 2022, in order to optimize our supply chain network.

Purchases of property, plant and equipment were $149 million and $186 million for the first six months of 2023 and 2022, respectively.

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 2023 and 2022 primarily related to the manufacturing and warehousing facilities discussed above. Capital expenditures included in accounts payable and accrued expenses were $214 million and $138 million for the first six months of 2023 and 2022, respectively, which primarily related to these investments.

Investments in Unconsolidated Affiliates

From time to time, we expect to invest in beverage startup companies or in brand ownership companies to grow our presence in certain product categories, or enter into various licensing and distribution agreements to expand our product portfolio. Our investments in beverage startup companies generally involve acquiring a minority interest in equity securities of a company, in certain cases with a protected path to ownership at our future option.

Purchases of Intangible Assets

We have invested in the expansion of our DSD network through transactions with strategic independent bottlers or third-party brand ownership companies to ensure competitive distribution scale. From time to time, we additionally acquire brand ownership companies to expand our portfolio. 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 $55 million and $10 million for the first six months of 2023 and 2022, respectively.

Uncertainties and Trends Affecting Liquidity

Disruptions in financial and credit markets, including those caused by inflation, global economic uncertainty and rising interest rates, 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.

Table of Contents

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., 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 2023
Net sales	$	4,497

Income from operations	531
Net income attributable to KDP	970


(in millions)	June 30, 2023		December 31, 2022
Current assets	$	1,773	$	1,712
Non-current assets	46,145		45,721
Total assets(1)	$	47,918	$	47,433

Current liabilities	$	6,029	$	4,797
Non-current liabilities	16,574		17,463
Total liabilities(2)	$	22,603	$	22,260

(1)Includes $4 million and $3 million of intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of June 30, 2023 and December 31, 2022, respectively.

(2)Includes $1,374 million and $1,186 million of intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of June 30, 2023 and December 31, 2022, respectively.

Previous: Item 1. Financial Statements (Unaudited) · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk