Item 1. Financial Statements (Unaudited)

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Item 1. Financial Statements (Unaudited)

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Third Quarter				First Nine Months
(in millions, except per share data)	2023		2022		2023		2022
Net sales	$	3,805	$	3,622	$	10,947	$	10,254
Cost of sales	1,694		1,721		5,051		4,927
Gross profit	2,111		1,901		5,896		5,327
Selling, general and administrative expenses	1,217		1,196		3,654		3,418
Impairment of intangible assets	2		311		2		311
Gain on litigation settlement	—		—		—		(299)
Other operating income, net	(4)		—		(9)		(35)
Income from operations	896		394		2,249		1,932
Interest expense	237		207		432		570
Loss on early extinguishment of debt	—		—		—		217
Gain on sale of equity method investment	—		—		—		(50)
Impairment of investments and note receivable	—		—		—		12
Other (income) expense, net	(5)		4		(41)		22
Income before provision for income taxes	664		183		1,858		1,161
Provision for income taxes	146		4		370		179
Net income including non-controlling interest	518		179		1,488		982
Less: Net loss attributable to non-controlling interest	—		(1)		—		(1)
Net income attributable to KDP	$	518	$	180	$	1,488	$	983

Earnings per common share:
Basic	$	0.37	$	0.13	$	1.06	$	0.69
Diluted	0.37		0.13		1.05		0.69
Weighted average common shares outstanding:
Basic	1,397.4		1,416.1		1,401.3		1,417.3
Diluted	1,406.2		1,427.2		1,410.8		1,428.8

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Third Quarter				First Nine Months
(in millions)	2023		2022		2023		2022
Net income including non-controlling interest	$	518	$	179	$	1,488	$	982
Other comprehensive (loss) income
Foreign currency translation adjustments	(135)		(249)		132		(283)
Net change in pension and post-retirement liability, net of tax of $0, $0, $0 and $0, respectively	—		—		—		(3)
Net change in cash flow hedges, net of tax of $0, $(12), $24 and $(98), respectively	9		35		(90)		303
Total other comprehensive (loss) income	(126)		(214)		42		17
Comprehensive income (loss) including non-controlling interest	392		(35)		1,530		999
Less: Comprehensive income attributable to non-controlling interest	—		—		—		—
Comprehensive income (loss) attributable to KDP	$	392	$	(35)	$	1,530	$	999

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30,		December 31,
(in millions, except share and per share data)	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	260	$	535

Trade accounts receivable, net	1,279		1,484
Inventories	1,348		1,314
Prepaid expenses and other current assets	519		471
Total current assets	3,406		3,804
Property, plant and equipment, net	2,527		2,491
Investments in unconsolidated affiliates	1,336		1,000
Goodwill	20,122		20,072
Other intangible assets, net	23,223		23,183
Other non-current assets	1,117		1,252
Deferred tax assets	32		35
Total assets	$	51,763	$	51,837
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	4,090	$	5,206
Accrued expenses	1,123		1,153
Structured payables	122		137
Short-term borrowings and current portion of long-term obligations	2,798		895
Other current liabilities	681		685
Total current liabilities	8,814		8,076
Long-term obligations	9,940		11,072
Deferred tax liabilities	5,714		5,739
Other non-current liabilities	1,931		1,825
Total liabilities	26,399		26,712
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued	—		—
Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,398,322,033 and 1,408,394,293 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	14		14
Additional paid-in capital	21,014		21,444
Retained earnings	4,165		3,539
Accumulated other comprehensive income	171		129
Total stockholders' equity	25,364		25,126
Non-controlling interest	—		(1)
Total equity	25,364		25,125
Total liabilities and equity	$	51,763	$	51,837

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	First Nine Months
(in millions)	2023		2022
Operating activities:
Net income attributable to KDP	$	1,488	$	983
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	299		301
Amortization of intangibles	103		100
Other amortization expense	136		129
Provision for sales returns	42		38
Deferred income taxes	(22)		(281)
Employee stock-based compensation expense	86		43
Loss on early extinguishment of debt	—		217

Gain on sale of equity method investment	—		(50)
Gain on disposal of property, plant and equipment	(3)		(38)
Unrealized (gain) loss on foreign currency	(4)		22
Unrealized loss on derivatives	44		387
Settlements of interest rate contracts	54		125
Equity in (earnings) loss of unconsolidated affiliates	(24)		6
Impairment of intangible assets	2		311
Impairment on investments and note receivable of unconsolidated affiliate	—		12
Other, net	(5)		22
Changes in assets and liabilities:
Trade accounts receivable	170		(372)
Inventories	(31)		(552)
Income taxes receivable and payables, net	(39)		(106)
Other current and non-current assets	(159)		(380)
Accounts payable and accrued expenses	(1,155)		1,014
Other current and non-current liabilities	50		167
Net change in operating assets and liabilities	(1,164)		(229)
Net cash provided by operating activities	1,032		2,098
Investing activities:


Proceeds from sale of investment in unconsolidated affiliates	—		50
Purchases of property, plant and equipment	(271)		(260)
Proceeds from sales of property, plant and equipment	9		79
Purchases of intangibles	(55)		(19)
Issuance of related party note receivable	—		(18)
Investments in unconsolidated affiliates	(308)		(48)

Other, net	2		3
Net cash (used in) provided by investing activities	$	(623)	$	(213)

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

**(**UNAUDITED, CONTINUED)


	First Nine Months
(in millions)	2023		2022
Financing activities:
Proceeds from issuance of Notes	$	—	$	3,000
Repayments of Notes	—		(3,365)
Net issuance (repayment) of commercial paper	750		(149)






Proceeds from structured payables	91		114
Repayments of structured payables	(105)		(111)
Cash dividends paid	(842)		(796)
Repurchases of common stock	(457)		(88)

Tax withholdings related to net share settlements	(57)		(10)
Payments on finance leases	(74)		(65)
Other, net	(3)		(45)
Net cash used in financing activities	(697)		(1,515)
Cash, cash equivalents, and restricted cash and cash equivalents:
Net change from operating, investing and financing activities	(288)		370
Effect of exchange rate changes	13		(10)
Beginning balance	535		568
Ending balance	$	260	$	928

Supplemental cash flow disclosures of non-cash investing activities:
Capital expenditures included in accounts payable and accrued expenses	$	196	$	179
Transaction costs included in accounts payable and accrued expenses	13		—
Non-cash conversion of note receivable to investment in unconsolidated affiliate	—		6
Non-cash purchases of intangibles	—		22
Supplemental cash flow disclosures of non-cash financing activities:
Dividends declared but not yet paid	300		284

Supplemental cash flow disclosures:
Cash paid for interest	255		236
Cash paid for income taxes	413		566

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

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KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)


	Common Stock Issued			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders' Equity		Non-controlling Interest		Total Equity
(in millions, except per share data)	Shares	Amount
Balance as of January 1, 2023	1,408.4	$	14	$	21,444	$	3,539	$	129	$	25,126	$	(1)	$	25,125
Net income	—	—		—		467		—		467		—		467
Other comprehensive income	—	—		—		—		26		26		—		26
Dividends declared, $0.20 per share	—	—		—		(282)		—		(282)		—		(282)

Repurchases of common stock, inclusive of excise tax obligation	(6.6)	—		(232)		—		—		(232)		—		(232)
Shares issued under employee stock-based compensation plans and other	1.9	—		—		—		—		—		—		—
Tax withholdings related to net share settlements	—	—		(31)		—		—		(31)		—		(31)
Stock-based compensation and stock options exercised	—	—		29		—		—		29		—		29
Balance as of March 31, 2023	1,403.7	14		21,210		3,724		155		25,103		(1)		25,102
Net income	—	—		—		503		—		503		—		503
Other comprehensive income	—	—		—		—		142		142		—		142
Dividends declared, $0.20 per share	—	—		—		(279)		—		(279)		—		(279)

Repurchases of common stock, inclusive of excise tax obligation	(7.0)	—		(229)		—		—		(229)		—		(229)
Shares issued under employee stock-based compensation plans and other	0.2	—		—		—		—		—		—		—
Tax withholdings related to net share settlements	—	—		(1)		—		—		(1)		—		(1)
Stock-based compensation and stock options exercised	—	—		29		—		—		29		—		29
Balance as of June 30, 2023	1,396.9	$	14	$	21,009	$	3,948	$	297	$	25,268	$	(1)	$	25,267
Net income	—	—		—		518		—		518		—		518
Other comprehensive loss	—	—		—		—		(126)		(126)		—		(126)
Dividends declared, $0.215 per share	—	—		—		(300)		—		(300)		—		(300)
Repurchases of common stock, inclusive of excise tax obligation	—	—		1		—		—		1		—		1
Shares issued under employee stock-based compensation plans and other	1.4	—		—		—		—		—		—		—
Tax withholdings related to net share settlements	—	—		(25)		—		—		(25)		—		(25)
Stock-based compensation and stock options exercised	—	—		29		—		—		29		—		29
Non-controlling interest surrender of shares	—	—		—		(1)		—		(1)		1		—
Balance as of September 30, 2023	1,398.3	$	14	$	21,014	$	4,165	$	171	$	25,364	$	—	$	25,364

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	Common Stock Issued			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity		Non-controlling Interest		Total Equity
(in millions, except per share data)	Shares	Amount
Balance as of January 1, 2022	1,418.1	$	14	$	21,785	$	3,199	$	(26)	$	24,972	$	—	$	24,972

Net income	—	—		—		585		—		585		—		585
Other comprehensive income	—	—		—		—		241		241				241
Dividends declared, $0.1875 per share	—	—		—		(266)		—		(266)		—		(266)


Shares issued under employee stock-based compensation plans and other	0.4	—		—		—		—		—		—		—
Tax withholdings related to net share settlements	—	—		(5)		—		—		(5)		—		(5)
Stock-based compensation and stock options exercised	—	—		(16)		—		—		(16)		—		(16)
Balance as of March 31, 2022	1,418.5	14		21,764		3,518		215		25,511		—		25,511
Net income	—	—		—		218		—		218		—		218
Other comprehensive loss	—	—		—		—		(10)		(10)		—		(10)
Dividends declared, $0.1875 per share	—	—		—		(265)		—		(265)		—		(265)
Repurchases of common stock	(2.5)	—		(88)		—		—		(88)		—		(88)

Shares issued under employee stock-based compensation plans and other	0.1	—		—		—		—		—		—		—
Tax withholdings related to net share settlements	—	—		(3)		—		—		(3)		—		(3)
Stock-based compensation and stock options exercised	—	—		28		—		—		28		—		28
Balance as of June 30, 2022	1,416.1	14		21,701		3,471		205		25,391		—		25,391
Net income	—	—		—		180		—		180		(1)		179
Other comprehensive loss	—	—		—		—		(214)		(214)		—		(214)
Dividends declared, $0.20 per share	—	—		—		(284)		—		(284)		—		(284)


Shares issued under employee stock-based compensation plans and other	0.2	—		—		—		—		—		—		—
Tax withholdings related to net share settlements	—	—		(2)		—		—		(2)		—		(2)
Stock-based compensation and stock options exercised	—	—		31		—		—		31		—		31
Balance as of September 30, 2022	1,416.3	$	14	$	21,730	$	3,367	$	(9)	$	25,102	$	(1)	$	25,101

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

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. General

ORGANIZATION

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

This Quarterly Report on Form 10-Q refers to some of KDP's owned or licensed trademarks, trade names and service marks, which are referred to as the Company's brands. All of the product names included herein are either KDP registered trademarks or those of the Company's licensors.

BASIS OF PRESENTATION

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

References to the "third quarter" indicate the Company's quarterly periods ended September 30, 2023 and 2022.

USE OF ESTIMATES

The process of preparing KDP's unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect reported amounts. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. These estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates.

REPORTABLE SEGMENTS

As of January 1, 2023, the Company revised its segment structure to align with changes in how the Company’s Chief Operating Decision Maker manages the business, assesses performance and allocates resources. This change had no impact on the Company’s consolidated results of operations or financial position. Prior period segment results have been recast to reflect the Company’s new reportable segments. Refer to Note 6 for additional information on the Company’s reportable segments and Note 7 for the Company’s disaggregated revenue portfolio for each reportable segment. The change in segment structure also resulted in a change to the Company’s reporting units. Refer to Note 3 for additional information on the Company’s reporting units.

RECLASSIFICATIONS

The Company reclassified amounts in the Financing Activities section of the unaudited condensed consolidated Statement of Cash Flows for the first nine months of 2022 in order to conform to current year presentation, as maturities for the Company’s commercial paper program in both periods are 90 days or less.


(in millions)	Prior Presentation	First Nine Months of 2022
Net issuance (repayment) of commercial paper	Proceeds from issuance of commercial paper	$	500
Net issuance (repayment) of commercial paper	Repayments of commercial paper	(649)

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

RECENTLY ADOPTED ACCOUNTING STANDARDS

As of January 1, 2023, the Company adopted ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The objective of ASU 2022-04 is to require entities to disclose information about the use of supplier finance programs in connection with the purchase of goods and services. While the adoption of ASU 2022-04 did not have a material impact on the Company’s unaudited condensed consolidated financial statements, it did impact the nature of the disclosures. The disclosure previously included in the Company’s Form 10-K was specific to the amount of KDP’s outstanding payment obligations that were voluntarily elected by the supplier and sold to financial institutions as informed by the third party administrators. ASU 2022-04 instead requires disclosure of the amount of KDP’s outstanding obligations loaded into the supplier finance programs by the Company at each reporting period regardless of whether the outstanding obligation has been elected by the supplier to be sold to financial institutions. Refer to Note 13 for additional information on the Company’s obligations to participating suppliers.

2. Long-term Obligations and Borrowing Arrangements

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


(in millions)	September 30, 2023		December 31, 2022
Notes	$	11,589	$	11,568
Less: current portion of long-term obligations	(1,649)		(496)
Long-term obligations	$	9,940	$	11,072

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


(in millions)	September 30, 2023		December 31, 2022
Commercial paper notes	$	1,149	$	399
Current portion of long-term obligations	1,649		496
Short-term borrowings and current portion of long-term obligations	$	2,798	$	895

SENIOR UNSECURED NOTES

The Company's Notes consisted of the following:


(in millions, except %)
Issuance	Maturity Date	Rate	September 30, 2023		December 31, 2022
2023 Notes	December 15, 2023	3.130%	$	500	$	500
2024 Notes	March 15, 2024	0.750%	1,150		1,150
2025 Merger Notes	May 25, 2025	4.417%	529		529
2025 Notes	November 15, 2025	3.400%	500		500
2026 Notes	September 15, 2026	2.550%	400		400
2027 Notes	June 15, 2027	3.430%	500		500
2028 Merger Notes	May 25, 2028	4.597%	1,112		1,112
2029 Notes	April 15, 2029	3.950%	1,000		1,000
2030 Notes	May 1, 2030	3.200%	750		750
2031 Notes	March 15, 2031	2.250%	500		500
2032 Notes	April 15, 2032	4.050%	850		850
2038 Merger Notes	May 25, 2038	4.985%	211		211
2045 Notes	November 15, 2045	4.500%	550		550
2046 Notes	December 15, 2046	4.420%	400		400
2048 Merger Notes	May 25, 2048	5.085%	391		391
2050 Notes	May 1, 2050	3.800%	750		750
2051 Notes	March 15, 2051	3.350%	500		500
2052 Notes	April 15, 2052	4.500%	1,150		1,150
Principal amount			11,743		11,743
Adjustment from principal amount to carrying amount(1)			(154)		(175)
Carrying amount			$	11,589	$	11,568

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

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

VARIABLE-RATE BORROWING ARRANGEMENTS

Revolving Credit Agreement

The following table summarizes information about the 2022 Revolving Credit Agreement:


(in millions)		September 30, 2023				December 31, 2022
Issuance	Maturity Date	Capacity		Carrying Value		Carrying Value
2022 Revolving Credit Agreement(1)	February 23, 2027	$	4,000	$	—	$	—

(1)The 2022 Revolving Credit Agreement has $200 million letters of credit available, none of which were utilized as of September 30, 2023.

As of September 30, 2023, KDP was in compliance with its minimum interest coverage ratio relating to the 2022 Revolving Credit Agreement.

Commercial Paper Program

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


	Third Quarter						First Nine Months
(in millions, except %)	2023			2022			2023			2022
Weighted average commercial paper borrowings	$	1,495		$	—		$	1,061		$	29
Weighted average borrowing rates	5.49		%	—		%	5.31		%	0.58		%

Letter of Credit Facility

In addition to the portion of the 2022 Revolving Credit Agreement reserved for issuance of letters of credit, KDP has an incremental letter of credit facility. Under this facility, $150 million is available for the issuance of letters of credit, $68 million of which was utilized as of September 30, 2023 and $82 million of which remains available for use.

FAIR VALUE DISCLOSURES

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

The fair values of KDP's Notes are based on current market rates available to KDP and are considered Level 2 within the fair value hierarchy. The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all the Notes and related unamortized costs to be incurred at such date. The fair value of KDP's Notes was $10,242 million and $10,495 million as of September 30, 2023 and December 31, 2022, respectively.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

3. Goodwill and Other Intangible Assets

GOODWILL

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


(in millions)	U.S. Refreshment Beverages		U.S. Coffee		International		Total
Balance as of January 1, 2023	$	8,714	$	8,622	$	2,736	$	20,072
Foreign currency translation	—		—		50		50

Balance as of September 30, 2023	$	8,714	$	8,622	$	2,786	$	20,122

INTANGIBLE ASSETS OTHER THAN GOODWILL

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


(in millions)	September 30, 2023		December 31, 2022
Brands(1)	$	19,380	$	19,291
Trade names	2,478		2,480
Contractual arrangements	122		122
Distribution rights(2)	155		100
Total	$	22,135	$	21,993

(1)The change in brands with indefinite lives was primarily driven by foreign currency translation of $89 million during the first nine months of 2023.

(2)The Company acquired certain distribution rights during the first nine months of 2023 of approximately $55 million, primarily attributable to Nutrabolt.

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


	September 30, 2023						December 31, 2022
(in millions)	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Acquired technology	$	1,146	$	(530)	$	616	$	1,146	$	(475)	$	671
Customer relationships	636		(227)		409		638		(204)		434
Trade names	126		(111)		15		127		(101)		26
Brands	51		(24)		27		51		(19)		32
Contractual arrangements	24		(11)		13		24		(10)		14
Distribution rights	29		(21)		8		29		(16)		13

Total	$	2,012	$	(924)	$	1,088	$	2,015	$	(825)	$	1,190

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


	Third Quarter				First Nine Months
(in millions)	2023		2022		2023		2022
Amortization expense	$	34	$	33	$	103	$	100

Amortization expense of these intangible assets over the remainder of 2023 and the next five years is expected to be as follows:


	Remainder of 2023			For the Years Ending December 31,
(in millions)			2024			2025			2026			2027			2028
Expected amortization expense	$	33		$	127		$	115		$	111		$	95		$	87

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

IMPAIRMENT TESTING

KDP conducts impairment tests on goodwill and all indefinite lived intangible assets annually, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. Changes to the Company’s operating segments effective January 1, 2023, as described in Note 6, resulted in a change to the Company’s reporting units. The Company’s reporting units are as follows:


Reportable Segments						Reporting Units
U.S. Refreshment Beverages						U.S. Beverage Concentrates
						U.S. WD
						DSD
U.S. Coffee						U.S. Coffee
International						Canada Beverage Concentrates
						Canada WD
						Canada Coffee
						Latin America Beverages

Management performed a step 0 analysis of the goodwill as of the effective date of the segment change for the impacted reporting units. The Company also performed an analysis as of September 30, 2023 to ensure that there were no additional triggering events which occurred during the quarter. As a result of these analyses, management did not identify any indications that a material carrying amount of any goodwill or any intangible asset may not be recoverable.

4. Derivatives

KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and FX rates. KDP manages these risks through a variety of strategies, including the use of interest rate contracts, FX forward contracts, commodity forward, future, swap and option contracts and supplier pricing agreements. KDP does not hold or issue derivative financial instruments for trading or speculative purposes.

KDP formally designates and accounts for certain foreign exchange forward contracts and interest rate contracts that meet established accounting criteria under U.S. GAAP as cash flow hedges. For such contracts, the effective portion of the gain or loss on the derivative instruments is recorded, net of applicable taxes, in AOCI. When net income is affected by the variability of the underlying transaction, the applicable offsetting amount of the gain or loss from the derivative instrument deferred in AOCI is reclassified to net income. Cash flows from derivative instruments designated in a qualifying hedging relationship are classified in the same category as the cash flows from the hedged items. If a cash flow hedge were to cease to qualify for hedge accounting, or were terminated, the derivatives would continue to be carried on the balance sheet at fair value until settled, and hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCI would be reclassified to earnings at that time.

For derivatives that are not designated or for which the designated hedging relationship is discontinued, the gain or loss on the instrument is recognized in earnings in the period of change.

The Company has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically, the Company has not experienced material credit losses as a result of counterparty nonperformance. The Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines and monitors the market position of the programs upon execution of a hedging transaction and at least on a quarterly basis.

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INTEREST RATES

Economic Hedges

KDP is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate contracts to provide predictability in the Company's overall cost structure and to manage the balance of fixed-rate and variable-rate debt. KDP primarily enters into receive-fixed, pay-variable and receive-variable, pay-fixed swaps and swaption contracts. A natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are generally reported in interest expense in the unaudited Condensed Consolidated Statements of Income. As of September 30, 2023, economic interest rate derivative instruments have maturities ranging from December 2023 to January 2038.

Cash Flow Hedges

In order to hedge the variability in cash flows from interest rate changes associated with the Company’s planned future issuances of long-term debt, during the first quarter of 2021, the Company entered into forward starting swaps and designated them as cash flow hedges. During the first quarter of 2023, KDP terminated the remaining forward starting swaps which were designated as cash flow hedges. As the forecasted debt transaction associated with the terminated forward starting swaps was no longer considered probable, the realized gains associated with the termination were recorded in interest expense during the first quarter of 2023.

FOREIGN EXCHANGE

KDP is exposed to foreign exchange risk in its international subsidiaries or with certain counterparties in foreign jurisdictions, which may transact in currencies that are different from the functional currencies of KDP’s legal entities. Additionally, the balance sheets of each of the Company’s Canadian and Mexican businesses are subject to exposure from movements in exchange rates.

Economic Hedges

KDP holds FX forward contracts to economically manage the balance sheet exposures resulting from changes in the FX rates described above. The intent of these FX contracts is to minimize the impact of FX risk associated with balance sheet positions not in local currency. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same caption of the unaudited Condensed Consolidated Statements of Income as the associated risk. As of September 30, 2023, these FX contracts have maturities ranging from October 2023 to October 2024.

Cash Flow Hedges

KDP designates certain FX forward contracts as cash flow hedges in order to manage the exposures resulting from changes in the FX rates described above. These designated FX forward contracts relate to forecasted inventory purchases in U.S. dollars of the Canadian and Mexican businesses. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. As of September 30, 2023, these FX contracts have maturities ranging from October 2023 to December 2024.

COMMODITIES

Economic Hedges

KDP centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. The Company generally holds some combination of future, swap and option contracts that economically hedge certain of its risks. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items or as an offset to certain costs of production. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company's reportable segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations. As of September 30, 2023, these commodity contracts have maturities ranging from October 2023 to June 2025.

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(UNAUDITED, CONTINUED)

NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS

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


(in millions)	September 30, 2023		December 31, 2022
Interest rate contracts
Forward starting swaps, not designated as hedging instruments	$	1,700	$	1,000
Forward starting swaps, designated as cash flow hedges	—		500

Receive-fixed, pay-variable interest rate swaps, not designated as hedging instruments	—		1,900
Swaptions, not designated as hedging instruments	1,700		—
FX contracts
Forward contracts, not designated as hedging instruments	652		490
Forward contracts, designated as cash flow hedges	482		511
Commodity contracts, not designated as hedging instruments(1)	439		754

(1)Notional value for commodity contracts is calculated as the expected volume times strike price per unit on a gross basis.

FAIR VALUE OF DERIVATIVE INSTRUMENTS

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

Not Designated as Hedging Instruments

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


(in millions)	Balance Sheet Location	September 30, 2023		December 31, 2022
Assets:

FX contracts	Prepaid expenses and other current assets	$	6	$	8
Commodity contracts	Prepaid expenses and other current assets	22		6
Interest rate contracts	Other non-current assets	—		49
FX contracts	Other non-current assets	3		1
Commodity contracts	Other non-current assets	5		1

Liabilities:
Interest rate contracts	Other current liabilities	26		58
FX contracts	Other current liabilities	1		—
Commodity contracts	Other current liabilities	39		51
Interest rate contracts	Other non-current liabilities	299		194

Commodity contracts	Other non-current liabilities	1		1

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

Designated as Hedging Instruments

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


(in millions)	Balance Sheet Location	September 30, 2023		December 31, 2022
Assets:
FX contracts	Prepaid expenses and other current assets	$	9	$	21
FX contracts	Other non-current assets	—		1

Interest rate contracts	Other non-current assets	—		88

Liabilities:
FX contracts	Other current liabilities	11		3

IMPACT OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

The following table presents the amount of (gains) losses, net, recognized in the unaudited Condensed Consolidated Statements of Income related to derivative instruments not designated as hedging instruments under U.S. GAAP during the periods presented. Amounts include both realized and unrealized gains and losses.


		Third Quarter				First Nine Months
(in millions)	Income Statement Location	2023		2022		2023		2022
Interest rate contracts	Interest expense	$	104	$	96	$	49	$	219
Interest rate contracts	Loss on early extinguishment of debt	—		—		—		31
FX contracts	Cost of sales	(4)		(7)		(4)		(9)
FX contracts	Other (income) expense, net	(6)		(10)		(1)		(9)
Commodity contracts	Cost of sales	(7)		29		2		33
Commodity contracts	SG&A expenses	(20)		24		(2)		(39)

IMPACT OF CASH FLOW HEDGES

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


		Third Quarter				First Nine Months
(in millions)	Income Statement Location	2023		2022		2023		2022
Interest rate contracts(1)	Interest expense	$	(2)	$	(2)	$	(72)	$	(4)
FX contracts	Cost of sales	4		—		(1)		5

(1)Amounts recognized during the first nine months of 2023 include the realized gains associated with the termination of forward starting swaps designated as cash flow hedges of approximately $66 million.

KDP expects to reclassify approximately $8 million and $1 million of pre-tax net gains from AOCI into net income during the next twelve months related to interest rate contracts and FX contracts, respectively.

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5. Leases

The following table presents the components of lease cost:


	Third Quarter				First Nine Months
(in millions)	2023		2022		2023		2022
Operating lease cost	$	40	$	34	$	118	$	101
Finance lease cost
Amortization of right-of-use assets	21		19		60		57
Interest on lease liabilities	6		6		18		17
Variable lease cost(1)	10		9		30		26
Short-term lease cost	1		1		1		1
Sublease income	—		(1)		—		(1)
Total lease cost	$	78	$	68	$	227	$	201

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

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


	First Nine Months
(in millions)	2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	110	$	92
Operating cash flows from finance leases	18		17
Financing cash flows from finance leases	74		65
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	78		245
Finance leases	75		84

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


	September 30, 2023		December 31, 2022
Weighted average discount rate
Operating leases	5.2	%	5.0	%
Finance leases	3.8	%	3.7	%
Weighted average remaining lease term
Operating leases	10 years		11 years
Finance leases	9 years		9 years

Future minimum lease payments for non-cancellable leases that have commenced and are reflected on the unaudited Condensed Consolidated Balance Sheets as of September 30, 2023 were as follows:


(in millions)	Operating Leases		Finance Leases
Remainder of 2023	$	25	$	31
2024	148		124
2025	141		120
2026	129		157
2027	107		69
2028	85		54
Thereafter	527		290
Total future minimum lease payments	1,162		845
Less: imputed interest	(261)		(131)
Present value of minimum lease payments	$	901	$	714

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(UNAUDITED, CONTINUED)

SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED

As of September 30, 2023, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $210 million. These leases are expected to commence between the fourth quarter of 2023 through 2026, with initial lease terms ranging from 4 years to 10 years.

ASSET SALE-LEASEBACK TRANSACTION

The Company entered into a sale-leaseback transaction with the Veyron SPEs during the first nine months of 2023. The following table presents details of the transaction. The gain on the sale-leaseback is recorded in Other operating income, net, and the leaseback is accounted for as an operating lease.


(in millions)						Sale Proceeds						Carrying Value						Gain on Sale
March 31, 2023(1)						$	7					$	1					$	6

(1)The sale-leaseback transaction included one distribution property.

The initial term of the leaseback is approximately 15 years, with two 10-year renewal options. The renewal options are not reasonably assured as (i) the Company's position that the dynamic environment in which it operates precludes the Company's ability to be reasonably certain of exercising the renewal options in the distant future and (ii) the options are contingent on the Company remaining investment grade and no change-in-control as of the end of the lease term. The leaseback has a RVG. Refer to Note 15 for additional information about the RVG associated with the asset sale-leaseback transaction.

6. Segments

Effective January 1, 2023, the Company revised its segment structure to align with changes in 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 accessories, and other coffee products to partners, retailers and directly to consumers through the Company’s 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.

Segment results are based on management reports. Net sales and income from operations are the significant financial measures used to assess the operating performance of the Company's reportable segments. Intersegment sales are recorded at cost and are eliminated in the unaudited Condensed Consolidated Statements of Income. “Unallocated corporate costs” are excluded from the Company's measurement of segment performance and include unrealized commodity derivative gains and losses, and certain general corporate expenses.

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Information about the Company's operations by reportable segment is as follows:


	Third Quarter				First Nine Months
(in millions)	2023		2022		2023		2022
Segment Results – Net sales
U.S. Refreshment Beverages	$	2,270	$	2,144	$	6,607	$	6,009
U.S. Coffee	1,012		1,045		2,913		3,017
International	523		433		1,427		1,228
Net sales	$	3,805	$	3,622	$	10,947	$	10,254

Segment Results – Income from operations
U.S. Refreshment Beverages	$	676	$	322	$	1,795	$	1,554
U.S. Coffee	293		272		775		822
International	139		97		331		259
Unallocated corporate costs	(212)		(297)		(652)		(703)
Income from operations	$	896	$	394	$	2,249	$	1,932


(in millions)	September 30, 2023		December 31, 2022
Identifiable operating assets
U.S. Refreshment Beverages	$	28,688	$	28,987
U.S. Coffee	14,103		14,220
International	6,961		6,873
Segment total	49,752		50,080
Unallocated corporate assets	675		757
Total identifiable operating assets	50,427		50,837
Investments in unconsolidated affiliates	1,336		1,000
Total assets	$	51,763	$	51,837

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(UNAUDITED, CONTINUED)

7. Revenue Recognition

KDP recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include LRB, K-Cup pods and appliances, occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration that KDP expects to receive in exchange for transferring goods. The amount of consideration KDP receives and revenue KDP recognizes varies with changes in customer incentives that KDP offers to its customers and their customers. Sales taxes and other similar taxes are excluded from revenue. Costs associated with shipping and handling activities, such as merchandising, are included in SG&A expenses as revenue is recognized.

The following table disaggregates KDP's revenue by product portfolio and by reportable segment:


(in millions)	U.S. Refreshment Beverages		U.S. Coffee		International		Total
For the third quarter of 2023:
LRB	$	2,232	$	—	$	348	$	2,580
K-Cup pods	—		769		120		889
Appliances	—		211		20		231
Other	38		32		35		105
Net sales	$	2,270	$	1,012	$	523	$	3,805

For the third quarter of 2022:
LRB	$	2,107	$	—	$	268	$	2,375
K-Cup pods	—		808		105		913
Appliances	—		204		21		225
Other	37		33		39		109
Net sales	$	2,144	$	1,045	$	433	$	3,622

For the first nine months of 2023:
LRB	$	6,498	$	—	$	932	$	7,430
K-Cup pods	—		2,301		345		2,646
Appliances	—		512		46		558
Other	109		100		104		313
Net sales	$	6,607	$	2,913	$	1,427	$	10,947

For the first nine months of 2022:
LRB	$	5,912	$	—	$	745	$	6,657
K-Cup pods	—		2,355		320		2,675
Appliances	—		566		55		621
Other	97		96		108		301
Net sales	$	6,009	$	3,017	$	1,228	$	10,254

LRB represents net sales of owned and partner brands within our portfolio and includes CSDs, NCBs, and contract manufacturing of KDP branded products for our bottlers and distributors. K-Cup pods represents net sales from owned brands, partner brands, and private label owners. Net sales for partner brands and private label owners are contractual and long-term in nature.

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8. Earnings Per Share

The following table presents the Company's basic and diluted EPS and shares outstanding.


	Third Quarter				First Nine Months
(in millions, except per share data)	2023		2022		2023		2022
Net income attributable to KDP	$	518	$	180	$	1,488	$	983

Weighted average common shares outstanding	1,397.4		1,416.1		1,401.3		1,417.3
Dilutive effect of stock-based awards	8.8		11.1		9.5		11.5
Weighted average common shares outstanding and common stock equivalents	1,406.2		1,427.2		1,410.8		1,428.8

Basic EPS	$	0.37	$	0.13	$	1.06	$	0.69
Diluted EPS	0.37		0.13		1.05		0.69

Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation	1.0		—		1.0		—

9. Stock-Based Compensation

The components of stock-based compensation expense are presented below:


	Third Quarter				First Nine Months
(in millions)	2023		2022		2023		2022
Total stock-based compensation expense(1)	$	29	$	31	$	86	$	43
Income tax benefit	(5)		(5)		(14)		(6)
Stock-based compensation expense, net of tax	$	24	$	26	$	72	$	37

(1)The Company recorded a one-time $40 million reduction to stock-based compensation expense as a result of the change in forfeiture policy in the first nine months of 2022.

RESTRICTED SHARE UNITS

The table below summarizes RSU activity:


	RSUs	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2022	18,038,745	$	27.46	1.6	$	643
Granted	3,520,386	31.21
Vested and released	(5,273,915)	23.68			178
Forfeited	(913,249)	29.43
Outstanding as of September 30, 2023	15,371,967	$	29.50	1.7	$	485

As of September 30, 2023, there was $189 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.1 years.

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10. Investments

The following table summarizes investments in unconsolidated affiliates as of September 30, 2023 and December 31, 2022:


(in millions)	Ownership Interest		September 30, 2023		December 31, 2022
Nutrabolt(1)	33.2	%	$	907	$	874
La Colombe	33.3	%	307		—
Tractor	19.2	%	45		49
Athletic Brewing	13.1	%	50		51
Dyla LLC	12.5	%	13		12
Force Holdings LLC(2)	33.3	%	4		4
Beverage startup companies(3)	(various)		5		5
Other	(various)		5		5
Investments in unconsolidated affiliates			$	1,336	$	1,000

(1)The Company’s investment in Nutrabolt consists of preferred equity units, and the ownership interest is calculated on an as-converted basis.

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

(3)Beverage startup companies represent equity method investments in development stage entities and may include entities which are pre-revenue, in test markets, or in early operations.

LA COLOMBE

In August 2023, the Company invested $300 million in exchange for common shares in La Colombe that represent a 33.3% ownership interest. The Company additionally capitalized $7 million of incremental third-party costs into the investment balance.

REVIVE

On July 31, 2023, the remaining shareholders of Revive surrendered their ownership interests. As a result, the Company holds 100% ownership interest in Revive and has eliminated the Non-controlling interest component within the Company’s unaudited Condensed Consolidated Statements of Stockholder’s Equity.

11. Income Taxes

The Company’s effective tax rates were as follows:


	Third Quarter				First Nine Months
	2023		2022		2023		2022
Effective tax rate	22.0	%	2.2	%	19.9	%	15.4	%

The following is a reconciliation of the provision for income taxes computed at the U.S. federal statutory tax rate to the provision for income taxes reported in the unaudited Condensed Consolidated Statements of Income:


	Third Quarter				First Nine Months
	2023		2022		2023		2022
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%	21.0	%
State income taxes, net	3.0	%	1.7	%	3.0	%	3.3	%
Impact of non-U.S. operations(1)(2)	(0.7)	%	(5.9)	%	(3.3)	%	(1.7)	%
Tax credits(2)	(3.8)	%	(11.7)	%	(3.4)	%	(3.2)	%

U.S. taxation of foreign earnings(2)	2.3	%	11.2	%	2.5	%	3.1	%
Deferred rate change(3)	(0.4)	%	(18.5)	%	—	%	(7.8)	%
Uncertain tax positions	0.2	%	0.4	%	0.1	%	0.1	%
U.S. federal provision to return	0.4	%	—	%	—	%	—	%
Excess tax deductions on stock-based compensation	(0.5)	%	—	%	(0.5)	%	(0.1)	%
Other	0.5	%	4.0	%	0.5	%	0.7	%
Total provision for income taxes	22.0	%	2.2	%	19.9	%	15.4	%

(1)For the first nine months of 2023, primarily driven by an immaterial non-cash true-up related to a prior period, which resulted in a $28 million reduction in foreign deferred tax liabilities.

(2)For the third quarter and first nine months of 2022, primarily driven by the Company’s incremental income in low tax jurisdictions.

(3)For the third quarter and first nine months of 2022, primarily driven by the revaluation of state deferred tax liabilities due to state legislative changes during 2022.

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12. Accumulated Other Comprehensive Income

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


(in millions)	Foreign Currency Translation Adjustments		Pension and Post-Retirement Benefit Liabilities		Cash Flow Hedges		Accumulated Other Comprehensive Income
For the third quarter of 2023:
Beginning balance	$	181	$	(10)	$	126	$	297
Other comprehensive (loss) income	(135)		—		7		(128)
Amounts reclassified from AOCI	—		—		2		2
Total other comprehensive (loss) income	(135)		—		9		(126)
Balance as of September 30, 2023	$	46	$	(10)	$	135	$	171

For the third quarter of 2022:
Beginning balance	$	47	$	(7)	$	165	$	205
Other comprehensive (loss) income	(249)		—		36		(213)
Amounts reclassified from AOCI	—		—		(1)		(1)
Total other comprehensive (loss) income	(249)		—		35		(214)
Balance as of September 30, 2022	$	(202)	$	(7)	$	200	$	(9)

For the first nine months of 2023:
Beginning balance	$	(86)	$	(10)	$	225	$	129
Other comprehensive income (loss)	132		—		(34)		98
Amounts reclassified from AOCI	—		—		(56)		(56)
Total other comprehensive income (loss)	132		—		(90)		42
Balance as of September 30, 2023	$	46	$	(10)	$	135	$	171

For the first nine months of 2022:
Beginning balance	$	81	$	(4)	$	(103)	$	(26)
Other comprehensive (loss) income	(283)		(3)		302		16
Amounts reclassified from AOCI	—		—		1		1
Total other comprehensive (loss) income	(283)		(3)		303		17
Balance as of September 30, 2022	$	(202)	$	(7)	$	200	$	(9)

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


		Third Quarter				First Nine Months
(in millions)	Income Statement Caption	2023		2022		2023		2022
Cash Flow Hedges:
Interest rate contracts(1)	Interest expense	$	(2)	$	(2)	$	(72)	$	(4)
FX contracts	Cost of sales	4		—		(1)		5
Total		2		(2)		(73)		1
Income tax expense		—		1		17		—
Total, net of tax		$	2	$	(1)	$	(56)	$	1

(1)Amounts reclassified from AOCI into interest expense during the first nine months of 2023 include the realized gains associated with the termination of forward starting swaps designated as cash flow hedges of approximately $66 million. Refer to Note 4 for additional information on the terminated forward starting swaps.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

13. Other Financial Information

SELECTED BALANCE SHEET INFORMATION

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


	September 30,		December 31,
(in millions)	2023		2022
Inventories:
Raw materials	$	449	$	475
Work-in-progress	9		8
Finished goods	914		858
Total	1,372		1,341
Allowance for excess and obsolete inventories	(24)		(27)
Total Inventories	$	1,348	$	1,314
Prepaid expenses and other current assets:
Other receivables	$	116	$	167
Prepaid income taxes	53		49
Customer incentive programs	55		25
Derivative instruments	37		35
Prepaid marketing	46		19
Spare parts	106		89

Income tax receivable	14		17
Other	92		70
Total prepaid expenses and other current assets	$	519	$	471
Other non-current assets:
Operating lease right-of-use assets	$	873	$	881
Customer incentive programs	34		46
Derivative instruments	8		140

Equity securities(1)	67		48
Equity securities without readily determinable fair values	—		1


Other	135		136
Total other non-current assets	$	1,117	$	1,252

(1)Fair values of these equity securities are determined using quoted market prices from daily exchange traded markets, based on the closing price as of the balance sheet date, and are classified as Level 1. Unrealized mark-to-market gains and losses are recorded to Other (income) expense, net. For the first nine months of 2023, the Company recorded an unrealized mark-to-market gain of $16 million on its investment in Vita Coco. The Company recorded no mark-to-market gains or losses on its investment in Vita Coco for the first nine months of 2022.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)


	September 30,		December 31,
(in millions)	2023		2022
Accrued expenses:
Accrued customer trade	$	403	$	429
Accrued compensation	191		246
Insurance reserve	51		53
Accrued interest	151		76
Accrued professional fees	6		7
Other accrued expenses	321		342
Total accrued expenses	$	1,123	$	1,153
Other current liabilities:
Dividends payable	$	300	$	281
Income taxes payable	49		87
Operating lease liability	108		100
Finance lease liability	100		95
Derivative instruments	77		112

Other	47		10
Total other current liabilities	$	681	$	685
Other non-current liabilities:
Operating lease liability	$	793	$	803
Finance lease liability	614		618
Pension and post-retirement liability	30		37
Insurance reserves	87		69


Derivative instruments	300		195
Deferred compensation liability	30		30
Other	77		73
Total other non-current liabilities	$	1,931	$	1,825

ACCOUNTS PAYABLE

KDP has agreements with third party administrators which allow participating suppliers to track payment obligations from KDP, and, if voluntarily elected by the supplier, to sell payment obligations from KDP to financial institutions. Suppliers can sell one or more of KDP's payment obligations, at their sole discretion, and the rights and obligations of KDP to its suppliers are not impacted. KDP has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. KDP's obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted. The amount of the outstanding obligations confirmed as valid included in accounts payable as of September 30, 2023 and December 31, 2022 was $2,794 million and $4,113 million, respectively.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

14. Commitments and Contingencies

KDP is occasionally subject to litigation or other legal proceedings. Reserves are recorded for specific legal proceedings when the Company determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. As of September 30, 2023 and December 31, 2022, the Company had litigation reserves of $10 million and $12 million, respectively. KDP has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. The Company does not believe that the outcome of these, or any other, pending legal matters, individually or collectively, will have a material adverse effect on the results of operations, financial condition or liquidity of KDP.

ANTITRUST LITIGATION

In February 2014, TreeHouse Foods, Inc. and certain affiliated entities filed suit against KDP’s wholly-owned subsidiary, Keurig, in the U.S. District Court for the Southern District of New York (“SDNY”) (TreeHouse Foods, Inc. et al. v. Green Mountain Coffee Roasters, Inc. et al.). The TreeHouse complaint asserted claims under the federal antitrust laws and various state laws, contending that Keurig had monopolized alleged markets for single serve coffee brewers and single serve coffee pods. The TreeHouse complaint sought treble monetary damages, declaratory relief, injunctive relief and attorneys’ fees. In March 2014, JBR, Inc. filed suit against Keurig in the U.S. District Court for the Eastern District of California (JBR, Inc. v. Keurig Green Mountain, Inc.). The claims asserted and relief sought in the JBR complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint.

Beginning in 2014, a number of putative class actions asserting similar claims and seeking similar relief to the matters described above were filed on behalf of purported direct purchasers of Keurig’s products in various federal district courts. In June 2014, these various actions, including the TreeHouse and JBR suits, were transferred to a single judicial district for coordinated pre-trial proceedings (the “Multidistrict Antitrust Litigation”). A consolidated putative class action complaint by direct purchaser plaintiffs was filed in July 2014. In January 2019, McLane Company, Inc. filed suit against Keurig (McLane Company, Inc. v. Keurig Green Mountain, Inc.) in the SDNY asserting similar claims and was also transferred into the Multidistrict Antitrust Litigation. These actions are now pending in the SDNY (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation). Discovery in the Multidistrict Antitrust Litigation concluded in 2021, with plaintiffs collectively claiming more than $5 billion of monetary damages. Keurig strongly disputes the merits of the claims and the calculation of damages. As a result, Keurig has fully briefed a summary judgment motion that, if successful, would end the cases entirely. Keurig has also fully briefed other significant motions, including challenges to the validity of plaintiffs’ damages calculations. Keurig is also pursuing its opposition to direct purchaser plaintiffs’ motion for class certification. Keurig’s motions and opposition remain pending in the SDNY.

In July 2021, BJ’s Wholesale Club, Inc. filed suit against Keurig (BJ’s Wholesale Club, Inc. v. Keurig Green Mountain, Inc.) in the U.S. District Court for the Eastern District of New York (“EDNY”) asserting similar claims and also was transferred into the Multidistrict Antitrust Litigation. In August 2021, Winn-Dixie Stores, Inc. and Bi-Lo Holding LLC filed suit against Keurig (Winn-Dixie Stores, Inc. et al. v. Keurig Green Mountain, Inc. et al.) in the EDNY asserting similar claims and was also transferred into the Multidistrict Antitrust Litigation. Following the conclusion of discovery in 2023, Keurig similarly filed a motion for summary judgment seeking dismissal of these cases and also filed other significant motions. These motions remain pending in the SDNY.

A number of putative class actions asserting similar claims and seeking similar relief were previously filed on behalf of purported indirect purchasers of Keurig’s products. In July 2020, Keurig reached an agreement with the putative indirect purchaser class plaintiffs in the Multidistrict Antitrust Litigation to settle the claims asserted for $31 million. The settlement class consists of individuals and entities in the United States that purchased, from persons other than Keurig and not for purposes of resale, Keurig manufactured or licensed single serve beverage portion packs during the applicable class period (beginning in September 2010 for most states). The SDNY granted preliminary approval of the settlement in December 2020, and the Company paid the settlement amount in January 2021. In June 2021, the SDNY granted final approval of the settlement, entered final judgment, and dismissed the indirect purchasers’ claims.

Separate from the U.S. actions described above, a statement of claim was filed in September 2014 against Keurig and Keurig Canada Inc. in Ontario, Canada, by Club Coffee L.P., a Canadian manufacturer of single serve beverage pods, asserting a breach of competition law and false and misleading statements by Keurig. To date, this plaintiff has not taken substantive action to prosecute its claims.

KDP intends to vigorously defend the remaining lawsuits described above. At this time, the Company is unable to predict the outcome of these lawsuits, the potential loss or range of loss, if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations. Accordingly, the Company has not accrued for a loss contingency. Additionally, as the timelines in these cases may be beyond our control, we cannot assure you if or when there will be material developments in these matters.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

15. Transactions with Variable Interest Entities

TRANSACTIONS WITH VEYRON SPEs

The Company has a number of leasing arrangements and one licensing arrangement with special purpose entities associated with the same sponsor, which are referred to as the Veyron SPEs. The Veyron SPEs are VIEs for which KDP is not the primary beneficiary, as KDP has limited power based on the contractual agreements to direct the activities that most significantly impact the VIEs’ performance.

Leasing Arrangements

As of September 30, 2023, the Company has entered into sixteen lease transactions with the Veyron SPEs, fifteen of which were associated with asset sale-leaseback transactions. Refer to Note 5 for additional information about the asset sale-leaseback transaction during the first nine months of 2023. Each lease has a RVG based on a percentage of Veyron SPEs’s purchase price; however, the Company concluded it was not probable that the Company will owe an amount at the end of each individual lease term, as the fair values of the properties are not expected to fall below the RVGs at the end of each individual lease term. As such, the Company recorded each lease obligation excluding the associated RVG. The aggregate maximum undiscounted RVG associated with the leasing arrangements as of September 30, 2023 and December 31, 2022 were $653 million and $650 million, respectively. This aggregate maximum value assumes that the fair value of each property at the end of either the original lease term or renewal term is equal to zero, which the Company has concluded is not probable.

The following table provides the carrying amounts of the right-to-use assets and lease obligations recorded on the Company’s unaudited Condensed Consolidated Balance Sheets associated with these leasing arrangements related to the VIEs as of September 30, 2023 and December 31, 2022.


(in millions)	September 30, 2023(1)		December 31, 2022(2)
Non-current assets	$	418	$	430
Current liabilities	23		22
Non-current liabilities	408		419

(1)The leasing agreements included as of September 30, 2023 include nine manufacturing sites, five distribution centers and our Frisco, Texas headquarters.

(2)The leasing agreements included as of December 31, 2022 include nine manufacturing sites, four distribution centers and our Frisco, Texas headquarters.

Licensing Arrangement

ABC, a wholly-owned subsidiary of KDP, has provided a guarantee in connection with its distribution agreement with the Veyron SPEs to be paid only in the event the Veyron SPEs sell specific distribution rights and the value of those distribution rights does not exceed $142 million, which is the maximum undiscounted amount that KDP could pay under the guarantee. All obligations with respect to the guarantee will cease upon termination of the distribution agreement, which would occur upon notice by ABC not to renew the distribution agreement, KDP no longer being investment grade at the end of the term, or the sale of the distribution rights by the Veyron SPEs. As of September 30, 2023, KDP has not recorded a liability as it is not probable that the Company will have to make any payments required under the residual value guarantee, as the fair value of the distribution rights is not expected to fall below $142 million over the term of the agreement.

As of September 30, 2023, KDP had $94 million in fixed service fee commitments related to the 15-year distribution agreement which was effective on December 28, 2020, with Veyron SPEs. These commitments were used to assist the Veyron SPEs in obtaining financing. Such fixed service fee payments began on January 1, 2021.

Fixed service fees over the next five years are expected to be as follows:


	Remainder of 2023			For the Years Ending December 31,
(in millions)			2024			2025			2026			2027			2028
Fixed service fees	$	1		$	8		$	8		$	7		$	8		$	8

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

TRANSACTION WITH NUTRABOLT

The Company has a preferred equity investment in Nutrabolt, which will earn the greater of (i) a 5% annual coupon on the preferred equity units plus any accretion for amounts not yet paid or (ii) KDP’s share of Nutrabolt’s earnings as if KDP’s preferred equity was converted into common units. As the other investors of Nutrabolt have to share in Nutrabolt's earnings with KDP if in excess of the 5% annual coupon, the other investors lack certain characteristics of a controlling financial interest, which qualifies Nutrabolt as a VIE. KDP is not the primary beneficiary of the VIE and therefore is not required to consolidate Nutrabolt, as the primary shareholder of the VIE has control over the board and decision-making for the activities that most significantly impact the VIE’s economic performance, including sales, marketing, and operations. KDP has no obligation to provide additional funding to Nutrabolt, and thus the Company’s maximum exposure and risk of loss related to Nutrabolt is limited to the carrying value of KDP’s investment. Refer to Note 10 for the carrying value of the Company’s investment in Nutrabolt.

TRANSACTION WITH LA COLOMBE

The Company has an investment in common shares of La Colombe. Under the terms of the investment agreement, KDP has certain contractual rights that will result in a return of investment at the greater of a specified floor or fair value. As other investors of La Colombe will have to absorb more risk when the specified floor is greater than fair value, the other investors lack certain characteristics of a controlling financial interest, which qualifies La Colombe as a VIE. KDP is not the primary beneficiary of the VIE and therefore is not required to consolidate La Colombe, as the primary shareholder of the VIE has control over the board and decision-making for the activities that most significantly impact the VIE’s economic performance, including sales, marketing, and operations. KDP has no obligation to provide additional funding to La Colombe, and thus the Company’s maximum exposure and risk of loss related to La Colombe is limited to the carrying value of KDP’s investment. Refer to Note 10 for the carrying value of the Company’s investment in La Colombe.

16. Restructuring

RESTRUCTURING PROGRAMS

The Company records severance costs provided under an ongoing benefit arrangement once they are both probable and estimable.

2023 CEO Succession and Associated Realignment

In the third quarter of 2023, the Company began to enact several organization movements to ensure succession plans, to reinforce enterprise capabilities to support growth, and to control costs. A key component of the program was the announcement of the appointment of a Chief Operating Officer, effective November 6, 2023, with the expectation that the new Chief Operating Officer will succeed Robert Gamgort as Chief Executive Officer of the Company during the second quarter of 2024. The Company is also planning to realign its executive and operating leadership structure to enable faster decision making and to better support various strategic initiatives of the Company. Additionally, certain workforce reductions could occur as we assess our organization and upskill our talent and capabilities as needed. The program is expected to incur charges of approximately $45 million, primarily driven by severance costs and the sign-on bonus for our new Chief Operating Officer.

DPS Integration Program

As part of the DPS Merger, the Company developed a program to deliver $600 million in synergies over a three-year period through supply chain optimization, reduction of indirect spend through new economies of scale, elimination of duplicative support functions and advertising and promotion optimization. Although the program was initially expected to be completed in 2021, as a result of delays due to COVID-19, KDP continued to recognize expenditures for certain initiatives which began during the integration period through December 31, 2022. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $962 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, CONTINUED)

RESTRUCTURING CHARGES

Restructuring and integration expenses for the defined programs during the periods presented were as follows:


	Third Quarter				First Nine Months
(in millions)	2023		2022		2023		2022
2023 CEO Succession and Associated Realignment	$	25	$	—	$	25	$	—
DPS Integration Program	—		33		—		91

RESTRUCTURING LIABILITIES

Restructuring liabilities that qualify as exit and disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements. Restructuring liabilities, primarily consisting of workforce reduction costs, were as follows:


(in millions)	Restructuring Liabilities
Balance as of January 1, 2023	$	55
Charges to expense	18
Cash payments	(42)

Balance as of September 30, 2023	$	31

17. Subsequent Events

STRATEGIC PARTNERSHIP WITH GRUPO PISA

Effective October 23, 2023, the Company executed an agreement for a strategic partnership with Grupo PiSA to sell and distribute Electrolit instant hydration beverages within the U.S. Under the long-term sales and distribution agreement, KDP will sell and distribute Electrolit in the majority of KDP's company-owned direct store distribution territories. The distribution is expected to begin in early 2024, and the Company estimates spending up to $57 million to transition the rights.

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