0001418135 kdp:A2048MergerNotesMember us-gaap:SeniorNotesMember 2019-12-31
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCHMarch 31, 20202021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 001-33829
Keurig Dr Pepper Inc.
(Exact name of registrant as specified in its charter) |
| | | | | | | | | | |
| Delaware | Keurig Dr Pepper Inc. | 98-0517725 |
| (Exact name of registrant as specified in its charter) | |
|
| | | |
Delaware | 98-0517725 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) |
| | | |
| 53 South Avenue | |
| Burlington, | Massachusetts | |
| 01803 | |
(Address of principal executive offices) |
| (781) | 418-7000 | |
|
53 South Avenue
Burlington, Massachusetts
01803
(Address of principal executive offices)
(781) 418-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | | | | | | | |
| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Common stock | | KDP | | New YorkThe Nasdaq Stock ExchangeMarket LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Yes☒ ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes Yes☒ ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer☒ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ☐ No ☒
As of April 28, 2020,27, 2021, there were 1,407,151,4081,417,389,722 shares of the registrant's common stock, par value $0.01 per share, outstanding.
KEURIG DR PEPPER INC.
FORM 10-Q TABLE OF CONTENTS
KEURIG DR PEPPER INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020TABLE OF CONTENTS
KEURIG DR PEPPER INC.
MASTER GLOSSARY
| | | | | | | | |
| Term | | Definition |
| | |
| | |
Term | | Definition |
2019 Incentive Plan | | Keurig Dr Pepper Inc. Omnibus Incentive Plan of 2019 |
| 2019 KDP Term Loan | | The Company refinanced$2 billion aggregate principal amount, with the 2018 KDP Term Loanability to make voluntary and mandatory prepayments, due on February 8, 2019 and entered into the 2019 KDP Term Loan Agreement2023 |
2019 KDP Term Loan Agreement | | The agreement executed on February 8, 2019 between KDP and the Term Loan Lenders in order to refinance the 2018 KDP Term Loan with the 2019 KDP Term Loan |
2019 364-Day Credit Agreement | | The Company's $750 million credit agreement, which was entered into on May 29, 2019 |
| 2020 364-Day Credit Agreement | | The Company's $1,500 million credit agreement, which was entered into on April 12, 2020 and terminated on March 26, 2021 |
2030 Notes2021 364-Day Credit Agreement | | $750The Company's $1,500 million aggregate principal amount of 3.20% senior unsecured notes due May 1, 2030credit agreement, which was entered into on March 26, 2021 and contains a term-out option |
2050 NotesA Shoc | | $750 million aggregate principal amountA Shoc Beverage LLC, an equity method investment of 3.80% senior unsecured notes due May 1, 2050KDP, or Adrenaline Shoc energy drinks |
A ShocABC | | Adrenaline ShocThe American Bottling Company, a wholly-owned subsidiary of KDP |
| ABI | | Anheuser-Busch InBev SA/NV |
| Annual Report | | Annual Report on Form 10-K for the year ended December 31, 20192020 |
| AOCI | | Accumulated other comprehensive income or loss |
| ASU | | Accounting Standards Update |
ASU 2016-13Bedford | | Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments |
ASU 2018-13 | | Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements |
ASU 2020-01 | | Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 |
ASU 2020-04 | | Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting |
Bai Acquisition | | The acquisition of Bai by DPS |
Bedford | | Bedford Systems, LLC, an equity method investment of KDP and the maker of Drinkworks |
Big Red AcquisitionBodyArmor | | The acquisition of Big Red by KDP |
BodyArmor | | BA Sports Nutrition, LLC, an equity method investment of KDP |
| bps | | basis points |
CompanyCSD | | Keurig Dr Pepper Inc. |
Core | | Core Nutrition LLC |
Core Acquisition | | The acquisition of Core by KDP |
CSD | | Carbonated soft drink |
| DIO | | Days inventory outstanding |
| DPO | | Days of payables outstanding |
| DPS | | Dr Pepper Snapple Group, Inc. |
| DPS Merger | | The acquisitioncombination of the business operations of Keurig and DPS that was consummated on July 9, 2018 through a reverse merger transaction, whereby a wholly-owned special purpose merger subsidiary of DPS by Maple, whereby Merger Sub merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiarydirect parent of DPS as of July 9, 2018Keurig |
DPS Merger AgreementDSD | | The Agreement and Plan of Merger by and among DPS, Maple and Merger Sub to effect the DPS Merger |
DSD | | Direct Store Delivery, the operating segment whereby finished beverages are delivered directly to retailers |
| DSO | | Days sales outstanding |
| EPS | | Earnings per share |
| Exchange Act | | Securities Exchange Act of 1934, as amended |
FASBFFS | | Fountain Foodservice, an operating segment of KDP which serves the fountain channel, such as restaurants |
| FASB | | Financial Accounting Standards Board |
| FX | | Foreign exchange |
IRiGoldman | | Goldman Sachs & Co. LLC |
| IRi | | Information Resources, Inc. |
| JAB | | JAB Holding Company S.a.r.l. and affiliates |
JP Morgan | | JPMorgan Chase Bank, N.A. |
KEURIG DR PEPPER INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020
|
| KDP | | |
KDP | | Keurig Dr Pepper Inc. |
| KDP Credit Agreements | | Collectively, the KDP Revolver, the 2019 364-Day Credit Agreement, the 2020 364-Day Credit Agreement, the 2021 364-Day Credit Agreement, and the 2019 KDP Term Loan |
| KDP Revolver | | The Company's $2,400 million revolving credit facility, which was entered into on February 28, 2018 |
LIBORKeurig | | Keurig Green Mountain, Inc., and the brand of our brewers |
| LIBOR | | London Interbank Offered Rate |
MapleLifeFuels | | Maple Parent Holdings Corp.LifeFuels, Inc., an equity method investment |
Merger SubNCB | | Salt Merger Sub, Inc.Non-carbonated beverage |
NCBNotes | | Non-carbonated beverage |
Notes | | Collectively, the Company's senior unsecured notes |
ParentPeet's | | Keurig Dr Pepper,Peet's Coffee & Tea, Inc. |
RSUPET | | Restricted stock unitPolyethylene terephthalate, which is used to make the Company's plastic bottles |
RTDProposition 65 | | The State of California's Safe Drinking Water and Toxic Enforcement Act of 1986 |
| RSU | | Restricted share unit |
| RTD | | Ready to drink |
S&PSEC | | Standard & Poors |
SEC | | Securities and Exchange Commission |
| SG&A | | Selling, general and administrative |
Term Loan Lenders | | The lenders party to the 2019 KDP Term Loan, with JP Morgan as the administrative agent of the 2019 KDP Term Loan Agreement |
U.S. | | United States |
| U.S. GAAP | | Accounting principles generally accepted in the U.S. |
WDVeyron SPE | | Warehouse DirectVeyron NE Beverage Licensing LLC |
WIPWD | | Work-in-processWarehouse Direct, the operating segment whereby finished beverages are shipped to retailer warehouses, and then delivered by the retailer through its own delivery system to its stores |
PART I - FINANCIAL INFORMATION
| |
ITEM 1. | Financial Statements (Unaudited) |
ITEM 1.Financial Statements (Unaudited)
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the First Quarter of 2020 and 2019
(Unaudited)
| | | | First Quarter | | | | First Quarter |
| (in millions, except per share data) | 2020 | | 2019 | (in millions, except per share data) | | | 2021 | | 2020 |
| Net sales | $ | 2,613 |
| | $ | 2,504 |
| Net sales | | | $ | 2,902 | | | $ | 2,613 | |
| Cost of sales | 1,161 |
| | 1,106 |
| Cost of sales | | | 1,302 | | | 1,161 | |
| Gross profit | 1,452 |
| | 1,398 |
| Gross profit | | | 1,600 | | | 1,452 | |
| Selling, general and administrative expenses | 1,028 |
| | 911 |
| Selling, general and administrative expenses | | | 961 | | | 1,028 | |
| Other operating income, net | (42 | ) | | (11 | ) | Other operating income, net | | | (1) | | | (42) | |
| Income from operations | 466 |
| | 498 |
| Income from operations | | | 640 | | | 466 | |
| Interest expense | 153 |
| | 169 |
| Interest expense | | | 140 | | | 153 | |
| Loss on early extinguishment of debt | 2 |
| | 9 |
| Loss on early extinguishment of debt | | | 105 | | | 2 | |
| Impairment on investment and note receivable | 86 |
| | — |
| |
| Other expense, net | 20 |
| | 5 |
| |
| Impairment of investments and note receivable | | Impairment of investments and note receivable | | | 0 | | | 86 | |
| Other (income) expense, net | | Other (income) expense, net | | | (3) | | | 20 | |
| Income before provision for income taxes | 205 |
| | 315 |
| Income before provision for income taxes | | | 398 | | | 205 | |
| Provision for income taxes | 49 |
| | 85 |
| Provision for income taxes | | | 73 | | | 49 | |
| Net income | $ | 156 |
| | $ | 230 |
| Net income | | | 325 | | | 156 | |
| Less: Net income attributable to non-controlling interest | | Less: Net income attributable to non-controlling interest | | | 0 | | | 0 | |
| Net income attributable to KDP | | Net income attributable to KDP | | | $ | 325 | | | $ | 156 | |
| | Earnings per common share: | | | | Earnings per common share: | | | | | |
| Basic | $ | 0.11 |
| | $ | 0.16 |
| Basic | | | $ | 0.23 | | | $ | 0.11 | |
| Diluted | 0.11 |
| | 0.16 |
| Diluted | | | 0.23 | | | 0.11 | |
| Weighted average common shares outstanding: | | | | Weighted average common shares outstanding: | | | | | |
| Basic | 1,407.0 |
| | 1,406.3 |
| Basic | | | 1,409.2 | | | 1,407.0 | |
| Diluted | 1,420.1 |
| | 1,417.7 |
| Diluted | | | 1,425.6 | | | 1,420.1 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the First Quarter of 2020 and 2019
(Unaudited)
| | | | First Quarter | | | | First Quarter |
| (in millions) | 2020 | | 2019 | (in millions) | | | 2021 | | 2020 |
| Comprehensive (loss) income | $ | (428 | ) | | $ | 323 |
| |
| Net income | | Net income | | | $ | 325 | | | $ | 156 | |
| Other comprehensive income | | Other comprehensive income | | |
| Foreign currency translation adjustments | | Foreign currency translation adjustments | | | 16 | | | (583) | |
| Net change in pension and post-retirement liability, net of tax of $0 and $0, respectively | | Net change in pension and post-retirement liability, net of tax of $0 and $0, respectively | | | 0 | | | (1) | |
| Net change in cash flow hedges, net of tax of $22 and $0, respectively | | Net change in cash flow hedges, net of tax of $22 and $0, respectively | | | 71 | | | 0 | |
| Total other comprehensive income (loss) | | Total other comprehensive income (loss) | | | 87 | | | (584) | |
| Comprehensive income (loss) | | Comprehensive income (loss) | | | 412 | | | (428) | |
| Less: Comprehensive income attributable to non-controlling interest | | Less: Comprehensive income attributable to non-controlling interest | | | 0 | | | 0 | |
| Comprehensive income (loss) attributable to KDP | | Comprehensive income (loss) attributable to KDP | | | $ | 412 | | | $ | (428) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2020 and December 31, 2019
| | | | March 31, | | December 31, | | March 31, | | December 31, |
| (in millions, except share and per share data) | 2020 | | 2019 | (in millions, except share and per share data) | 2021 | | 2020 |
| Assets | Assets | Assets |
| Current assets: | | | | Current assets: | | | |
| Cash and cash equivalents | $ | 197 |
| | $ | 75 |
| Cash and cash equivalents | $ | 335 | | | $ | 240 | |
| Restricted cash and restricted cash equivalents | 26 |
| | 26 |
| Restricted cash and restricted cash equivalents | 14 | | | 15 | |
| Trade accounts receivable, net | 1,037 |
| | 1,115 |
| Trade accounts receivable, net | 1,065 | | | 1,048 | |
| Inventories | 682 |
| | 654 |
| Inventories | 841 | | | 762 | |
| Prepaid expenses and other current assets | 335 |
| | 403 |
| Prepaid expenses and other current assets | 410 | | | 323 | |
| Total current assets | 2,277 |
| | 2,273 |
| Total current assets | 2,665 | | | 2,388 | |
| Property, plant and equipment, net | 2,017 |
| | 2,028 |
| Property, plant and equipment, net | 2,261 | | | 2,212 | |
| Investments in unconsolidated affiliates | 105 |
| | 151 |
| Investments in unconsolidated affiliates | 88 | | | 88 | |
| Goodwill | 19,898 |
| | 20,172 |
| Goodwill | 20,209 | | | 20,184 | |
| Other intangible assets, net | 23,706 |
| | 24,117 |
| Other intangible assets, net | 23,949 | | | 23,968 | |
| Other non-current assets | 811 |
| | 748 |
| Other non-current assets | 1,187 | | | 894 | |
| Deferred tax assets | 29 |
| | 29 |
| Deferred tax assets | 44 | | | 45 | |
| Total assets | $ | 48,843 |
| | $ | 49,518 |
| Total assets | $ | 50,403 | | | $ | 49,779 | |
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity |
| Current liabilities: | | | | Current liabilities: | | | |
| Accounts payable | $ | 3,238 |
| | $ | 3,176 |
| Accounts payable | $ | 3,871 | | | $ | 3,740 | |
| Accrued expenses | 960 |
| | 939 |
| Accrued expenses | 989 | | | 1,040 | |
| Structured payables | 258 |
| | 321 |
| Structured payables | 148 | | | 153 | |
| Short-term borrowings and current portion of long-term obligations | 1,957 |
| | 1,593 |
| Short-term borrowings and current portion of long-term obligations | 1,750 | | | 2,345 | |
| Other current liabilities | 445 |
| | 445 |
| Other current liabilities | 467 | | | 416 | |
| Total current liabilities | 6,858 |
| | 6,474 |
| Total current liabilities | 7,225 | | | 7,694 | |
| Long-term obligations | 12,431 |
| | 12,827 |
| Long-term obligations | 11,715 | | | 11,143 | |
| Deferred tax liabilities | 5,917 |
| | 6,030 |
| Deferred tax liabilities | 6,025 | | | 5,993 | |
| Other non-current liabilities | 997 |
| | 930 |
| Other non-current liabilities | 1,367 | | | 1,119 | |
| Total liabilities | 26,203 |
| | 26,261 |
| Total liabilities | 26,332 | | | 25,949 | |
| Commitments and contingencies |
| |
| Commitments and contingencies | 0 | | 0 |
| Stockholders' equity: | | | | 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, 1,407,079,951 and 1,406,852,305 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | 14 |
| | 14 |
| |
| Preferred stock, $0.01 par value, 15,000,000 shares authorized, 0 shares issued | | Preferred stock, $0.01 par value, 15,000,000 shares authorized, 0 shares issued | 0 | | | 0 | |
| Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,417,325,379 and 1,407,260,676 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | | Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,417,325,379 and 1,407,260,676 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 14 | | | 14 | |
| Additional paid-in capital | 21,579 |
| | 21,557 |
| Additional paid-in capital | 21,718 | | | 21,677 | |
| Retained earnings | 1,527 |
| | 1,582 |
| Retained earnings | 2,174 | | | 2,061 | |
| Accumulated other comprehensive (loss) income | (480 | ) | | 104 |
| |
| Accumulated other comprehensive income | | Accumulated other comprehensive income | 164 | | | 77 | |
| Total stockholders' equity | 22,640 |
| | 23,257 |
| Total stockholders' equity | 24,070 | | | 23,829 | |
| Total liabilities and stockholders' equity | $ | 48,843 |
| | $ | 49,518 |
| |
| Non-controlling interest | | Non-controlling interest | 1 | | | 1 | |
| Total equity | | Total equity | 24,071 | | | 23,830 | |
| Total liabilities and equity | | Total liabilities and equity | $ | 50,403 | | | $ | 49,779 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the First Quarter(Unaudited) | | | | | | | | | | | |
| | First Quarter |
| (in millions) | 2021 | | 2020 |
| Operating activities: | | | |
| Net income | $ | 325 | | | $ | 156 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation expense | 102 | | | 98 | |
| Amortization of intangibles | 33 | | | 33 | |
| Other amortization expense | 40 | | | 32 | |
| Provision for sales returns | 19 | | | 7 | |
| Deferred income taxes | 11 | | | (5) | |
| Employee stock-based compensation expense | 25 | | | 19 | |
| Loss on early extinguishment of debt | 105 | | | 2 | |
| | | |
| Gain on disposal of property, plant and equipment | (1) | | | (43) | |
| Unrealized (gain) loss on foreign currency | (10) | | | 22 | |
| Unrealized (gain) loss on derivatives | (41) | | | 43 | |
| Equity in loss of unconsolidated affiliates | 0 | | | 15 | |
| Impairment on investments and note receivable of unconsolidated affiliate | 0 | | | 86 | |
| Other, net | 15 | | | 22 | |
| Changes in assets and liabilities: | | | |
| Trade accounts receivable | (37) | | | 42 | |
| Inventories | (77) | | | (38) | |
| Income taxes receivable and payables, net | 25 | | | (29) | |
| Other current and non-current assets | (295) | | | (179) | |
| Accounts payable and accrued expenses | 121 | | | 150 | |
| Other current and non-current liabilities | 186 | | | (19) | |
| Net change in operating assets and liabilities | (77) | | | (73) | |
| Net cash provided by operating activities | 546 | | | 414 | |
| Investing activities: | | | |
| | | |
| | | |
| | | |
| | | |
| Purchases of property, plant and equipment | (95) | | | (151) | |
| Proceeds from sales of property, plant and equipment | 7 | | | 201 | |
| Purchases of intangibles | (12) | | | (15) | |
| Issuance of related party note receivable | 0 | | | (6) | |
| Other, net | 1 | | | 5 | |
| Net cash (used in) provided by investing activities | $ | (99) | | | $ | 34 | |
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| | First Quarter |
| (in millions) | 2020 | | 2019 |
| Operating activities: | | | |
| Net income | $ | 156 |
| | $ | 230 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation expense | 98 |
| | 85 |
|
| Amortization of intangibles | 33 |
| | 31 |
|
| Other amortization expense | 32 |
| | 36 |
|
| Provision for sales returns | 7 |
| | 9 |
|
| Deferred income taxes | (5 | ) | | 1 |
|
| Employee stock-based compensation expense | 19 |
| | 14 |
|
| Loss on early extinguishment of debt | 2 |
| | 9 |
|
| Gain on disposal of property, plant and equipment | (43 | ) | | — |
|
| Unrealized loss (gain) on foreign currency | 22 |
| | (17 | ) |
| Unrealized loss on derivatives | 43 |
| | 7 |
|
| Equity in loss of unconsolidated affiliates | 15 |
| | 15 |
|
| Impairment on investment and note receivable of unconsolidated affiliate | 86 |
| | — |
|
| Other, net | 22 |
| | (4 | ) |
| Changes in assets and liabilities: | | | |
| Trade accounts receivable | 42 |
| | 126 |
|
| Inventories | (38 | ) | | (36 | ) |
| Income taxes receivable and payables, net | (29 | ) | | 68 |
|
| Other current and non-current assets | (179 | ) | | (102 | ) |
| Accounts payable and accrued expenses | 150 |
| | 125 |
|
| Other current and non-current liabilities | (19 | ) | | (6 | ) |
| Net change in operating assets and liabilities | (73 | ) | | 175 |
|
| Net cash provided by operating activities | 414 |
| | 591 |
|
| Investing activities: | | | |
| Issuance of related party note receivable | (6 | ) | | (7 | ) |
| Purchases of property, plant and equipment | (151 | ) | | (62 | ) |
| Proceeds from sales of property, plant and equipment | 201 |
| | 18 |
|
| Purchases of intangibles | (15 | ) | | (2 | ) |
| Other, net | 5 |
| | 8 |
|
| Net cash provided by (used in) investing activities | 34 |
| | (45 | ) |
| Financing activities: | | | |
| Proceeds from unsecured credit facility | 1,000 |
| | — |
|
| Proceeds from term loan | — |
| | 2,000 |
|
| Net (repayment) issuance of commercial paper | (387 | ) | | 594 |
|
| Proceeds from structured payables | 44 |
| | 78 |
|
| Payments on structured payables | (107 | ) | | (9 | ) |
| Payments on senior unsecured notes | (250 | ) | | (250 | ) |
| Repayment of term loan | (405 | ) | | (2,758 | ) |
| Payments on finance leases | (13 | ) | | (10 | ) |
| Cash dividends paid | (212 | ) | | (211 | ) |
| Other, net | 2 |
| | 10 |
|
| Net cash used in financing activities | (328 | ) | | (556 | ) |
| Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from: | | | |
| Operating, investing and financing activities | 120 |
| | (10 | ) |
| Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | (8 | ) | | 10 |
|
| Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 111 |
| | 139 |
|
| Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 223 |
| | $ | 139 |
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Continued)
| | | | | | | | | | | |
| | First Quarter |
| (in millions) | 2021 | | 2020 |
| Financing activities: | | | |
| Proceeds from issuance of common stock | $ | 140 | | | $ | 0 | |
| Proceeds from unsecured credit facility | 0 | | | 1,000 | |
| Proceeds from senior unsecured notes | 2,150 | | | 0 | |
| | | |
| Net payment of commercial paper | 0 | | | (387) | |
| Proceeds from structured payables | 35 | | | 44 | |
| Payments on structured payables | (41) | | | (107) | |
| Payments on Notes | (1,845) | | | (250) | |
| | | |
| Payments on term loan | (425) | | | (405) | |
| Payments on finance leases | (15) | | | (13) | |
| Cash dividends paid | (192) | | | (212) | |
| Tax witholdings related to net share settlements | (125) | | | 0 | |
| Other, net | (37) | | | 2 | |
| Net cash used in financing activities | (355) | | | (328) | |
| Cash, cash equivalents, restricted cash, and restricted cash equivalents: | | | |
| Net change from operating, investing and financing activities | 92 | | | 120 | |
| Effect of exchange rate changes | 2 | | | (8) | |
| Beginning balance | 255 | | | 111 | |
| Ending balance | $ | 349 | | | $ | 223 | |
| | | |
| Supplemental cash flow disclosures of non-cash investing activities: | | | |
| Capital expenditures included in accounts payable and accrued expenses | $ | 259 | | | $ | 177 | |
| | | |
| | | |
| Supplemental cash flow disclosures of non-cash financing activities: | | | |
| Dividends declared but not yet paid | 232 | | | 212 | |
| Finance lease additions | 88 | | | 10 | |
| Supplemental cash flow disclosures: | | | |
| Cash paid for interest | 29 | | | 0 | |
| Cash paid for income taxes | 31 | | | 81 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the First Quarter of 2020 and 2019
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock Issued | | Additional
Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | | Non-controlling Interest | | Total
Equity |
| (in millions, except per share data) | Shares | | Amount | | | | | | |
| Balance as of January 1, 2021 | 1,407.3 | | | $ | 14 | | | $ | 21,677 | | | $ | 2,061 | | | $ | 77 | | | $ | 23,829 | | | $ | 1 | | | $ | 23,830 | |
| Net income | — | | | — | | | — | | | 325 | | | — | | | 325 | | | 0 | | | 325 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 87 | | | 87 | | | — | | | 87 | |
| Dividends declared, $0.15 per share | — | | | — | | | — | | | (212) | | | — | | | (212) | | | — | | | (212) | |
| Issuance of common stock | 4.3 | | | — | | | 140 | | | — | | | — | | | 140 | | | — | | | 140 | |
| Shares issued under employee stock-based compensation plans and other | 5.7 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation and stock options exercised | — | | | — | | | (99) | | | — | | | — | | | (99) | | | — | | | (99) | |
| Balance as of March 31, 2021 | 1,417.3 | | | $ | 14 | | | $ | 21,718 | | | $ | 2,174 | | | $ | 164 | | | $ | 24,070 | | | $ | 1 | | | $ | 24,071 | |
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| | | | Common Stock Issued | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | | 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 | | (in millions, except per share data) | Shares | | Amount | |
| Balance as of January 1, 2020 | 1,406.8 |
| | $ | 14 |
| | $ | 21,557 |
| | $ | 1,582 |
| | $ | 104 |
| | $ | 23,257 |
| Balance as of January 1, 2020 | 1,406.8 | | | $ | 14 | | | $ | 21,557 | | | $ | 1,582 | | | $ | 104 | | | $ | 23,257 | | | $ | 0 | | | $ | 23,257 | |
| | Net income | — |
| | — |
| | — |
| | 156 |
| | — |
| | 156 |
| Net income | — | | | — | | | — | | | 156 | | | — | | | 156 | | | — | | | 156 | |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (584 | ) | | (584 | ) | Other comprehensive loss | — | | | — | | | — | | | — | | | (584) | | | (584) | | | — | | | (584) | |
| Dividends declared, $0.15 per share | — |
| | — |
| | — |
| | (211 | ) | | — |
| | (211 | ) | Dividends declared, $0.15 per share | — | | | — | | | — | | | (211) | | | — | | | (211) | | | — | | | (211) | |
| Shares issued under employee stock-based compensation plans and other | 0.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| | Shares issued under stock-based compensation plans and other | | Shares issued under stock-based compensation plans and other | 0.3 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation and stock options exercised | — |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
| Stock-based compensation and stock options exercised | — | | | — | | | 22 | | | — | | | — | | | 22 | | | — | | | 22 | |
| Balance as of March 31, 2020 | 1,407.1 |
| | $ | 14 |
| | $ | 21,579 |
| | $ | 1,527 |
| | $ | (480 | ) | | $ | 22,640 |
| Balance as of March 31, 2020 | 1,407.1 | | | $ | 14 | | | $ | 21,579 | | | $ | 1,527 | | | $ | (480) | | | $ | 22,640 | | | $ | 0 | | | $ | 22,640 | |
| | | | | | | | | | | | | |
| Balance as of January 1, 2019 | 1,405.9 |
| | $ | 14 |
| | $ | 21,471 |
| | $ | 1,178 |
| | $ | (130 | ) | | $ | 22,533 |
| |
| Adoption of new accounting standards | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) | |
| Net income | — |
| | — |
| | — |
| | 230 |
| | — |
| | 230 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 93 |
| | 93 |
| |
| Dividends declared, $0.15 per share | — |
| | — |
| | — |
| | (211 | ) | | — |
| | (211 | ) | |
| Measurement period adjustment | — |
| | — |
| | 11 |
| | — |
| | — |
| | 11 |
| |
| Shares issued under stock-based compensation plans and other | 0.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Stock-based compensation and stock options exercised | — |
| | — |
| | 23 |
| | — |
| | — |
| | 23 |
| |
| Balance as of March 31, 2019 | 1,406.7 |
| | $ | 14 |
| | $ | 21,505 |
| | $ | 1,192 |
| | $ | (37 | ) | | $ | 22,674 |
| |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
ORGANIZATION
On January 29, 2018, DPS entered into the DPS Merger Agreement by and among DPS, Maple and Merger Sub. The DPS Merger was consummated on July 9, 2018, at which time DPS changed its name to "Keurig Dr Pepper Inc.".
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.
Except as otherwise specified, references to the "first quarter" indicate the Company's quarterly periods ended March 31, 20202021 and 2019.2020.
PRINCIPLES OF CONSOLIDATION
KDP consolidates all wholly owned subsidiaries.
The Company consolidates investments in companies in which it holds the majority interest. In these cases, the third party equity interest is referred to as non-controlling interest. Non-controlling interests are presented as a separate component within equity in the unaudited Condensed Consolidated Balance Sheets, and net income attributable to the non-controlling interests are presented separately in the unaudited Condensed Consolidated Statements of Income.
The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes KDP's proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors or similar governing body, participation in policy-making decisions and material intercompany transactions.
KDP eliminates from its financial results all intercompany transactions between entities included in the unaudited condensed consolidated financial statements.
USE OF ESTIMATES
The process of preparing KDP's unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. 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.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
RECLASSIFICATIONS
The Company reclassified the following amounts in the unaudited condensed consolidated Statement of Cash Flows for the first quarter of 2019 in order to conform to current year presentation:
|
| | | | | | | | |
| (in millions) | | Prior Presentation | | Revised Presentation | | First Quarter of 2019 |
| Net cash provided by operating activities: | | | | | | |
| Amortization of intangibles | | Amortization expense | | Amortization of intangibles | | $ | 31 |
|
Other amortization expense(1) | | Amortization expense | | Other amortization expense | | 36 |
|
| Amortization of deferred financing fees | | Amortization expense | | Other, net | | 4 |
|
| Amortization of bond fair value | | Amortization expense | | Other, net | | 7 |
|
| Equity in loss of unconsolidated affiliates | | Other, net | | Equity in loss of unconsolidated affiliates | | 15 |
|
| Net cash provided by (used in) investing activities: | | | | | | |
| Proceeds from sales of property, plant and equipment | | Other, net | | Proceeds from sales of property, plant and equipment | | 18 |
|
| Purchase of intangibles | | Other, net | | Purchases of intangibles | | (2 | ) |
| Net cash provided by (used in) financing activities: | | | | | | |
| Proceeds from stock options exercised | | Proceeds from stock options exercised | | Other, net | | 8 |
|
| |
(1) | Primarily includes amortization of customer rebates and upfront payments. |
RECENTLY ISSUED ACCOUNTING STANDARDSADOPTED PROVISIONS OF U.S. GAAP
InAs of January 2020,1, 2021, the FASB issuedCompany adopted ASU 2020-01.2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The objective of ASU 2020-01the new standard is to clarify the interaction of the accounting for equity securities, investments accounted for under the equity method of accounting and the accounting for certain forward contracts and purchased options accounted for under different topics in U.S. GAAP. ASU 2020-01 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. The Company is currently evaluatingadoption of the standard did not impact of ASU 2020-01 but expects the impact to be immaterial to KDP's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04. The objective
RECENTLY ADOPTED PROVISIONS OF U.S. GAAP
Credit Losses
As of January 1, 2020, the Company adopted ASU 2016-13, which replaced the incurred loss methodology with an expected loss methodology. The objective of ASU 2016-13 was to provide for a new impairment model which requires measurement and recognition of current expected credit losses (CECL) for most financial assets held. The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost, which means that results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption of ASU 2016-13 did not have an impact on the Company's unaudited condensed consolidated financial statements.
Refer to Note 13 for additional information.
Other Accounting Standards
As of January 1, 2020, the Company adopted ASU 2018-13. The objective of ASU 2018-13 is to improve the disclosures related to fair value measurement by removing, modifying, or adding disclosure requirements related to recurring and non-recurring fair value measurements. The adoption of ASU 2018-13 did not have an impact on the Company's unaudited condensed consolidated financial statements.Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
2. Long-term Obligations and Borrowing Arrangements
The following table summarizes the Company's long-term obligations:
|
| | | | | | | |
| (in millions) | March 31, 2020 | | December 31, 2019 |
| Senior unsecured notes | $ | 11,559 |
| | $ | 11,802 |
|
| Term loan | 970 |
| | 1,372 |
|
| Subtotal | 12,529 |
| | 13,174 |
|
| Less - current portion | (98 | ) | | (347 | ) |
| Long-term obligations | $ | 12,431 |
| | $ | 12,827 |
|
| | | | | | | | | | | |
| (in millions) | March 31, 2021 | | December 31, 2020 |
| Notes | $ | 13,465 | | | $ | 13,065 | |
| | | |
| Term loan | 0 | | | 423 | |
| Subtotal | 13,465 | | | 13,488 | |
| Less - current portion | (1,750) | | | (2,345) | |
| Long-term obligations | $ | 11,715 | | | $ | 11,143 | |
The following table summarizes the Company'sCompany's short-term borrowings and current portion of long-term obligations:
| | | | | | | | | | | |
| (in millions) | March 31, 2021 | | December 31, 2020 |
| Commercial paper notes | $ | 0 | | | $ | 0 | |
| Revolving credit facilities | 0 | | | 0 | |
| Current portion of long-term obligations: | | | |
| Notes | 1,750 | | | 2,246 | |
| Term loan | 0 | | | 99 | |
| Short-term borrowings and current portion of long-term obligations | $ | 1,750 | | | $ | 2,345 | |
|
| | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy Level | | March 31, 2020 | | December 31, 2019 |
| (in millions) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Commercial paper notes | 2 | | $ | 859 |
| | $ | 859 |
| | $ | 1,246 |
| | $ | 1,246 |
|
| Revolving credit facilities | 2 | | 1,000 |
| | 1,000 |
| | — |
| | — |
|
| Current portion of long-term obligations: | | | | | | | | | |
| Senior unsecured notes | 2 | | — |
| | — |
| | 250 |
| | 250 |
|
| Term loan | 2 | | 98 |
| | 98 |
| | 97 |
| | 97 |
|
| Short-term borrowings and current portion of long-term obligations | | | $ | 1,957 |
| | $ | 1,957 |
| | $ | 1,593 |
| | $ | 1,593 |
|
The Company's Notes consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | Fair Value Hierarchy Level | | March 31, 2020 | | December 31, 2019 |
| Issuance | | Maturity Date | | Rate | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
2020 Notes(1) | | January 15, 2020 | | 2.000% | | 2 | | $ | — |
| | $ | — |
| | $ | 250 |
| | $ | 250 |
|
| 2021 Merger Notes | | May 25, 2021 | | 3.551% | | 2 | | 1,750 |
| | 1,766 |
| | 1,750 |
| | 1,785 |
|
| 2021-A Notes | | November 15, 2021 | | 3.200% | | 2 | | 250 |
| | 250 |
| | 250 |
| | 254 |
|
| 2021-B Notes | | November 15, 2021 | | 2.530% | | 2 | | 250 |
| | 247 |
| | 250 |
| | 251 |
|
| 2022 Notes | | November 15, 2022 | | 2.700% | | 2 | | 250 |
| | 247 |
| | 250 |
| | 251 |
|
| 2023 Merger Notes | | May 25, 2023 | | 4.057% | | 2 | | 2,000 |
| | 2,075 |
| | 2,000 |
| | 2,110 |
|
| 2023 Notes | | December 15, 2023 | | 3.130% | | 2 | | 500 |
| | 504 |
| | 500 |
| | 514 |
|
| 2025 Merger Notes | | May 25, 2025 | | 4.417% | | 2 | | 1,000 |
| | 1,059 |
| | 1,000 |
| | 1,090 |
|
| 2025 Notes | | November 15, 2025 | | 3.400% | | 2 | | 500 |
| | 507 |
| | 500 |
| | 521 |
|
| 2026 Notes | | September 15, 2026 | | 2.550% | | 2 | | 400 |
| | 387 |
| | 400 |
| | 400 |
|
| 2027 Notes | | June 15, 2027 | | 3.430% | | 2 | | 500 |
| | 503 |
| | 500 |
| | 520 |
|
| 2028 Merger Notes | | May 25, 2028 | | 4.597% | | 2 | | 2,000 |
| | 2,184 |
| | 2,000 |
| | 2,253 |
|
| 2038 Notes | | May 1, 2038 | | 7.450% | | 2 | | 125 |
| | 187 |
| | 125 |
| | 167 |
|
| 2038 Merger Notes | | May 25, 2038 | | 4.985% | | 2 | | 500 |
| | 559 |
| | 500 |
| | 587 |
|
| 2045 Notes | | November 15, 2045 | | 4.500% | | 2 | | 550 |
| | 580 |
| | 550 |
| | 605 |
|
| 2046 Notes | | December 15, 2046 | | 4.420% | | 2 | | 400 |
| | 417 |
| | 400 |
| | 435 |
|
| 2048 Merger Notes | | May 25, 2048 | | 5.085% | | 2 | | 750 |
| | 886 |
| | 750 |
| | 905 |
|
| Principal amount | | | | | | | | $ | 11,725 |
| | $ | 12,358 |
| | $ | 11,975 |
| | $ | 12,898 |
|
| Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger | | | | (166 | ) | | | | (173 | ) | | |
| Carrying amount | | | | | | | | $ | 11,559 |
| | | | $ | 11,802 |
| | |
| |
(1) | On January 15, 2020, the Company repaid the 2020 Notes at maturity, using commercial paper notes. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The fair value amountsCompany's Notes consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except %) | | | | | | | | |
| Issuance | | Maturity Date | | Rate | | March 31, 2021 | | December 31, 2020 |
| 2021 Merger Notes | | May 25, 2021 | | 3.551% | | $ | 1,750 | | | $ | 1,750 | |
| 2021-A Notes | | November 15, 2021 | | 3.200% | | 0 | | | 250 | |
| 2021-B Notes | | November 15, 2021 | | 2.530% | | 0 | | | 250 | |
| 2022 Notes | | November 15, 2022 | | 2.700% | | 0 | | | 250 | |
| 2023 Merger Notes | | May 25, 2023 | | 4.057% | | 1,000 | | | 2,000 | |
| 2023 Notes | | December 15, 2023 | | 3.130% | | 500 | | | 500 | |
2024 Notes(1) | | March 15, 2024 | | 0.750% | | 1,150 | | | 0 | |
| 2025 Merger Notes | | May 25, 2025 | | 4.417% | | 1,000 | | | 1,000 | |
| 2025 Notes | | November 15, 2025 | | 3.400% | | 500 | | | 500 | |
| 2026 Notes | | September 15, 2026 | | 2.550% | | 400 | | | 400 | |
| 2027 Notes | | June 15, 2027 | | 3.430% | | 500 | | | 500 | |
| 2028 Merger Notes | | May 25, 2028 | | 4.597% | | 2,000 | | | 2,000 | |
| 2030 Notes | | May 1, 2030 | | 3.200% | | 750 | | | 750 | |
| 2031 Notes | | March 15, 2031 | | 2.250% | | 500 | | | 0 | |
| 2038 Notes | | May 1, 2038 | | 7.450% | | 125 | | | 125 | |
| 2038 Merger Notes | | May 25, 2038 | | 4.985% | | 500 | | | 500 | |
| 2045 Notes | | November 15, 2045 | | 4.500% | | 550 | | | 550 | |
| 2046 Notes | | December 15, 2046 | | 4.420% | | 400 | | | 400 | |
| 2048 Merger Notes | | May 25, 2048 | | 5.085% | | 750 | | | 750 | |
| 2050 Notes | | May 1, 2050 | | 3.800% | | 750 | | | 750 | |
| 2051 Notes | | March 15, 2051 | | 3.350% | | 500 | | | 0 | |
| Principal amount | | | | | | $ | 13,625 | | | $ | 13,225 | |
Adjustment from principal amount to carrying amount(2) | | (160) | | | (160) | |
| Carrying amount | | | | | | $ | 13,465 | | | $ | 13,065 | |
(1)The 2024 Notes were basedmay be called anytime on current market rates availableor after March 15, 2022, in whole or in part, at the Company’s option, at a redemption price equal to 100% of the Company. The difference between the fair valueprincipal amount being redeemed, plus accrued 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. unpaid interest.
(2)The carrying amount includes the unamortized discounts, debt issuance costs and the fair value adjustment foradjustments related to the DPS Merger.
On March 15, 2021, the Company completed the issuance of the 2024 Notes, the 2031 Notes, and the 2051 Notes. The discount associated with these notes was approximately $3 million and the Company incurred $13 million in debt issuance costs. The net proceeds from the issuance were used to repay the Company’s 2021-A Notes, 2021-B Notes, 2022 Notes, and approximately $1 billion of the 2023 Merger Notes, as well as to repay and terminate the 2019 KDP Term Loan as described below. As a result of the repayments of senior unsecured notes, the Company recorded losses on early extinguishment of debt of $104 million during the first quarter of 2021, comprised of a make-whole premium, fair market value adjustments and deferred financing fees written off.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
VARIABLE-RATE BORROWING ARRANGEMENTS
The KDP Credit Agreements consistedconsist of the following carrying valuesfollowing:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | March 31, 2021 | | December 31, 2020 |
| Issuance | | Maturity Date | | Available Balances | | Carrying Value | | Carrying Value |
| 2019 KDP Term Loan | | | | $ | — | | | $ | 0 | | | $ | 425 | |
KDP Revolver(1) | | February 2023 | | 2,400 | | | 0 | | | 0 | |
| 2020 364-Day Credit Agreement | | | | 0 | | | 0 | | | 0 | |
| 2021 364-Day Credit Agreement | | March 2022 | | 1,500 | | | 0 | | | 0 | |
| Principal amount | | | | | | $ | 0 | | | $ | 425 | |
| Unamortized discounts and debt issuance costs | | | 0 | | | (2) | |
| Carrying amount | | | | | | $ | 0 | | | $ | 423 | |
(1)The KDP Revolver has $200 million letters of credit availability and estimated fair values that are not required to be measured at fair value in the unaudited Condensed Consolidated Balance Sheets:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | Fair Value Hierarchy Level | | March 31, 2020 | | December 31, 2019 |
| Issuance | | Maturity Date | | | Available Balances | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
2019 KDP Term Loan(1) | | February 2023 | | 2 | | $ | — |
| | $ | 975 |
| | $ | 975 |
| | $ | 1,380 |
| | $ | 1,380 |
|
KDP Revolver(2) | | February 2023 | | 2 | | 1,400 |
| | 1,000 |
| | 1,000 |
| | — |
| | — |
|
| 2019 364-Day Credit Agreement | | May 2020 | | 2 | | 750 |
| | — |
| | — |
| | — |
| | — |
|
| Principal amount | | | | | | | | $ | 1,975 |
| | $ | 1,975 |
| | $ | 1,380 |
| | $ | 1,380 |
|
| Unamortized discounts and debt issuance costs | | | | (5 | ) | | | | (8 | ) | | |
| Carrying amount | | | | | | | | $ | 1,970 |
| | | | $ | 1,372 |
| | |
| |
(1) | The Company borrowed $380 million of commercial paper to voluntarily prepay a portion of its outstanding obligations under the 2019 KDP Term Loan. As a result of these voluntary prepayments, the Company recorded a $2 million loss on early extinguishment during the first quarter of 2020
|
| |
(2) | The KDP Revolver has $200 million letters of credit availability and NaN utilized as of March 31, 2020.
|
As of March 31, 2020,2021, the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements.
2019 KDP Term Loan
During the first quarter of 2021, the Company voluntarily prepaid and terminated the 2019 KDP Term Loan using proceeds from the aforementioned issuance of senior subordinated notes. As a result of this voluntary prepayment, the Company recorded $1 million of losses on early extinguishment of debt related to the 2019 KDP Term Loan during the first quarter of 2021.
364-Day Credit Agreements
During the first quarter of 2021, the Company terminated its 2020 364-Day Credit Agreement, which was originally available through April 2021. No amounts were drawn under the 2020 364-Day Credit Agreement prior to termination.
The Company then entered into the 2021 364-Day Credit Agreement on March 24, 2021 among KDP, the banks party thereto and Bank of America, N.A. as administrative agent, pursuant to which the Company obtained a $1,500 million commitment. The interest rate applicable to borrowings under the 2021 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 1.000% to 1.625% or a base rate plus a margin of 0.000% to 0.625%, depending on the rating of certain index debt of the Company. The 2021 364-Day Credit Agreement matures on March 23, 2022, and includes a term-out option which allows KDP to extend any outstanding amounts borrowed under the agreement for one year for a fee of 0.750% on the amounts borrowed.
Commercial Paper Program
The following table provides information about the Company's weighted average borrowings under its commercial paper program:
|
| | | | | | | |
| | First Quarter |
| (in millions, except %) | 2020 | | 2019 |
| Weighted average commercial paper borrowings | $ | 1,670 |
| | $ | 1,748 |
|
| Weighted average borrowing rates | 1.85 | % | | 2.90 | % |
| | | | | | | | | | | | | | | | | |
| | | First Quarter |
| (in millions, except %) | | | | | 2021 | | 2020 |
| Weighted average commercial paper borrowings | | | | | $ | 22 | | | $ | 1,670 | |
| Weighted average borrowing rates | | | | | 0.18 | % | | 1.85 | % |
Letter of Credit Facility
In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility. Under this facility, $100 million is available for the issuance of letters of credit, $44 million of which was utilized as of March 31, 20202021 and $56 million of which remains available for use.
FAIR VALUE DISCLOSURES
The fair values of the Company's commercial paper approximate the carrying value and are considered Level 2 within the fair value hierarchy.
The fair values of the Company's Notes are based on current market rates available to the Company 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 the Company's Notes was $14,828 million and $15,274 million as of March 31, 2021 and December 31, 2020, respectively.
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) | Coffee Systems | | Packaged Beverages | | Beverage Concentrates | | Latin America Beverages | | Total |
| Balance as of January 1, 2020 | $ | 9,775 |
| | $ | 5,301 |
| | $ | 4,526 |
| | $ | 570 |
| | $ | 20,172 |
|
| Foreign currency translation | (74 | ) | | (57 | ) | | (37 | ) | | (112 | ) | | (280 | ) |
| Acquisitions | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
| Balance as of March 31, 2020 | $ | 9,701 |
| | $ | 5,250 |
| | $ | 4,489 |
| | $ | 458 |
| | $ | 19,898 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Coffee Systems | | Packaged Beverages | | Beverage Concentrates | | Latin America Beverages | | | | Total |
| Balance as of January 1, 2021 | $ | 9,795 | | | $ | 5,314 | | | $ | 4,536 | | | $ | 539 | | | | | $ | 20,184 | |
| Foreign currency translation | 27 | | | 9 | | | 6 | | | (17) | | | | | 25 | |
| | | | | | | | | | | |
| Balance as of March 31, 2021 | $ | 9,822 | | | $ | 5,323 | | | $ | 4,542 | | | $ | 522 | | | | | $ | 20,209 | |
INTANGIBLE ASSETS OTHER THAN GOODWILL
The net carrying amounts of intangible assets other than goodwill with indefinite lives are as follows:
| | | | | | | | | | | | | | |
| (in millions) | | March 31, 2021 | | December 31, 2020 |
Brands(1) | | $ | 19,876 | | | $ | 19,874 | |
| Trade names | | 2,480 | | | 2,480 | |
| Contractual arrangements | | 123 | | | 123 | |
| Distribution rights | | 66 | | | 57 | |
| Total | | $ | 22,545 | | | $ | 22,534 | |
|
| | | | | | | | |
| (in millions) | | March 31, 2020 | | December 31, 2019 |
Brands(1) | | $ | 19,569 |
| | $ | 19,948 |
|
| Trade names | | 2,479 |
| | 2,479 |
|
| Contractual arrangements | | 120 |
| | 122 |
|
| Distribution rights | | 19 |
| | 16 |
|
| Total | | $ | 22,187 |
| | $ | 22,565 |
|
| |
(1) | The decrease of $379 million in brands with indefinite lives was due to foreign currency translation during the first quarter of 2020. |
The net carrying amounts of intangible assets other than goodwill with definite lives are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| (in millions) | Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
| Acquired technology | $ | 1,146 |
| | $ | (273 | ) | | $ | 873 |
| | $ | 1,146 |
| | $ | (255 | ) | | $ | 891 |
|
| Customer relationships | 632 |
| | (109 | ) | | 523 |
| | 638 |
| | (102 | ) | | 536 |
|
| Trade names | 126 |
| | (58 | ) | | 68 |
| | 128 |
| | (55 | ) | | 73 |
|
| Contractual arrangements | 24 |
| | (4 | ) | | 20 |
| | 24 |
| | (3 | ) | | 21 |
|
| Brands | 15 |
| | (2 | ) | | 13 |
| | 10 |
| | (2 | ) | | 8 |
|
| Distribution rights | 24 |
| | (2 | ) | | 22 |
| | 24 |
| | (1 | ) | | 23 |
|
| Total | $ | 1,967 |
| | $ | (448 | ) | | $ | 1,519 |
| | $ | 1,970 |
| | $ | (418 | ) | | $ | 1,552 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (in millions) | Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
| Acquired technology | $ | 1,146 | | | $ | (346) | | | $ | 800 | | | $ | 1,146 | | | $ | (328) | | | $ | 818 | |
| Customer relationships | 638 | | | (143) | | | 495 | | | 638 | | | (135) | | | 503 | |
| Trade names | 128 | | | (74) | | | 54 | | | 127 | | | (69) | | | 58 | |
| Contractual arrangements | 24 | | | (6) | | | 18 | | | 24 | | | (5) | | | 19 | |
| Brands | 21 | | | (6) | | | 15 | | | 21 | | | (5) | | | 16 | |
| Distribution rights | 29 | | | (7) | | | 22 | | | 26 | | | (6) | | | 20 | |
| Total | $ | 1,986 | | | $ | (582) | | | $ | 1,404 | | | $ | 1,982 | | | $ | (548) | | | $ | 1,434 | |
Amortization expense for intangible assets with definite lives was as follows:
|
| | | | | | | |
| | First Quarter |
| (in millions) | 2020 | | 2019 |
| Amortization expense for intangible assets with definite lives | $ | 33 |
| | $ | 31 |
|
| | | | | | | | | | | | | | | | | |
| | | | First Quarter |
| (in millions) | | | | | 2021 | | 2020 |
| Amortization expense | | | | | $ | 33 | | | $ | 33 | |
Amortization expense of these intangible assets over the remainder of 20202021 and the next five years is expected to be as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Remainder of 2021 | | For the Years Ending December 31, |
| (in millions) | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 |
| Expected amortization expense | $ | 101 | | | $ | 134 | | | $ | 132 | | | $ | 124 | | | $ | 110 | | | $ | 105 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Remainder of 2020 | | For the Years Ending December 31, |
| (in millions) | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| Expected amortization expense for intangible assets with definite lives | $ | 100 |
| | $ | 133 |
| | $ | 133 |
| | $ | 132 |
| | $ | 123 |
| | $ | 111 |
|
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. As a result of the changes to the Company’s operating segments effective January 1, 2021, as described in Note 7, which resulted in a change to the Company’s reporting units, management performed a step zero analysis as of the effective date of the goodwill for the impacted reporting units. The Company also performed an analysis as of March 31, 2021 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 circumstances, which included the recent COVID-19 pandemic, that indicatedindications that the carrying amount of any goodwill or any intangible asset may not be recoverable as of March 31, 2020.recoverable.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
4.Investments in Unconsolidated Affiliates
The following table summarizes investments in unconsolidated affiliates as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | |
| | | | | March 31, | | December 31, |
| (in millions) | | Ownership Interest | | 2020 | | 2019 |
| BodyArmor | | 12.5 | % | | $ | 51 |
| | $ | 52 |
|
| Bedford | | 30.0 | % | | 1 |
| | 46 |
|
| Dyla LLC | | 12.4 | % | | 13 |
| | 13 |
|
| Force Holdings LLC | | 33.3 | % | | 5 |
| | 5 |
|
| Beverage startup companies | | (various) |
| | 30 |
| | 30 |
|
| Other | | (various) |
| | 5 |
| | 5 |
|
| Investments in unconsolidated affiliates | | | | $ | 105 |
| | $ | 151 |
|
Impairment of Bedford Investment and Related Party Note Receivable
The Company and ABI, in conjunction with the creation of Bedford, had executed a line of credit agreement with Bedford on March 3, 2017, which was amended on December 7, 2018 to increase the line of credit. The Company committed and funded the $51 million capacity, which incurs a fixed interest rate of 8.1% per annum. The credit agreement with Bedford matures on March 3, 2024.
During the first quarter of 2020, the Company reduced its expectation of future operating performance for Bedford based on COVID-19 and a new revised five-year projection during the first quarter of 2020 from the management of Bedford that projected the possibility of profitability two years later than previously anticipated. As a result of these indicators of impairment, the Company tested the Bedford investment for an other-than-temporary impairment using a discounted cash flow framework with multiple scenarios, including the conversion of the note receivable into equity. The results of its analysis indicated that the note receivable of $55 million was fully impaired and the investment in unconsolidated affiliates was impaired by $31 million on the impairment on investment line in the Condensed Consolidated Statements of Income. As a result of the other-than-temporary impairment, the Company has placed the note receivable in non-accrual status.
5. Restructuring and Integration Costs
The Company implements restructuring programs from time to time and incurs costs that are designed to improve operating effectiveness and lower costs. When the Company implements these programs, the Company incurs expenses, such as employee separations, lease terminations and other direct exit costs, that qualify as exit and disposal costs under U.S. GAAP.
The Company also incurs expenses that are an integral component of, and directly attributable to, its restructuring activities, which do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments, implementation costs and other incremental costs. These costs are recorded within SG&A expenses on the income statement and are held primarily within unallocated corporate costs.
Restructuring and integration charges incurred on the defined programs were as follows:
|
| | | | | | | |
| | First Quarter |
| (in millions) | 2020 | | 2019 |
| Keurig 2.0 exit | $ | — |
| | $ | 1 |
|
| DPS integration program | 53 |
| | 60 |
|
| Total restructuring and integration charges | $ | 53 |
| | $ | 61 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
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 as of March 31, 2020 along with charges to expense, cash payments and non-cash charges for the period specific to the Integration Program were as follows:
|
| | | |
| (in millions) | Workforce Reduction Costs |
| Balance as of January 1, 2020 | $ | 15 |
|
| Charges to expense | 12 |
|
| Cash payments | (2 | ) |
| Non-cash adjustment items | (2 | ) |
| Balance as of March 31, 2020 | $ | 23 |
|
RESTRUCTURING PROGRAMS
DPS Integration ProgramINTEGRATION 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. The Company expects to incur total cash expenditures of $750 million, comprised of both capital expenditures and expense, and expects to complete the program byin 2021. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $440$630 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through March 31, 2020.
6. Income Taxes
The effective tax rates2021. Restructuring and integration charges on the DPS Integration Program were $43 million and $53 million for the first quarter of 2021 and 2020, respectively.
Restructuring liabilities that qualify as exit and 2019disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements. Restructuring liabilities for the DPS Integration Program, all of which were 23.9% and 27.0%, respectively. Forworkforce reduction costs, were as follows for the first quarter of 2020, the provision for income taxes was lower than the first quarter of 2019 primarily due to the benefit received from the revaluation of the Company’s deferred tax liabilities and the decrease of income tax reserves due to the lapse in statute of limitations.period presented:
| | | | | | | | | |
| (in millions) | Restructuring Liabilities | | | | |
| Balance as of January 1, 2021 | $ | 14 | | | | | |
| Charges to expense | 13 | | | | | |
| Cash payments | (9) | | | | | |
| | | | | |
| Balance as of March 31, 2021 | $ | 18 | | | | | |
7.
5. 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 designate these contracts as hedges for accounting purposes, and 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 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.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
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.
INTEREST RATES
Economic Hedges
The CompanyKDP is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate swaps to provide predictability in the Company's overall cost structure, including both receive-fixed, pay-variable and receive-variable, pay-fixed swaps. A natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in interest expense in the unaudited Condensed Consolidated Statements of Income. As of March 31, 2020,2021, all economic interest rate swap contracts will mature in March 2025.
Cash Flow Hedges
In order to hedge the variability in cash flows from interest rate changes associated with the Company’s planned future issuances of long-term debt, during the first quarter of 2021, the Company entered into forward starting swaps and designated them as cash flow hedges. The forward starting swaps are planned to be unwound at the issuance of long-term debt. As of March 31, 2021, the forward starting swaps have mandatory termination dates ranging from June 2022 to May 2025.
FOREIGN EXCHANGE
The Company's Canadian and Mexican businesses purchase certain inventory under extended payment termsKDP is exposed to foreign exchange risk in most cases through transactions denominated and settledits international subsidiaries, which may transact in U.S. dollars, a currencycurrencies that are different from the functional currencycurrencies of those businesses.subsidiaries. The Company additionally has a subsidiary in Canada with intercompany notes denominated and settled in U.S. dollars, a currency different from the functional currencybalance sheets of the Canadian business. The accounts payable related to the inventory purchases and the intercompany noteseach of these businesses are also subject to exposure from movements in exchange rates.
Economic Hedges
During the first quarter of 2021 and 2020, and 2019, the CompanyKDP held FX forward contracts to economically manage the balance sheet exposures resulting from changes in thesethe FX exchange rates.rates described above. The intent of these FX contracts is to provide predictabilityminimize the impact of FX risk associated with balance sheet positions not in the Company's overall cost structure.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. These FX contracts have maturities ranging from April 20202021 to September 2024 as of March 31, 2020.2021.
KEURIG DR PEPPER INC.Cash Flow Hedges
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
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 intent of these contracts is to provide a certain level of predictability in the Company's overall cost structure. During the first quarter of 20202021 and 2019,2020, the Company held forward, future, swap and option contracts that economically hedged certain of its risks. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations. These commodity contracts have maturities ranging from April 20202021 to June 2022January 2024 as of March 31, 2020.
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS
The following table presents the notional amounts of the Company's outstanding derivative instruments by type:2021.
|
| | | | | | | |
| | March 31, | | December 31, |
| (in millions) | 2020 | | 2019 |
| Interest rate contracts | | | |
Receive-fixed, pay-variable interest rate swaps(1) | $ | — |
| | $ | 50 |
|
Receive-variable, pay-fixed interest rate swaps(2) | 450 |
| | 575 |
|
| FX contracts | 471 |
| | 523 |
|
| Commodity contracts | 317 |
| | 150 |
|
| |
(1) | During the first quarter of 2020, the Company elected to terminate $50 million notional amount of receive-fixed, pay-variable interest rate swaps and received cash of $18 million. |
| |
(2) | During the first quarter of 2020, the Company elected to terminate $575 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $2 million. |
FAIR VALUE OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS
|
| | | | | | | | | | | |
| (in millions) | Fair Value Hierarchy Level | | Balance Sheet Location | | March 31,
2020 | | December 31,
2019 |
| Assets: | | | | | | | |
| Interest rate contracts | 2 | | Prepaid expenses and other current assets | | $ | — |
| | $ | 1 |
|
| FX contracts | 2 | | Prepaid expenses and other current assets | | 19 |
| | — |
|
| Commodity contracts | 2 | | Prepaid expenses and other current assets | | 7 |
| | 30 |
|
| Interest rate contracts | 2 | | Other non-current assets | | — |
| | 18 |
|
| FX contracts | 2 | | Other non-current assets | | 14 |
| | — |
|
| Commodity contracts | 2 | | Other non-current assets | | 6 |
| | 1 |
|
| | | | | |
| |
|
|
| Liabilities: | | | | | | | |
| Interest rate contracts | 2 | | Other current liabilities | | $ | 2 |
| | $ | — |
|
| FX contracts | 2 | | Other current liabilities | | — |
| | 2 |
|
| Commodity contracts | 2 | | Other current liabilities | | 37 |
| | 10 |
|
| Interest rate contracts | 2 | | Other non-current liabilities | | 3 |
| | — |
|
| FX contracts | 2 | | Other non-current liabilities | | — |
| | 3 |
|
| Commodity contracts | 2 | | Other non-current liabilities | | 13 |
| | 1 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The following table presents the notional amounts of KDP's outstanding derivative instruments by type:
| | | | | | | | | | | |
| (in millions) | March 31, 2021 | | December 31, 2020 |
| Interest rate contracts | | | |
| Forward starting swaps, designated as cash flow hedges | $ | 2,500 | | | $ | 0 | |
| Receive-variable, pay-fixed interest rate swaps, not designated as hedging instruments | 450 | | | 450 | |
| FX contracts | | | |
| Forward contracts, not designated as hedging instruments | 505 | | | 476 | |
| Forward contracts, designated as cash flow hedges | 369 | | | 333 | |
| Commodity contracts | 450 | | | 450 | |
FAIR VALUE OF DERIVATIVE INSTRUMENTS
The fair values of commodity contracts, interest rate contracts and FX forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the reporting date. Interest rate contracts are valued using models based primarily on readily observable market parameters, such as LIBOR 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 designated level 2 within the fair value hierarchy.
| | | | | | | | | | | | | | | | | |
| (in millions) | Balance Sheet Location | | March 31, 2021 | | December 31, 2020 |
| Assets: | | | | | |
| | | | | |
| | | | | |
| Commodity contracts | Prepaid expenses and other current assets | | $ | 65 | | | $ | 45 | |
| Interest rate contracts | Other non-current assets | | 2 | | | 0 | |
| | | | | |
| Commodity contracts | Other non-current assets | | 25 | | | 12 | |
| | | | | |
| Liabilities: | | | | | |
| Interest rate contracts | Other current liabilities | | $ | 2 | | | $ | 2 | |
| FX contracts | Other current liabilities | | 7 | | | 6 | |
| Commodity contracts | Other current liabilities | | 1 | | | 5 | |
| Interest rate contracts | Other non-current liabilities | | 0 | | | 7 | |
| FX contracts | Other non-current liabilities | | 14 | | | 9 | |
| Commodity contracts | Other non-current liabilities | | 2 | | | 2 | |
Designated as Hedging Instruments
The following table summarizes the location of the fair value of the Company's derivative instruments which are designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets. All such instruments are designated level 2 within the fair value hierarchy.
| | | | | | | | | | | | | | | | | |
| (in millions) | Balance Sheet Location | | March 31, 2021 | | December 31, 2020 |
| Assets: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Interest rate contracts | Other non-current assets | | $ | 92 | | | $ | 0 | |
| | | | | |
| Liabilities: | | | | | |
| FX contracts | Other current liabilities | | $ | 13 | | | $ | 12 | |
| | | | | |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
IMPACT OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS
The following table presents the amount of (gains) losses recognized in the unaudited Condensed Consolidated Statements of Income related to derivative instruments not designated as hedging instruments under U.S. GAAP during the periods presented. Amounts include both realized and unrealized gains and losses.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | First Quarter |
| (in millions) | Income Statement Location | | | | | | 2021 | | 2020 |
| Interest rate contracts | Interest expense | | | | | | $ | (8) | | | $ | 4 | |
| FX contracts | Cost of sales | | | | | | 4 | | | (23) | |
| FX contracts | Other (income) expense, net | | | | | | 5 | | | (17) | |
| Commodity contracts | Cost of sales | | | | | | (17) | | | 17 | |
| Commodity contracts | SG&A expenses | | | | | | (29) | | | 45 | |
| Total | | | | | | | $ | (45) | | | $ | 26 | |
|
| | | | | | | | | |
| | | | First Quarter |
| (in millions) | Income Statement Location | | 2020 | | 2019 |
| Interest rate contracts | Interest expense | | $ | 4 |
| | $ | 2 |
|
| FX contracts | Cost of sales | | (23 | ) | | 2 |
|
| FX contracts | Other expense, net | | (17 | ) | | 6 |
|
| Commodity contracts | Cost of sales | | 17 |
| | 15 |
|
| Commodity contracts | SG&A expenses | | 45 |
| | (14 | ) |
| Total | | | $ | 26 |
| | $ | 11 |
|
The Company has exposurefollowing table presents the amount of loss reclassified from AOCI into the unaudited Condensed Consolidated Statements of Income related to creditderivative instruments designated as cash flow hedging instruments during the periods presented:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | First Quarter |
| (in millions) | Income Statement Location | | | | | | 2021 | | 2020 |
| Interest rate contracts | Interest expense | | | | | | $ | 0 | | | $ | 0 | |
| FX contracts | Cost of sales | | | | | | 5 | | | 0 | |
KDP expects to reclassify approximately $15 million of pre-tax net losses from derivative instruments in an asset position inAOCI into net income during the event of nonperformance bynext twelve months related to its FX contracts. KDP does not expect to reclassify any amounts from AOCI into net income during the counterpartiesnext twelve months related 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.interest rate contracts.
8.6. Leases
The Company leases certain facilities and machinery and equipment, including fleet. These leases expire at various dates through 2044. Some lease agreements contain standard renewal provisions that allow the Company to renew the lease at rates equivalent to fair market value at the end of the lease term. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants, except for leases of certain manufacturing properties that contain a residual value guaranteeguarantees at the end of the term. KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.
The following table presents the components of lease cost:
| | | | | | | | | | | | | | | | | |
| | | | First Quarter |
| (in millions) | | | | | 2021 | | 2020 |
| Operating lease cost | | | | | $ | 30 | | | $ | 28 | |
| Finance lease cost | | | | | | | |
| Amortization of right-of-use assets | | | | | 13 | | | 11�� | |
| Interest on lease liabilities | | | | | 3 | | | 4 | |
Variable lease cost(1) | | | | | 8 | | | 6 | |
| Short-term lease cost | | | | | 0 | | | 0 | |
| Sublease income | | | | | 0 | | | (1) | |
| Total lease cost | | | | | $ | 54 | | | $ | 48 | |
(1)Variable lease cost primarily consists of common area maintenance costs, property taxes, and adjustments for inflation.
|
| | | | | | | |
| | First Quarter |
| (in millions) | 2020 | | 2019 |
| Operating lease cost | $ | 28 |
| | $ | 20 |
|
| Finance lease cost | | | |
| Amortization of right-of-use assets | 11 |
| | 10 |
|
| Interest on lease liabilities | 4 |
| | 4 |
|
Variable lease cost(1) | 6 |
| | 6 |
|
| Short-term lease cost | — |
| | 1 |
|
| Sublease income | (1 | ) | | — |
|
| Total lease cost | $ | 48 |
| | $ | 41 |
|
| |
(1) | Variable lease cost primarily consists of common area maintenance costs, property taxes, and adjustments for inflation. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The following table presents supplemental cash flow information about the Company's leases:
|
| | | | | | | |
| | First Quarter |
| (in millions) | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 26 |
| | $ | 18 |
|
| Operating cash flows from finance leases | 4 |
| | 4 |
|
| Financing cash flows from finance leases | 13 |
| | 10 |
|
| | | | | | | | | | | |
| First Quarter |
| (in millions) | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 28 | | | $ | 26 | |
| Operating cash flows from finance leases | 3 | | | 4 | |
| Financing cash flows from finance leases | 15 | | | 13 | |
The following table presents information about the Company's weighted average discount rate and remaining lease term:
|
| | | | | |
| | March 31, 2020 | | December 31, 2019 |
| Weighted average discount rate | | | |
| Operating leases | 4.7 | % | | 4.6 | % |
| Finance leases | 5.0 | % | | 5.4 | % |
| Weighted average remaining lease term | | | |
| Operating leases | 11 years |
| | 8 years |
|
| Finance leases | 12 years |
| | 12 years |
|
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Weighted average discount rate | | | |
| Operating leases | 3.8 | % | | 4.3 | % |
| Finance leases | 4.5 | % | | 4.4 | % |
| Weighted average remaining lease term | | | |
| Operating leases | 13 years | | 12 years |
| Finance leases | 11 years | | 11 years |
Future minimum lease payments underfor non-cancellable leases that have commenced and are reflected on the unaudited Condensed Consolidated Balance Sheets as of March 31, 20202021 were as follows:
|
| | | | | | | |
| (in millions) | Operating Leases | | Finance Leases |
| Remainder of 2020 | $ | 60 |
| | $ | 41 |
|
| 2021 | 85 |
| | 44 |
|
| 2022 | 74 |
| | 39 |
|
| 2023 | 66 |
| | 38 |
|
| 2024 | 64 |
| | 36 |
|
| 2025 | 57 |
| | 32 |
|
| Thereafter | 326 |
| | 165 |
|
| Total future minimum lease payments | 732 |
| | 395 |
|
| Less: imputed interest | (157 | ) | | (89 | ) |
| Present value of minimum lease payments | $ | 575 |
| | $ | 306 |
|
| | | | | | | | | | | |
| (in millions) | Operating Leases | | Finance Leases |
| Remainder of 2021 | $ | 72 | | | $ | 52 | |
| 2022 | 99 | | | 65 | |
| 2023 | 92 | | | 59 | |
| 2024 | 90 | | | 56 | |
| 2025 | 84 | | | 52 | |
| 2025 | 73 | | | 65 | |
| Thereafter | 536 | | | 153 | |
| Total future minimum lease payments | 1,046 | | | 502 | |
| Less: imputed interest | (206) | | | (86) | |
| Present value of minimum lease payments | $ | 840 | | | $ | 416 | |
SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED
As of March 31, 2020,2021, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $610$343 million. These leases are expected to commence between the second quarter of 2020 and secondfourth quarter of 2021, with initial lease terms ranging from 75 years to 2010 years.
ASSET SALE-LEASEBACK TRANSACTIONS16
On January 6, 2020, the Company closed an asset sale-leaseback transaction on two manufacturing properties as the buyer obtained control. The Company received proceeds of approximately $150 million, net of selling costs for the properties, which had a carrying value of $131 million, and resulted in an approximately $19 million gain on the sale transaction. The initial term of the leaseback is expected to end during 2034 and has 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 as the Company must remain investment grade and a change-in-control has not occurred as of the end of the lease term. The leaseback has a residual value guarantee; however, the Company concluded it was not probable that the Company will owe an amount at the end of the lease term and will record the lease obligation excluding the residual value guarantee.
On January 10, 2020, the Company closed the asset sale-leaseback transaction on two distribution properties as the buyer obtained control. The Company received proceeds of approximately $50 million, net of selling costs for the properties, which had a carrying value of $27 million, and resulted in an approximately $23 million gain on the sale transaction. The term of the leaseback is expected to end in 2025 and has two three-year renewals.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
9. Earnings Per Share
The following table presents the Company's basic and diluted EPS and shares outstanding:
|
| | | | | | | |
| | First Quarter |
| (in millions, except per share data) | 2020 | | 2019 |
| Basic EPS: | | | |
| Net income | $ | 156 |
| | $ | 230 |
|
| Weighted average common shares outstanding | 1,407.0 |
| | 1,406.3 |
|
| Earnings per common share — basic | $ | 0.11 |
| | $ | 0.16 |
|
| Diluted EPS: | | | |
| Net income | $ | 156 |
| | $ | 230 |
|
| Weighted average common shares outstanding | 1,407.0 |
| | 1,406.3 |
|
| Effect of dilutive securities: | | | |
| Stock options | 0.4 |
| | 0.8 |
|
| RSUs | 12.7 |
| | 10.6 |
|
| Weighted average common shares outstanding and common stock equivalents | 1,420.1 |
| | 1,417.7 |
|
| Earnings per common share — diluted | $ | 0.11 |
| | $ | 0.16 |
|
| | | | |
| Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation | 0.3 |
| | — |
|
10. Stock-Based Compensation
Stock-based compensation expense is primarily recorded in SG&A expenses in the unaudited Condensed Consolidated StatementsTable of Income. The components of stock-based compensation expense are presented below:
|
| | | | | | | |
| | First Quarter |
| (in millions) | 2020 | | 2019 |
| Total stock-based compensation expense | $ | 19 |
| | $ | 14 |
|
| Income tax benefit recognized in the Statements of Income | (4 | ) | | (3 | ) |
| Stock-based compensation expense, net of tax | $ | 15 |
| | $ | 11 |
|
RESTRICTED STOCK 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, 2019 | 21,492,786 |
| | $ | 18.14 |
| | 2.6 | | $ | 622 |
|
| Granted | 5,597,154 |
| | 22.99 |
| | | | |
| Vested and released | (25,082 | ) | | 24.80 |
| | | | 1 |
|
| Forfeited | (390,712 | ) | | 21.63 |
| | | | |
| Outstanding as of March 31, 2020 | 26,674,146 |
| | $ | 19.10 |
| | 2.6 | | $ | 647 |
|
As of March 31, 2020, there was $351 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.97 years.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
11. Accumulated Other Comprehensive Income (Loss)
The following table provides a summary of changes in AOCI, net of taxes:
|
| | | | | | | | | | | |
| (in millions) | Foreign Currency Translation Adjustments | | Pension and PRMB Liabilities | | Accumulated Other Comprehensive Income (Loss) |
| Balance as of January 1, 2020 | $ | 104 |
| | $ | — |
| | $ | 104 |
|
| Other comprehensive loss | (583 | ) | | (1 | ) | | (584 | ) |
| Balance as of March 31, 2020 | $ | (479 | ) | | $ | (1 | ) | | $ | (480 | ) |
| | | | | | |
| Balance as of January 1, 2019 | $ | (126 | ) | | $ | (4 | ) | | $ | (130 | ) |
| Other comprehensive income | 93 |
| | — |
| | 93 |
|
| Balance as of March 31, 2019 | $ | (33 | ) | | $ | (4 | ) | | $ | (37 | ) |
12. Supplemental Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the unaudited Condensed Consolidated Balance Sheets to the total of the same amounts shown in the unaudited Condensed Consolidated Statements of Cash Flows:
|
| | | | | | | |
| (in millions) | March 31, 2020 | December 31, 2019 |
| Cash and cash equivalents | $ | 197 |
| | $ | 75 |
|
Restricted cash and restricted cash equivalents(1) | 26 |
| | 26 |
|
| Non-current restricted cash and restricted cash equivalents included in Other non-current assets | — |
| | 10 |
|
| Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows | $ | 223 |
| | $ | 111 |
|
| |
(1) | Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the Core Acquisition, Bai Acquisition and Big Red Acquisition. Amounts held in escrow are expected to be released within one year. |
The carrying value of cash, cash equivalents, restricted cash and restricted cash equivalents is valued as of the balance sheet date equating fair value and classified as Level 1.
The following table provides supplemental cash flow disclosures:
|
| | | | | | | |
| | First Quarter |
| (in millions) | 2020 | | 2019 |
| Supplemental cash flow disclosures of non-cash investing activities: | | | |
| Measurement period adjustment of Core purchase price | $ | — |
| | $ | (11 | ) |
| Capital expenditures included in accounts payable and accrued expenses | 177 |
| | 154 |
|
| Supplemental cash flow disclosures of non-cash financing activities: | | | |
| Dividends declared but not yet paid | 211 |
| | 211 |
|
| Finance lease additions | 10 |
| | 7 |
|
| Supplemental cash flow disclosures: | | | |
Cash paid for interest(1) | — |
| | 64 |
|
| Cash paid for income taxes | 81 |
| | 25 |
|
| |
(1) | Cash paid for interest includes amounts paid and received related to the Company's interest rate swap contracts and the termination of such contracts. Refer to Note 7 for additional information. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
13. Trade Accounts Receivable, Net
Trade accounts receivable are recorded at the invoiced amount and do not bear interest.
The Company is exposed to potential credit risks associated with its accounts receivable, as it generally does not require collateral on its accounts receivable. The Company determines the required allowance for expected credit losses using information such as its customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions such as the impacts of COVID-19 in the first quarter of 2020. Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies or expectations of any such events in a future period when reasonable and supportable. Historical information is utilized beyond reasonable and supportable forecast periods. Amounts are charged against the allowance when it is determined that expected credit losses may occur.
Activity in the allowance for expected credit loss accounts during the Periods was as follows:
|
| | | |
| (in millions) | Allowance for Expected Credit Loss |
| Balance as of January 1, 2019 | $ | 8 |
|
| Charges to bad debt expense | 2 |
|
| Write-offs and adjustments | (1 | ) |
| Balance as of December 31, 2019 | $ | 9 |
|
| Charges to bad debt expense | 10 |
|
| Write-offs and adjustments | — |
|
| Balance as of March 31, 2020 | $ | 19 |
|
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
14.Other Financial Information
The tables below provide selected financial information from the unaudited Condensed Consolidated Balance Sheets:
|
| | | | | | | |
| | March 31, | | December 31, |
| (in millions) | 2020 | | 2019 |
| Trade accounts receivable, net: | | | |
| Trade and other accounts receivable | $ | 1,056 |
| | $ | 1,124 |
|
| Allowance for expected credit losses | (19 | ) | | (9 | ) |
| Total trade accounts receivable, net | $ | 1,037 |
| | $ | 1,115 |
|
| Inventories: | | | |
| Raw materials | $ | 215 |
| | $ | 215 |
|
| WIP | 6 |
| | 8 |
|
| Finished goods | 478 |
| | 447 |
|
| Total | 699 |
| | 670 |
|
| Allowance for excess and obsolete inventories | (17 | ) | | (16 | ) |
| Total Inventories | $ | 682 |
| | $ | 654 |
|
| Prepaid expenses and other current assets: | | | |
| Other receivables | $ | 53 |
| | $ | 65 |
|
| Customer incentive programs | 78 |
| | 12 |
|
| Derivative instruments | 26 |
| | 31 |
|
| Prepaid marketing | 30 |
| | 17 |
|
| Spare parts | 50 |
| | 49 |
|
Assets held for sale(1) | 3 |
| | 165 |
|
| Income tax receivable | 7 |
| | 4 |
|
| Other | 88 |
| | 60 |
|
| Total prepaid expenses and other current assets | $ | 335 |
| | $ | 403 |
|
| Other non-current assets: | | | |
| Customer incentive programs | $ | 77 |
| | $ | 33 |
|
Marketable securities - trading(2) | 31 |
| | 40 |
|
| Operating lease right-of-use assets | 576 |
| | 497 |
|
| Derivative instruments | 20 |
| | 19 |
|
| Equity securities without readily determinable fair values | 1 |
| | 1 |
|
| Non-current restricted cash and restricted cash equivalents | — |
| | 10 |
|
Related party notes receivable(3) | 1 |
| | 50 |
|
| Other | 105 |
| | 98 |
|
| Total other non-current assets | $ | 811 |
| | $ | 748 |
|
| |
(1) | The decrease was due to the assets included in sale-leaseback transactions that closed during the period. Refer to Note 8 for additional information about the transactions. Remainder of amounts were comprised of property, plant and equipment expected to be sold within the next twelve months. |
| |
(2) | Fair values of marketable 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. The fair value of marketable securities was $31 million and $40 million as of March 31, 2020 and December 31, 2019, respectively. |
| |
(3) | Refer to Note 4 for additional information. |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
| | | | | | | |
| | March 31, | | December 31, |
| (in millions) | 2020 | | 2019 |
| Accrued expenses: | | | |
| Customer rebates & incentives | $ | 304 |
| | $ | 362 |
|
| Accrued compensation | 130 |
| | 183 |
|
| Insurance reserve | 36 |
| | 39 |
|
| Accrued interest | 164 |
| | 54 |
|
| Accrued professional fees | 37 |
| | 31 |
|
| Other accrued expenses | 289 |
| | 270 |
|
| Total accrued expenses | $ | 960 |
| | $ | 939 |
|
| Other current liabilities: | | | |
| Dividends payable | $ | 211 |
| | $ | 212 |
|
| Income taxes payable | 46 |
| | 75 |
|
| Operating lease liability | 73 |
| | 69 |
|
| Finance lease liability | 42 |
| | 41 |
|
| Derivative instruments | 39 |
| | 12 |
|
| Holdback liabilities | 25 |
| | 25 |
|
| Other | 9 |
| | 11 |
|
| Total other current liabilities | $ | 445 |
| | $ | 445 |
|
| Other non-current liabilities: | | | |
| Pension and post-retirement liability | $ | 27 |
| | $ | 29 |
|
| Insurance reserves | 69 |
| | 66 |
|
| Operating lease liability | 501 |
| | 427 |
|
| Finance lease liability | 264 |
| | 269 |
|
| Derivative instruments | 16 |
| | 4 |
|
| Deferred compensation liability | 31 |
| | 40 |
|
| Other | 89 |
| | 95 |
|
| Total other non-current liabilities | $ | 997 |
| | $ | 930 |
|
ACCOUNTS PAYABLE
KDP entered into an agreement with a third party administrator to allow participating suppliers to track payments from KDP, and if voluntarily elected by the supplier, 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. As of March 31, 2020 and December 31, 2019, $2,322 million and $2,097 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.
15. Commitments and Contingencies
LEGAL MATTERS
The Company is involved from time to time in various claims, proceedings, and litigation. The Company establishes reserves for specific legal proceedings whenEffective January 1, 2021, the Company determines that the likelihood of an unfavorable outcome is probablemodified its internal reporting and the amount of loss can be reasonably estimated. The Company has also identified certain other legal matters where the Company believes an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
16.Related Parties
IDENTIFICATION OF RELATED PARTIES
The Company is indirectly controlled by a single stockholder, JAB, a privately held investor group. JAB has ownership control over certain investments that create the following related party transaction types:
Coffee Transactions include transactions with Peet's Coffee, Caribou Coffee, Panera Bread and Krispy Kreme Doughnuts. The Company manufactures portion packs containing a selection of coffee and tea varieties under Peet’s Coffee brands for saleoperating segments to reflect changes in the U.S.executive leadership team to further enhance speed-to-market and Canada. As part of this agreement, Peet’s Coffee issues purchase orders todecision effectiveness. These modifications did not change the Company for portion packs to be supplied to Peet’s Coffee and sold in select channels. In turn, the Company places purchase orders for Peet’s Coffee raw materials to manufacture portion packs for sale by the Company in select channels.Company’s reportable segments. The Company licenses the Caribou Coffee, Panera Bread and Krispy Kreme Doughnuts trademarks for use in the Keurig system in the Company owned channels.
Additionally, the Company manufactures and distributes Peet's RTD Coffee in the U.S. and pays Peet's Coffee a royalty for useCompany's reportable segments consist of the brand name.
Restaurant Transactions include transactions with Caribou Coffee, Panera Bread, Einstein Bros Bagels and Krispy Kreme Doughnuts. The Company sells various beverage concentrates and packaged beverages to these companies.
The Company also has rights in certain territories to bottle and/or distribute various brands that the Company does not own. The Company holds investments in certain brand ownership companies. Refer to Note 4 for additional information about the Company's investments in unconsolidated affiliates. The Company purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S. Additionally, any transactions with significant partners in these investments, such as ABI, are considered related party transactions. ABI purchases Clamato from the Company and pays the Company a royalty for use of the brand name.
17. Segments•
As of March 31, 2020 and December 31, 2019 and for the first quarter of 2020 and 2019, the Company's operating structure consisted of the following four reportable segments:
The Coffee Systems segment reflects sales in the U.S. and Canada of the manufacture and distribution of finished goods relating to the Company's coffee system, K-Cup pods and brewers.
•The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third-party brands, through both the DSD system and WD systems. DSD and WD have both been identified as operating segments that the WD system.Company aggregated into Packaged Beverages due to similar economic characteristics and similarities in the nature of finished goods sales and route-to-markets.
•The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third-party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands. Our FFS operating segment is aggregated with our Branded Concentrates operating segment into our Beverage Concentrates reportable segment due to similar economic characteristics and similarities in the nature of the product sold.
•The Latin America Beverages segment reflects sales primarily in Mexico and the Caribbean and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.
Segment results are based on management reports. Net sales and income from operations are the significant financial measures used to assess the operating performance of the Company's operating segments. Intersegment sales are recorded at cost and are eliminated in the unaudited Condensed Consolidated Statements of Income. “Unallocated corporate costs” are excluded from the Company's measurement of segment performance and include unrealized commodity derivative gains and losses, and certain general corporate expenses.
Information about the Company's operations by reportable segment is as follows:
| | | | | | | | | | | | | | | | | |
| | | | First Quarter |
| (in millions) | | | | | 2021 | | 2020 |
| Segment Results – Net sales | | | | | | | |
| Coffee Systems | | | | | $ | 1,142 | | | $ | 973 | |
| Packaged Beverages | | | | | 1,307 | | | 1,217 | |
| Beverage Concentrates | | | | | 328 | | | 306 | |
| Latin America Beverages | | | | | 125 | | | 117 | |
| Net sales | | | | | $ | 2,902 | | | $ | 2,613 | |
| | | | First Quarter | | | | First Quarter |
| (in millions) | 2020 | | 2019 | (in millions) | | | 2021 | | 2020 |
| Segment Results – Net sales | | | | |
| Segment Results – Income from operations | | Segment Results – Income from operations | | | | | |
| Coffee Systems | $ | 973 |
| | $ | 968 |
| Coffee Systems | | | $ | 336 | | | $ | 272 | |
| Packaged Beverages | 1,217 |
| | 1,116 |
| Packaged Beverages | | | 175 | | | 189 | |
| Beverage Concentrates | 306 |
| | 304 |
| Beverage Concentrates | | | 238 | | | 197 | |
| Latin America Beverages | 117 |
| | 116 |
| Latin America Beverages | | | 22 | | | 27 | |
| Net sales | $ | 2,613 |
| | $ | 2,504 |
| |
| Unallocated corporate costs | | Unallocated corporate costs | | | (131) | | | (219) | |
| Income from operations | | Income from operations | | | $ | 640 | | | $ | 466 | |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The following table presents the Company's basic and diluted EPS and shares outstanding:
|
| | | | | | | | |
| | | First Quarter |
| (in millions) | | 2020 | | 2019 |
| Segment Results – Income from operations | | | | |
| Coffee Systems | | $ | 272 |
| | $ | 293 |
|
| Packaged Beverages | | 189 |
| | 149 |
|
| Beverage Concentrates | | 197 |
| | 201 |
|
| Latin America Beverages | | 27 |
| | 11 |
|
| Unallocated corporate costs | | (219 | ) | | (156 | ) |
| Income from operations | | $ | 466 |
| | $ | 498 |
|
| | | | | | | | | | | | | | | | | |
| | | | First Quarter |
| (in millions, except per share data) | | | | | 2021 | | 2020 |
| Basic EPS: | | | | | | | |
| Net income attributable to KDP | | | | | $ | 325 | | | $ | 156 | |
| Weighted average common shares outstanding | | | | | 1,409.2 | | | 1,407.0 | |
| Earnings per common share — basic | | | | | $ | 0.23 | | | $ | 0.11 | |
| Diluted EPS: | | | | | | | |
| Net income attributable to KDP | | | | | $ | 325 | | | $ | 156 | |
| Weighted average common shares outstanding | | | | | 1,409.2 | | | 1,407.0 | |
| Effect of dilutive securities: | | | | | | | |
| RSUs | | | | | 16.0 | | | 12.7 | |
| Stock options | | | | | 0.3 | | | 0.4 | |
| PSUs | | | | | 0.1 | | | 0 | |
| Weighted average common shares outstanding and common stock equivalents | | | | | 1,425.6 | | | 1,420.1 | |
| Earnings per common share — diluted | | | | | $ | 0.23 | | | $ | 0.11 | |
| | | | | | | |
| Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation | | | | | 0 | | | 0.3 | |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
9. Revenue Recognition
The Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Branded product sales, which include CSD,CSDs, NCB, K-Cup pods and appliances, occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company 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 the Company's revenue by portfolio for the first quarter of 2020 and 2019:portfolio:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Coffee Systems | | Packaged Beverages | | Beverage Concentrates | | Latin America Beverages | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| For the first quarter of 2021: | | | | | | | | | |
CSD(1) | $ | 0 | | | $ | 624 | | | $ | 323 | | | $ | 87 | | | $ | 1,034 | |
NCB(1) | 0 | | | 581 | | | 3 | | | 38 | | | 622 | |
K-Cup pods(2) | 903 | | | 0 | | | 0 | | | 0 | | | 903 | |
| Appliances | 174 | | | 0 | | | 0 | | | 0 | | | 174 | |
| Other | 65 | | | 102 | | | 2 | | | 0 | | | 169 | |
| Net sales | $ | 1,142 | | | $ | 1,307 | | | $ | 328 | | | $ | 125 | | | $ | 2,902 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| For the first quarter of 2020: | | | | | | | | | |
CSD(1) | $ | 0 | | | $ | 563 | | | $ | 302 | | | $ | 82 | | | $ | 947 | |
NCB(1) | 0 | | | 562 | | | 2 | | | 35 | | | 599 | |
K-Cup pods(2) | 791 | | | 0 | | | 0 | | | 0 | | | 791 | |
| Appliances | 127 | | | 0 | | | 0 | | | 0 | | | 127 | |
| Other | 55 | | | 92 | | | 2 | | | 0 | | | 149 | |
| Net sales | $ | 973 | | | $ | 1,217 | | | $ | 306 | | | $ | 117 | | | $ | 2,613 | |
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | Coffee Systems | | Packaged Beverages | | Beverage Concentrates | | Latin America Beverages | | Total |
| For the first quarter of 2020: | | | | | | | | | |
CSD(1) | $ | — |
| | $ | 563 |
| | $ | 302 |
| | $ | 82 |
| | $ | 947 |
|
NCB(1) | — |
| | 562 |
| | 2 |
| | 35 |
| | 599 |
|
K-Cup pods(2) | 791 |
| | — |
| | — |
| | — |
| | 791 |
|
| Appliances | 127 |
| | — |
| | — |
| | — |
| | 127 |
|
| Other | 55 |
| | 92 |
| | 2 |
| | — |
| | 149 |
|
| Net sales | $ | 973 |
| | $ | 1,217 |
| | $ | 306 |
| | $ | 117 |
| | $ | 2,613 |
|
| | | | | | | | | | |
| For the first quarter of 2019: | | | | | | | | | |
CSD(1) | $ | — |
| | $ | 522 |
| | $ | 298 |
| | $ | 80 |
| | $ | 900 |
|
NCB(1) | — |
| | 501 |
| | 2 |
| | 36 |
| | 539 |
|
K-Cup pods(2) | 793 |
| | — |
| | — |
| | — |
| | 793 |
|
| Appliances | 123 |
| | — |
| | — |
| | — |
| | 123 |
|
| Other | 52 |
| | 93 |
| | 4 |
| | — |
| | 149 |
|
| Net sales | $ | 968 |
| | $ | 1,116 |
| | $ | 304 |
| | $ | 116 |
| | $ | 2,504 |
|
(1)Represents net sales of owned and Allied Brandspartner brands within our portfolio.
| |
(2) | Represents net sales from owned brands, partner brands and private label owners. Net sales for partner brands and private label owners are contractual and long term in nature.
|
19. Subsequent Events(2) Represents net sales from owned brands, partner brands and private label owners. Net sales for partner brands and private label owners are contractual and long-term in nature.
On April 13, 2020, the Company completed the issuance
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
BORROWING ARRANGEMENTSStock-based compensation expense is primarily recorded in SG&A expenses in the unaudited Condensed Consolidated Statements of Income. The components of stock-based compensation expense are presented below:
On April 14, | | | | | | | | | | | | | | | | | |
| | | First Quarter |
| (in millions) | | | | | 2021 | | 2020 |
| Total stock-based compensation expense | | | | | $ | 25 | | | $ | 19 | |
| Income tax benefit recognized in the Statements of Income | | | | | (4) | | | (4) | |
| Stock-based compensation expense, net of tax | | | | | $ | 21 | | | $ | 15 | |
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, 2020 | 26,688,304 | | | $ | 19.66 | | | 2.0 | | $ | 854 | |
| Granted | 3,712,188 | | | 27.96 | | | | | |
| Vested and released | (9,401,295) | | | 10.38 | | | | | 316 | |
| Forfeited | (416,825) | | | 24.05 | | | | | |
| Outstanding as of March 31, 2021 | 20,582,372 | | | $ | 25.30 | | | 2.8 | | $ | 707 | |
As of March 31, 2021, there was $373 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.8 years.
Total payments for the employees' tax obligations to the relevant taxing authorities were $125 million for the first quarter of 2021, which were funded through the issuance of shares in at-the-market offerings, known as an ATM program. There were no such payments made during the first quarter of 2020. This payment is reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows.
11. Income Taxes
The Company’s effective tax rates were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | First Quarter |
| (in millions) | | | | | | 2021 | | 2020 |
| Effective tax rate | | | | | | 18.3 | % | | 23.9 | % |
For the first quarter of 2021, the provision for income taxes was lower than the first quarter of 2020, which was primarily driven by the tax benefit received from excess tax deductions that were generated from the vesting of RSUs.
12. Investments in Unconsolidated Affiliates
The following table summarizes investments in unconsolidated affiliates as of March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | | March 31, | | December 31, |
| (in millions) | | Ownership Interest | | 2021 | | 2020 |
| BodyArmor | | 12.5 | % | | $ | 53 | | | $ | 51 | |
| | | | | | |
| Dyla LLC | | 12.4 | % | | 12 | | | 12 | |
| Force Holdings LLC | | 33.3 | % | | 5 | | | 5 | |
| Beverage startup companies | | (various) | | 13 | | | 15 | |
| Other | | (various) | | 5 | | | 5 | |
| Investments in unconsolidated affiliates | | | | $ | 88 | | | $ | 88 | |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
13. Other Financial Information
CASH AND CASH EQUIVALENTS
The carrying value of cash, cash equivalents, restricted cash and restricted cash equivalents is valued as of the balance sheet date equating fair value and classified as Level 1. The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the unaudited Condensed Consolidated Balance Sheets to the total of the same amounts shown in the unaudited Condensed Consolidated Statements of Cash Flows:
| | | | | | | | | | | |
| (in millions) | March 31, 2021 | | December 31, 2020 |
| Cash and cash equivalents | $ | 335 | | | $ | 240 | |
Restricted cash and restricted cash equivalents(1) | 14 | | | 15 | |
| Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows | $ | 349 | | | $ | 255 | |
(1)Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the acquisitions of Bai Brands LLC, Core Nutrition LLC and Big Red Group Holdings, LLC, which have a corresponding holdback liability recorded in other current liabilities, as shown below.
ALLOWANCE FOR EXPECTED CREDIT LOSSES
Activity in the allowance for expected credit losses account during the periods presented was as follows:
| | | | | |
| (in millions) | Allowance for Expected Credit Losses |
| |
| |
| |
| Balance as of December 31, 2020 | $ | 21 | |
| Charges to bad debt expense | 1 | |
| Write-offs and adjustments | 0 | |
| Balance as of March 31, 2021 | $ | 22 | |
ACCOUNTS PAYABLE
KDP has an agreement with a third party administrator which allows participating suppliers to track payments from KDP, and if voluntarily elected by the supplier, to sell payment obligations from KDP to financial institutions. Suppliers can sell one or more of KDP's payment obligations at their sole discretion and the rights and obligations of KDP to its suppliers are not impacted. KDP has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. KDP's obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted. KDP has been informed by the third party administrator that as of March 31, 2021 and December 31, 2020, $2,777 million and $2,578 million, respectively, of KDP's outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
SELECTED BALANCE SHEET INFORMATION
The tables below provide selected financial information from the unaudited Condensed Consolidated Balance Sheets:
| | | | | | | | | | | |
| | March 31, | | December 31, |
| (in millions) | 2021 | | 2020 |
| Inventories: | | | |
| Raw materials | $ | 259 | | | $ | 260 | |
| Work-in-progress | 7 | | | 6 | |
| Finished goods | 600 | | | 520 | |
| Total | 866 | | | 786 | |
| Allowance for excess and obsolete inventories | (25) | | | (24) | |
| Total Inventories | $ | 841 | | | $ | 762 | |
| Prepaid expenses and other current assets: | | | |
| Other receivables | $ | 74 | | | $ | 85 | |
| Customer incentive programs | 91 | | | 34 | |
| Derivative instruments | 65 | | | 45 | |
| Prepaid marketing | 15 | | | 15 | |
| Spare parts | 60 | | | 55 | |
| Assets held for sale | 2 | | | 2 | |
| Income tax receivable | 10 | | | 11 | |
| Other | 93 | | | 76 | |
| Total prepaid expenses and other current assets | $ | 410 | | | $ | 323 | |
| Other non-current assets: | | | |
| Customer incentive programs | $ | 67 | | | $ | 70 | |
Marketable securities - trading(1) | 42 | | | 41 | |
| Operating lease right-of-use assets | 830 | | | 645 | |
| Derivative instruments | 119 | | | 12 | |
| | | |
| Equity securities without readily determinable fair values | 1 | | | 1 | |
| Other | 128 | | | 125 | |
| Total other non-current assets | $ | 1,187 | | | $ | 894 | |
(1)Fair values of marketable 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. The fair value of marketable securities was $42 million and $41 million as of March 31, 2021 and December 31, 2020, respectively.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
| | | | | | | | | | | |
| | March 31, | | December 31, |
| (in millions) | 2021 | | 2020 |
| Accrued expenses: | | | |
| Customer rebates & incentives | $ | 326 | | | $ | 382 | |
| Accrued compensation | 149 | | | 215 | |
| Insurance reserve | 40 | | | 35 | |
| Accrued interest | 163 | | | 57 | |
| Accrued professional fees | 24 | | | 21 | |
| Other accrued expenses | 287 | | | 330 | |
| Total accrued expenses | $ | 989 | | | $ | 1,040 | |
| Other current liabilities: | | | |
| Dividends payable | $ | 232 | | | $ | 212 | |
| Income taxes payable | 63 | | | 39 | |
| Operating lease liability | 80 | | | 72 | |
| Finance lease liability | 49 | | | 44 | |
| Derivative instruments | 23 | | | 25 | |
| Holdback liabilities | 12 | | | 15 | |
| Other | 8 | | | 9 | |
| Total other current liabilities | $ | 467 | | | $ | 416 | |
| Other non-current liabilities: | | | |
| Pension and post-retirement liability | $ | 38 | | | $ | 38 | |
| Insurance reserves | 74 | | | 72 | |
| Operating lease liability | 760 | | | 580 | |
| Finance lease liability | 367 | | | 298 | |
| Derivative instruments | 16 | | | 18 | |
| Deferred compensation liability | 42 | | | 41 | |
| Other | 70 | | | 72 | |
| Total other non-current liabilities | $ | 1,367 | | | $ | 1,119 | |
14. Accumulated Other Comprehensive Income (Loss)
The following table provides a summary of changes in AOCI, net of taxes:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Foreign Currency Translation Adjustments | | Pension and Post-Retirement Benefit Liabilities | | Cash Flow Hedges | | Accumulated Other Comprehensive Income (Loss) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance as of January 1, 2021 | $ | 95 | | | $ | (4) | | | $ | (14) | | | $ | 77 | |
| Other comprehensive income | 16 | | | 0 | | | 68 | | | 84 | |
| Amounts reclassified from accumulated other comprehensive income | 0 | | | 0 | | | 3 | | | 3 | |
| Net current period other comprehensive income | 16 | | | — | | | 71 | | | 87 | |
| Balance as of March 31, 2021 | $ | 111 | | | $ | (4) | | | $ | 57 | | | $ | 164 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance as of January 1, 2020 | $ | 104 | | | $ | 0 | | | $ | 0 | | | $ | 104 | |
| Other comprehensive loss | (583) | | | (1) | | | 0 | | | (584) | |
| | | | | | | |
| Balance as of March 31, 2020 | $ | (479) | | | $ | (1) | | | $ | 0 | | | $ | (480) | |
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The following table presents the amount of (gains)/losses reclassified from AOCI into the unaudited Condensed Consolidated Statements of Income:
| | | | | | | | | | | | | | | | | | | | |
| | | | First Quarter |
| (in millions) | | Income Statement Caption | | 2021 | | 2020 |
| Cash Flow Hedges: | | | | | | |
| Interest rate contracts | | Interest expense | | $ | 0 | | | $ | 0 | |
| FX contracts | | Cost of sales | | 5 | | | 0 | |
| Total | | | | 5 | | | 0 | |
| Income tax benefit | | | | (2) | | | 0 | |
| Total, net of tax | | | | $ | 3 | | | $ | 0 | |
15. Commitments and Contingencies
LEGAL MATTERS
The Company is involved from time to time in various claims, proceedings, and litigation. KDP establishes reserves 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. KDP has also identified certain other legal matters where the Company believes an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made.
Antitrust Litigation
In February 2014, TreeHouse Foods, Inc. and certain affiliated entities filed suit against KDP’s wholly-owned subsidiary, KGM, 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 monetary damages, declaratory relief, injunctive relief and attorneys’ fees. In March 2014, JBR, Inc. filed suit against KGM 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, Inc. complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint.
Beginning in March 2014, twenty-seven putative class actions asserting similar claims and seeking similar relief were filed on behalf of purported direct and indirect purchasers of KGM’s products in various federal district courts. In June 2014, the Judicial Panel on Multidistrict Litigation granted a motion to transfer these various actions, including the TreeHouse and JBR actions, to a single judicial district for coordinated or consolidated pre-trial proceedings (the “Multidistrict Antitrust Litigation”). Consolidated putative class action complaints by direct purchaser and indirect purchaser plaintiffs were filed in July 2014. An additional class action on behalf of indirect purchasers, originally filed in the Circuit Court of Faulkner County, Arkansas (Julie Rainwater et al. v. Keurig Green Mountain, Inc.), was transferred into the Multidistrict Antitrust Litigation in November 2015. In January 2019, McLane Company, Inc. filed suit against KGM (McLane Company, Inc. v. Keurig Green Mountain, Inc.) in the SDNY asserting similar claims and also was 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 commenced in December 2017.
Separately, a statement of claim was filed in September 2014 against KGM 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.
In July 2020, KGM reached an agreement with the putative indirect purchaser class plaintiffs in the Multidistrict Antitrust Litigation to settle the claims asserted in their complaint for $31 million. The settlement class consists of individuals and entities in the United States that purchased, from persons other than KGM and not for purposes of resale, KGM manufactured or licensed single serve beverage portion packs during the applicable class period (beginning in September 2010 for most states). The court granted preliminary approval of the settlement in December 2020, and the Company paid the settlement amount in January 2021. Putative class members have the opportunity to object or opt out of the settlement, and a final approval hearing is scheduled in June 2021.
KDP intends to vigorously defend the remaining lawsuits brought by Treehouse, JBR, McLane, the putative direct purchaser class and Club Coffee. 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.
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
Proposition 65 Litigation
In May 2011, CERT filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, (Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182), alleging that KGM, and certain other defendants who manufacture, package, distribute or sell coffee, failed to warn persons in California that KGM's coffee products expose persons to the chemical acrylamide in violation of Proposition 65.
KGM, as part of a joint defense group organized to defend against the lawsuit, disputed CERT's claims and asserted multiple affirmative defenses. The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees, but such trial did not occur in light of California’s Office of Environmental Health Hazard Assessment proposal of a new Proposition 65 regulation clarifying that cancer warnings are not required for chemicals, such as acrylamide, that are present in coffee as a result of roasting coffee beans. After the regulation took effect in October 2019, the litigation continued based on, among other items, CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims. In August 2020, the court granted the defendants' motion for summary judgment, effectively ending CERT's Proposition 65 litigation at the trial court level. CERT has filed its appeal brief, and the Company terminatedintends to continue vigorously defending itself in this action. However, the 2019 364-Day Credit Agreement and replacedCompany believes that the likelihood that it will incur a material loss in connection with the 2020 364-Day Credit AgreementCERT litigation is remote and accordingly, no loss contingency has been recorded.
16. Related Parties
IDENTIFICATION OF RELATED PARTIES
JAB holds a significant but non-controlling interest in order to increase the commitment from $750 million to $1,500 million. The 2020 364-Day Credit Agreement is unsecured,KDP. As of March 31, 2021, JAB beneficially owned approximately 33% of KDP's outstanding common stock. JAB and its proceeds may be usedaffiliates also hold investments in a number of other companies that have commercial relationships with the Company, including Peet's, Caribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc.
•KDP purchases certain raw materials from Peet's and manufactures coffee and tea portion packs under Peet's brands for general corporate purposes.sale by KDP and Peet's in the U.S. and Canada.
The interest rate applicable•KDP exclusively manufactures, distributes and sells Peet's RTD beverage products in the U.S. and Canada.
•KDP licenses the Caribou Coffee, Panera Bread and Krispy Kreme trademarks for use in the manufacturing of portion packs for the Keurig brewing system.
•KDP sells various beverage concentrates and packaged beverages to borrowings underCaribou Coffee Company, Inc., Panera Bread Company, Einstein Bros Bagels, and Krispy Kreme Doughnuts Inc. for resale to retail customers.
KDP holds investments in certain brand ownership companies, and in certain instances, the 2020 364-Day Credit Agreement rangesCompany also has rights in specified territories to bottle and/or distribute the brands owned by such companies. KDP purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S. Additionally, any transactions with significant partners in these investments, such as ABI, are considered related party transactions. ABI purchases Clamato from KDP and pays the Company a rate equal to LIBOR plus a margin of 2.250% to 2.750% or a base rate plus a margin of 1.250% to 1.750%, depending on the rating of certain index debtroyalty for use of the Company. The 2020 364-Day Credit Agreement will mature on April 13, 2021.brand name. Refer to Note 12 for additional information about KDP's investments in brand ownership companies.
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 Form 10-K,Annual Report, as filed on February 27, 2020.25, 2021.
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 anticipated benefits and expenses of the DPS Merger and other transactions, including estimated synergies, deleveraging and associated cash management, and cost savings, the impact of COVID-19, future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters 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 the“outlook,” “guidance,” “anticipate,” “expect,” “believe,” “could,” “estimate,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar words, "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend"phrases or the negativeexpressions and variations or negatives of these terms or similar expressionswords 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, andas well as our subsequent filings with the SEC. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them, after the date of this Quarterly Report on Form 10-Q, except to the extent required by applicable securities laws.
This Quarterly Report on Form 10-Q contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands. All of the product names included in this Quarterly Report on Form 10-Q are either our registered trademarks or those of our licensors.
OVERVIEW
KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including water (enhanced and flavored), ready-to-drink tea and coffee, juice, juice drinks, mixers and specialty coffee, and is a leading producer of innovative single serve brewing systems. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountain and The Original Donut Shop. KDP has some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. KDP offers more than 125 owned, licensed, partner and alliedpartner 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 system and our WD delivery system. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, pure-play e-commerce retailers, and office superstores; 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.
The beverage market is subject to some seasonal variations. Our cold beverage sales are generally higher during the warmer months, while hot beverage sales are generally higher during the cooler months. Overall beverage sales can be influenced by the timing of holidays and weather fluctuations. Sales of brewing systems and related accessories are generally higher during the second half of the year due to the holiday shopping season.
COFFEE SYSTEMS
Our Coffee Systems segment is primarily a producer of innovative single serve brewing systemsbrewers and specialty coffee in the U.S. and Canada. Our brewing systems are aimed at changing the way consumers prepare and enjoy coffee and other beverages, both at home and away from home in places such as offices, restaurants, cafeterias, convenience stores and hotels. We develop and sell a variety of Keurig brewers, brewer accessories and other coffee-related equipment. In addition to coffee, we produce and sell a variety of other specialty beverages in K-Cup pods (including hot and iced teas, hot cocoa and other beverages) for use with Keurig brewing systems. We also offer traditional whole bean and ground coffee in other package types, including bags, fractional packages and cans.
Our Coffee Systems segment manufactures over 75% of the pods in the single-serve K-Cup pod format in the U.S. We manufacture and sell 100% of the K-Cup pods of our ownthe following brands such asto retailers, away from home channel participants and end-use consumers: Green Mountain Coffee Roasters, The Original Donut Shop, McCafé, Laughing Man, REVV, and Van Houtte.
We have licensingmanufacture and manufacturing agreements withsell K-Cup pods for the following brands to our partner brands, including brands such aspartners, who in turn sell them to retailers: Starbucks, Smuckers, Peet's, Dunkin' Donuts, Folgers, Newman’s Own Organics, McCafé, Peet's Coffee, Caribou Coffee, Eight O’Clock, Maxwell House,and Tim Hortons, andas well as private label arrangements. Our Coffee Systems segmentGenerally, we are able to sell these brands to our away from home channel participants and end-use consumers. We also hashave agreements for manufacturing, distributing, and selling K-Cup pods for tea under brands such as Celestial Seasonings, Lipton and Tazo in addition to K-Cup pods of our own brand, Snapple. We also produce and sell K-Cup pods for cocoa, including through a licensing agreement for the Swiss Miss brand, and hot apple cider.cider, including under our own brand, Mott's.
Our Coffee Systems segment manufactures its K-Cup pods in facilities in North America that include specialty designed proprietary high-speed packaging lines using freshly roasted and ground coffee as well as tea, cocoa and other products. We offer high-quality coffee, including certified single-origin, organic, flavored, limited edition and proprietary blends. We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences. We engineer and design most of our single serve brewing systems,brewers, where we then utilize third-party contract manufacturers located in various countries in Asia for brewer appliance manufacturing. We distribute our Coffee Systems productsbrewers using third-party distributors, retail partners and through e-commerce, including our website at www.keurig.com.
PACKAGED BEVERAGES
Our Packaged Beverages segment is principally a brand ownership, manufacturing and distribution business. In this segment, we primarily manufacture and distribute packaged beverages of our brands. Additionally, in order to maximize the size and scale of our manufacturing and distribution operations, we also distribute packaged beverages for our alliedpartner brands and manufacture packaged beverages for other third parties in the U.S. and Canada.
OurThe larger NCB brands in this segment include Snapple, Mott's, Bai, Clamato, Hawaiian Punch, Core, Yoo-Hoo, ReaLemon, evian, Vita Coco coconut water, evian water,and Mr and Mrs T mixers, and Forto Coffee. Ourmixers. The larger CSD brands in this segment include Dr Pepper, Canada Dry, 7UP, A&W, 7UP, Sunkist, soda, Squirt, Big Red, RC Cola, Vernors and A Shoc. Vernors.
Approximately 95%The majority of our 2019 Packaged Beverages net sales come from the manufacturing and distribution of our own brands and the contract manufacturing of certain private label and emerging brand beverages. The remaining portion of our 2019 Packaged BeveragesWe also recognize net sales camein this segment from the distribution of our alliedpartner brands such as evian, Vita Coco, coconut water, evian water, Neuro drinks, High BrewPeet's RTD Coffee, Forto Coffee shots, A Shoc energy drinks, Peet's RTD Coffee and Runa energy drinks.drinks and Polar sparkling seltzer waters. We provide a route-to-market for third party brand owners seeking effective distribution for their new and emerging brands. These brands give us exposure in certain markets to fast growing segments of the beverage industry with minimal capital investment.
Our Packaged Beverages products are manufactured in multiple facilities across the U.S. and are sold or distributed to retailers and their warehouses by our own distribution network or by third party distributors.
We sell our Packaged Beverages products through our DSD and our WD systems, both of which include sales to all major retail channels, including supermarkets, fountains, mass merchandisers, club stores, e-commerce, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.channels.
BEVERAGE CONCENTRATES
Our Beverage Concentrates segment is principally a brand ownership business where we manufacture and sell beverage concentrates in the U.S. and Canada. Most of the brands in this segment are CSD brands. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, Sun Drop, Sunkist soda, A&W, 7UP, Squirt, Big Red, RC Cola and Hawaiian Punch. Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri. We are expanding our manufacturing capabilities to include a concentrate manufacturing facility in Ireland in 2021.
Beverage concentrates are shipped to third party bottlers, as well as to our own manufacturing systems, who combine them with carbonation, water, sweeteners and other ingredients, package the combined product in aluminum cans, PET containers and glass bottles, and sell them as a finished beverage to retailers.retailers through our Branded Concentrates operating segment. Beverage concentrates are also manufactured into syrup, which is shipped to fountain customers, such as fast food restaurants, who mix the syrup with water and carbonation to create a finished beverage at the point of sale to consumers.consumers through our FFS operating segment. Dr Pepper represents most of our fountain channelFFS volume.
Our Beverage Concentrates brands are sold by our bottlers through all major retail channels including supermarkets, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.channels.
LATIN AMERICA BEVERAGES
Our Latin America Beverages segment is a brand ownership, manufacturing and distribution business, with operations in Mexico representing approximately 90% of the segment's 20192020 net sales. This segment participates mainly in the carbonated mineral water, flavored CSD, bottled water and vegetable juice with particular strength in carbonated mineral water, vegetable juice categories and grapefruit flavored CSDs.categories. The largest brands include Peñafiel, Clamato, Squirt, Clamato, Aguafiel and Crush.
In Mexico, we manufacture and distribute our products through our bottling operations and third party bottlers and distributors. We sell our finished beverages through all major Mexican retail channels, including small outlets, supermarkets, hypermarkets, convenience stores and on-premise channels. In the Caribbean, we distribute our products through third party bottlers and distributors. We have also begun to distribute certain products in other international jurisdictions through various third party bottlers and distributors.
VOLUME
In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, K-Cup pods or brewers.
Beverage ConcentratesCoffee Systems K-Cup Pod and Appliance Sales Volume
In our Beverage Concentrates segment,Coffee Systems segments, we measure our sales volume as concentrate case sales. The unitthe number of measurement for concentrate case sales equals 288 fluid ouncesappliances and the number of finished beverage, the equivalent of 24 twelve ounce servings.
Concentrate case sales represent units of measurement for concentratesindividual K-Cup pods sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases.customers.
Packaged Beverages and Latin America Beverages Sales Volume
In our Packaged Beverages and Latin America Beverages segments, we measure volume as case sales to customers. A case sale represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case sales include both our owned brands and certain brands licensed to and/or distributed by us.
Coffee Systems K-Cup Pod and ApplianceBeverage Concentrates Sales Volume
In our Coffee Systems segments,Beverage Concentrates segment, we measure our sales volume as the number of appliances and the number of individual K-Cup podsconcentrate case sales for concentrates sold by us to our customers.bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings. It does not include any other component of the finished beverage other than concentrate.
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. See Non-GAAP Financial Measures for further information on the certain items affecting comparability used in the preparation of the financial information. These items are referred to within this Management's Discussion and Analysis discussion as Adjusted income from operations, Adjusted interest expense, Adjusted provision for income taxes, Adjusted net income and Adjusted diluted EPS.
EXECUTIVE SUMMARY
Impact of COVID-19 on our Financial OverviewStatements
Net income decreased $74 millionOn March 11, 2021, the world marked the one-year anniversary of the date that the World Health Organization declared COVID-19 a global pandemic. The impact of COVID-19 on our first quarter net sales performance continued to $156 millionpresent both headwinds and tailwinds across the business and within the segments, requiring strong portfolio, package and channel mix management to optimize overall performance. The diversity of the Company’s broad portfolio and extensive route to market network enabled it to successfully navigate these mix impacts posed by the pandemic to drive overall performance and deliver a strong first quarter.
•Coffee Systems experienced double-digit growth in K-Cup coffee pods for at-home consumption which more than offset the continued significant decline in away-from-home consumption due to weaknesses in the office coffee channel, as elevated work-from-home trends persisted throughout the quarter. Brewer volume advanced significantly reflecting growth in purchases of brewers due to successful innovation and investments to drive household penetration. Sales in the e-commerce channel were again very strong, as consumers continue to shift purchases to the online channel, including at the www.keurig.com retail site.
•Packaged Beverages delivered strong net sales driven by strong in-market execution that resulted in market share growth in the majority of the segment's beverage portfolio, despite lapping the initial pantry stock-up behavior at the onset of the COVID-19 pandemic at the end of the first quarter of 2020. Performance in large-format channels continued to be strong across multi-pack and take-home packages, and performance in the convenience and gas channels improved during the quarter, as consumer mobility increased.
•Beverage Concentrates returned to growth in the quarter as volume growth in sales to bottlers and distributors was tempered by declines in the fountain foodservice business, which services restaurants and hospitality, which continues to experience softness as a result of COVID-19 but has been steadily improving as businesses begin to reopen.
•Latin America Beverages experienced a modest decline in sales volumes driven by continued limited consumer mobility in Mexico.
The current environment has increased operating costs, requiring us to take deliberate action. In addition to strong portfolio, package and channel mix management to optimize overall net sales performance, we maintained our strong cost discipline, which included the following:
•Reduced marketing expense in relation to the prior year pre-COVID-19 levels of spending, given the current COVID-19 landscape has reduced the effectiveness and return on certain marketing investments; and
•Significantly reduced all other discretionary costs, such as travel and entertainment expenses, within the business.
As a result of these items, COVID-19 is impacting our results, both positively and negatively, and should be taken into account when reviewing this Management's Discussion and Analysis.
The following table sets forth our reconciliation of significant COVID-19-related expenses. Employee compensation expense and employee protection costs, which impact our SG&A expenses and cost of sales, are included as the COVID-19 item affecting comparability and is excluded in our Adjusted financial measures. In addition, reported amounts under U.S. GAAP also include additional costs, not included as the COVID-19 item affecting comparability, as presented in tables below.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Items Affecting Comparability(1) | | | | | | |
| (in millions) | Employee Compensation Expense(2) | | Employee Protection Costs(3) | | Allowances for Expected Credit Losses(4) | | | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| For the first quarter of 2021: | | | | | | | | | |
| Coffee Systems | $ | 1 | | | $ | 9 | | | $ | — | | | | | $ | 10 | |
| Packaged Beverages | 3 | | | 2 | | | — | | | | | 5 | |
| Beverage Concentrates | — | | | — | | | — | | | | | — | |
| Latin America Beverages | — | | | 1 | | | — | | | | | 1 | |
| Total | $ | 4 | | | $ | 12 | | | $ | — | | | | | $ | 16 | |
| | | | | | | | | |
| For the first quarter of 2020: | | | | | | | | | |
| Coffee Systems | $ | — | | | $ | — | | | $ | 2 | | | | | $ | 2 | |
| Packaged Beverages | 3 | | | 2 | | | 8 | | | | | 13 | |
| Beverage Concentrates | — | | | — | | | — | | | | | — | |
| Latin America Beverages | — | | | — | | | — | | | | | — | |
| Total | $ | 3 | | | $ | 2 | | | $ | 10 | | | | | $ | 15 | |
| | | | | | | | | |
(1)Employee compensation expense and employee protection costs are both included as the COVID-19 items affecting comparability in the reconciliation of our Adjusted Non-GAAP financial measures.
(2)In 2021, includes pay for temporary employees, including the associated taxes, as well as incremental benefits provided to frontline workers such as extended sick leave, in order to maintain essential operations during the COVID-19 pandemic. In 2020, primarily reflected temporary incremental frontline incentive pay and benefits, as well as pay for temporary employees, including the associated taxes. Impacts both cost of sales and SG&A expenses.
(3)Includes costs associated with personal protective equipment, temperature scans, cleaning and other sanitization services. Impacts both cost of sales and SG&A expenses.
(4)Allowances reflect the expected impact of the economic uncertainty caused by COVID-19, leveraging estimates of credit worthiness, default and recovery rates for certain of our customers. Impacts SG&A expenses.
Financial Overview - First Quarter of 2021 as compared to $230 millionFirst Quarter of 2020
As Reported, in the prior year period, driven primarily by a non-cash impairment charge of $86 million associated with our Bedford investment.millions (except EPS)
As Adjusted, net income increased 12.7% to $408 million for the first quarter of 2020 as compared to Adjusted net income of $362 million in the prior year period, driven primarily by productivity and merger synergies and strong volume/mix growth, which reflected particular strength in the Packaged Beverages segment, which included a benefit from the impact of COVID-19 late in the quarter, partially offset by a slowdown in the Beverages Concentrates and Coffee Systems segments, both of which experienced a modest unfavorable impact from COVID-19 late in the quarter.millions (except EPS)
Diluted EPS decreased 31.3% to $0.11 per diluted share as compared to $0.16 in the prior year period.Adjusted diluted EPS increased 16.0% to $0.29 per diluted share as compared to Adjusted diluted EPS of $0.25 per diluted share in the prior year period.
Key Events During the first quarterFirst Quarter of 2020,2021
In February 2021, we madeannounced that our Board of Directors declared a regular quarterly cash dividend of $0.15 per share, payable in U.S. dollars, on the Company’s common stock. The regular quarterly dividend was paid on April 15, 2021 to shareholders of record on April 1, 2021.
In March 2021, we filed a prospectus supplement with the SEC to sell up to 4,300,000 shares to or through Goldman in at-the-market offerings, known as an ATM Program. The ATM Program was completed effective March 15, 2021, and the net repaymentsproceeds of $42approximately $140 million relatedwere primarily used to cover our commercial paper notes, KDP Revolver, 2019 KDP Term Loanobligation to remit cash to local, state and our 2020 Notes. Additionally, we repaid $107 million and added $44 millionfederal tax authorities in connection with the net settlement of structured payablesvesting restricted stock units during the first quarter of 2020.2021. Use of the ATM Program to fund these tax withholding obligations is intended to create an orderly market in KDP shares being sold to cover tax obligations on behalf of employees upon the vesting of equity awards in 2021.
In April 2020,March 2021, we completed the issuance of a strategic refinancing that extendedtotal of $1,150 million aggregate principal amount of 2024 Notes, $500 million aggregate principal amount of 2031 Notes and $500 million aggregate principal amount of 2051 Notes. We used the proceeds from these Notes to repay our debt maturities2021-A Notes, our 2021-B Notes, our 2022 Notes, and enhanced our liquidity profile, including a $1.5approximately $1 billion senior unsecured notes issuance and the refinancing and upsizing of our 2023 Notes, as well as to voluntarily prepay and terminate our 2019 364-Day Credit Agreement. The proactive refinancing, which did not changeKDP Term Loan.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS AND SEC REGULATIONS
On November 19, 2020, the SEC issued a final rule intended to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K related to Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information. Early adoption on an item-by-item basis is permitted after February 10, 2021, the effective date of the rule, and we must apply the rule to our total debt balance or deleveraging commitments, increased our excess liquidityForm 10-K for the year ending December 31, 2021. We early adopted the amendments to a level that we believe will exceed our liquidity needs, evenone item resulting in the eventelimination of Item 301, Selected Financial Data, from Part II, Item 6 of our Annual Report, and we have adopted the remaining amendments which are applicable to Form 10-Q in this Quarterly Report for the quarter ended March 31, 2021.
Refer to Note 1 of the Notes to our Unaudited Condensed Consolidated Financial Statements for a protracted downturn.discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP.
RESULTS OF OPERATIONS
We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees.
References in the financial tables to percentage changes that are not meaningful are denoted by "NM".
First Quarter of 20202021 Compared to First Quarter of 20192020
Consolidated Operations
The following table sets forth our unaudited condensed consolidated results of operations for the first quarter of 20202021 and 2019:2020:
| | | | First Quarter | | Dollar | | Percentage | | First Quarter | | Dollar | | Percentage |
| ($ in millions, except per share amounts) | 2020 | | 2019 | | Change | | Change | ($ in millions, except per share amounts) | 2021 | | 2020 | | Change | | Change |
| Net sales | $ | 2,613 |
| | $ | 2,504 |
| | $ | 109 |
| | 4.4 | % | Net sales | $ | 2,902 | | | $ | 2,613 | | | $ | 289 | | | 11.1 | % |
| Cost of sales | 1,161 |
| | 1,106 |
| | 55 |
| | 5.0 |
| Cost of sales | 1,302 | | | 1,161 | | | 141 | | | 12.1 | |
| Gross profit | 1,452 |
| | 1,398 |
| | 54 |
| | 3.9 |
| Gross profit | 1,600 | | | 1,452 | | | 148 | | | 10.2 | |
| Selling, general and administrative expenses | 1,028 |
| | 911 |
| | 117 |
| | 12.8 |
| Selling, general and administrative expenses | 961 | | | 1,028 | | | (67) | | | (6.5) | |
| Other operating income, net | (42 | ) | | (11 | ) | | (31 | ) | | NM |
| Other operating income, net | (1) | | | (42) | | | 41 | | | NM |
| Income from operations | 466 |
| | 498 |
| | (32 | ) | | (6.4 | ) | Income from operations | 640 | | | 466 | | | 174 | | | 37.3 | |
| Interest expense | 153 |
| | 169 |
| | (16 | ) | | (9.5 | ) | Interest expense | 140 | | | 153 | | | (13) | | | (8.5) | |
| Loss on early extinguishment of debt | 2 |
| | 9 |
| | (7 | ) | | (77.8 | ) | Loss on early extinguishment of debt | 105 | | | 2 | | | 103 | | | NM |
| Impairment on investment and note receivable | 86 |
| | — |
| | 86 |
| | NM |
| |
| Other expense, net | 20 |
| | 5 |
| | 15 |
| | NM |
| |
| Impairment of investments and note receivable | | Impairment of investments and note receivable | — | | | 86 | | | (86) | | | NM |
| Other (income) expense, net | | Other (income) expense, net | (3) | | | 20 | | | (23) | | | NM |
| Income before provision for income taxes | 205 |
| | 315 |
| | (110 | ) | | (34.9 | ) | Income before provision for income taxes | 398 | | | 205 | | | 193 | | | 94.1 | |
| Provision for income taxes | 49 |
| | 85 |
| | (36 | ) | | (42.4 | ) | Provision for income taxes | 73 | | | 49 | | | 24 | | | 49.0 | |
| Net income | $ | 156 |
| | $ | 230 |
| | (74 | ) | | (32.2 | ) | Net income | $ | 325 | | | $ | 156 | | | 169 | | | 108.3 | |
| | | | | | | | | | | | | |
| Earnings per common share: | | | | | | | | Earnings per common share: | | | | | |
| Basic | $ | 0.11 |
| | $ | 0.16 |
| | $ | (0.05 | ) | | (31.3 | )% | Basic | $ | 0.23 | | | $ | 0.11 | | | $ | 0.12 | | | 109.1 | % |
| Diluted | 0.11 |
| | 0.16 |
| | (0.05 | ) | | (31.3 | ) | Diluted | 0.23 | | | 0.11 | | | 0.12 | | | 109.1 | |
| | | | | | | | | |
| Gross margin | 55.6 | % | | 55.8 | % | |
|
| | (20 bps) |
| Gross margin | 55.1 | % | | 55.6 | % | | (50 bps) |
| Operating margin | 17.8 | % | | 19.9 | % | |
|
| | (210 bps) |
| Operating margin | 22.1 | % | | 17.8 | % | | 430 bps |
| Effective tax rate | 23.9 | % | | 27.0 | % | | | | (310 bps) |
| Effective tax rate | 18.3 | % | | 23.9 | % | | (560 bps) |
Sales volume.Volume. The following table sets forth changesprovides the percentage increase in sales volume for the first quarter of 2020volumes compared to the prior year period:
|
| | | | | | | |
| | Increase / (Decrease)Percentage Change |
K-Cup pod volumePods | | 5.613.7 | % |
Brewer volumeBrewers | | (2.461.4 | ) |
CSD sales volumeCSDs | | 0.36.8 |
|
NCB sales volumeNCBs | | 5.5(10.2) |
|
Net Sales. Net sales increased $109$289 million, or 4.4%11.1%, to $2,613$2,902 million for the first quarter of 20202021 compared to $2,504$2,613 million in the prior year period. This performance reflected higher volume/mix of 5.0% driven by strong volume/mix growth, which reflected particular strength in the Packaged Beverage segment, which included a benefit from the impact of COVID-19 late in the quarter, partially offset by a slowdown in the Beverages Concentrates and Coffee Systems segments, both of which experienced a modest unfavorable impact from COVID-19 late in the quarter. The volume/mix growth was partially offset by lower10.3%, net price realization of 0.5% and unfavorable foreign currencyfavorable FX translation which also impacted the period by 0.1%of 0.3%.
Gross Profit. Gross profit increased $54$148 million, or 3.9%10.2%, to $1,452$1,600 million for the first quarter of 20202021 compared to $1,398$1,452 million in the prior year period. This performance primarily reflected the impact of higherstrong volume/mix and the benefit of productivity and merger synergies, partially offset by tariffs, unfavorable net price realization and inflation in input costs, led by packaging.commodity costs. Gross margin decreased 2050 bps versus the year ago period to 55.6% in the first quarter55.1%.
Selling, General and Administrative Expenses. SG&A expenses increased $117decreased $67 million, or 12.8%6.5%, to $1,028$961 million for the first quarter of 20202021 compared to $911$1,028 million in the prior year period. The increasedecrease was driven by the unfavorablefavorable change in commodity mark-to-market impacts expenses associated withof $72 million, lower marketing expense in relation to the prior year pre-COVID-19 levels of spending and productivity and integration projects,merger synergies, partially offset by inflation in logistics, higher operating costs associated with the increased shipment volume and an increase in other operating costs. These increases were partially offset by strong productivity and merger synergies.higher professional fees.
Other Operating Income, net. Other operating income, net increased $31 million to $42had an unfavorable change of $41 million for the first quarter of 20202021 compared to $11 million in the prior year period, due tolargely driven by the network optimization program gain of $42 million on the asset sale-leaseback of four facilities in the current year versus a $10 million net gain on a renegotiationfirst quarter of a manufacturing contract in the prior year period.2020.
Income from Operations. Income from operations decreased $32increased $174 million, or 6.4%37.3%, to $466$640 million for the first quarter of 20202021 compared to $498$466 million in the prior year period, due todriven by the increase in gross profit and the decrease in SG&A expenses, partially offset by an increasethe unfavorable change in gross profit and other operating income, net. Operating margin declined 210increased 430 bps versus the year ago period to 17.8% in the first quarter of 2020 as compared to the prior year period.22.1%.
Interest Expense. Interest expense decreased $16$13 million, or 9.5%8.5%, to $153$140 million for the first quarter of 20202021 compared to $169$153 million for the prior year period. This change was primarily the result of the favorable change in unrealized interest rate swap mark-to-market impacts of $32 million, partially offset by the unfavorable comparison to the realized benefit of lower indebtednessunwinding several interest rate swap contracts in the prior year period.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt reflected expense of $105 million during the first quarter of 2021 due to continued deleveraging.our strategic refinancing initiatives.
Impairment on Investmentof Investments and Note Receivable. Impairment on investmentinvestments and note receivable reflected a favorable comparison to a non-cash impairment charge of $86 million forin the first quarter of 2020prior year period associated with our Bedford investment. Refer to Note 4 for additional information regarding the impairment charge.
Other Expense, net.Other expense, net increased $15 million to $20 million for the first quarter of 2020 compared to $5 million in the prior year period primarily driven by losses related to our deferred compensation plan in the current year versus gains recorded in the prior year period. The deferred compensation plan activity is fully offset by the same amount in SG&A expenses.
Effective Tax Rate. The effective tax ratesrate decreased 560 bps to 18.3% for the first quarter of 2020 and 2019 were2021, compared to 23.9% and 27.0%, respectively. For the first quarter of 2020, the provision for income taxes was lower thanin the prior year period, primarily due todriven by the tax benefit received from excess tax deductions that were generated from the revaluationvesting of the Company's deferred tax liabilities and the decrease of income tax reserves due to the lapse in statute of limitations.RSUs.
Net Income. Net income decreased $74increased $169 million, or 108.3%, to $156$325 million for the first quarter of 20202021 as compared to $230$156 million in the prior year period. This performance was primarilyperiod, driven by a non-cashimproved income from operations and reduced interest expense, as well as the favorable comparison to the impairment chargeon investments and note receivable in the first quarter of $86 million associated with our Bedford investment.2020, partially offset by the loss on early extinguishment of debt in the first quarter of 2021.
Diluted EPS. Diluted EPS decreased 31.3%increased 109.1% to $0.11$0.23 per diluted share as compared to $0.16$0.11 in the prior year period.
Adjusted Results of Operations
The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the first quarter of 20202021 and 2019:2020:
| | | | First Quarter | | Dollar | | Percent | | First Quarter | | Dollar | | Percent |
| (in millions, except per share amounts) | 2020 | | 2019 | | Change | | Change | (in millions, except per share amounts) | 2021 | | 2020 | | Change | | Change |
| | Adjusted income from operations | $ | 684 |
| | $ | 621 |
| | $ | 63 |
| | 10.1 |
| Adjusted income from operations | $ | 741 | | | $ | 684 | | | $ | 57 | | | 8.3 | % |
| Adjusted interest expense | 120 |
| | 124 |
| | (4 | ) | | (3.2 | ) | Adjusted interest expense | 139 | | | 120 | | | 19 | | | 15.8 | |
| Adjusted provision for income taxes | 136 |
| | 128 |
| | 8 |
| | 6.3 |
| Adjusted provision for income taxes | 134 | | | 136 | | | (2) | | | (1.5) | |
| Adjusted net income | 408 |
| | 362 |
| | 46 |
| | 12.7 |
| Adjusted net income | 471 | | | 408 | | | 63 | | | 15.4 | |
| Adjusted diluted EPS | 0.29 |
| | 0.25 |
| | 0.04 |
| | 16.0 |
| Adjusted diluted EPS | 0.33 | | | 0.29 | | | 0.04 | | | 13.8 | |
| | | | | | | | | |
| Adjusted operating margin | 26.2 | % | | 24.8 | % | | | | 140 bps |
| Adjusted operating margin | 25.5 | % | | 26.2 | % | | (70 bps) |
| Adjusted effective tax rate | 25.0 | % | | 26.1 | % | | | | (110 bps) |
| Adjusted effective tax rate | 22.1 | % | | 25.0 | % | | (290 bps) |
Adjusted Income from Operations. Adjusted income from operations increased $63$57 million, or 10.1%8.3%, to $684$741 million for the first quarter of 20202021 compared to Adjusted income from operations of $621$684 million in the prior year period. Driving this performance in the quartercurrent period were strong volume/mix, the benefit of productivity and merger synergies, which impacted both SG&A and cost of sales, and lower marketing expense in relation to the strong growthprior year pre-COVID-19 levels of spending. Partially offsetting these positive drivers were higher manufacturing costs and operating costs, driven by inflation in net salescommodities and logistics, increases in employee costs and professional fees, and an unfavorable comparison to a network optimization program gain of $42 million on the asset-sale leaseback of four facilities. Partially offsetting these positive drivers were inflation in input costs, led by packaging, and logistics, higher operating costs associated with the increased shipment volume, tariffs and the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contractfacilities in the prior year period. Adjusted operating margin grew 140declined 70 bps versus the year ago period to 26.2% in the first quarter of 2020.25.5%.
Adjusted Interest Expense. Adjusted interest expense decreased $4increased $19 million, or 3.2%15.8%, to $120$139 million for the first quarter of 20202021 compared to Adjusted interest expense of $124$120 million in the prior year period. This change wasperiod, driven by the result ofunfavorable comparison to the benefit of lower indebtedness due to continued deleveraging and the $20 million benefit of unwinding several interest rate swap contracts. Partially offsetting these factors was a $27 millionrealized benefit of unwinding several interest rate swap contracts in the prior year period.first quarter of 2020.
Adjusted Effective Tax Rate. The Adjusted effective tax rate decreased 110290 bps to 25.0%22.1% for the first quarter of 2020,2021, compared to the Adjusted effective tax rate of 26.1%25.0% in the prior year period. This decrease in our adjusted effectiveperiod, primarily driven by the tax rate was primarily due to the benefit received from excess tax deductions that were generated from the revaluationvesting of the Company's deferred tax liabilities and the decrease of income tax reserves due to the lapse in statute of limitations during the first quarter of 2020.RSUs.
Adjusted Net Income. Adjusted net income increased 12.7%15.4% to $408$471 million for the first quarter of 20202021 as compared to Adjusted net income of $362$408 million in the prior year period. This performance was driven primarily by strong growth in Adjusted income from operations, a lower Adjusted effective tax rate and lower Adjusted interest expense.operations.
Adjusted Diluted EPS. Adjusted diluted EPS increased 16.0%13.8% to $0.29$0.33 per diluted share as compared to Adjusted diluted EPS of $0.25$0.29 per diluted share in the prior year period.
Results of Operations by Segment
The following tables set forthprovide net sales and income from operations for our reportable segments for the first quarter of 20202021 and 2019,2020, 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 Quarter |
| Segment Results — Net sales | 2021 | | 2020 |
| Coffee Systems | $ | 1,142 | | | $ | 973 | |
| Packaged Beverages | 1,307 | | | 1,217 | |
| Beverage Concentrates | 328 | | | 306 | |
| Latin America Beverages | 125 | | | 117 | |
| Net sales | $ | 2,902 | | | $ | 2,613 | |
| | | |
| First Quarter |
| (in millions) | 2021 | | 2020 |
| Segment Results — Income from Operations | | | |
| Coffee Systems | $ | 336 | | | $ | 272 | |
| Packaged Beverages | 175 | | | 189 | |
| Beverage Concentrates | 238 | | | 197 | |
| Latin America Beverages | 22 | | | 27 | |
| Unallocated corporate costs | (131) | | | (219) | |
| Income from operations | $ | 640 | | | $ | 466 | |
|
| | | | | | | |
| (in millions) | First Quarter |
| Segment Results — Net sales | 2020 | | 2019 |
| Coffee Systems | $ | 973 |
| | $ | 968 |
|
| Packaged Beverages | 1,217 |
| | 1,116 |
|
| Beverage Concentrates | 306 |
| | 304 |
|
| Latin America Beverages | 117 |
| | 116 |
|
| Net sales | $ | 2,613 |
| | $ | 2,504 |
|
| | | | |
| | First Quarter |
| (in millions) | 2020 | | 2019 |
| Segment Results — Income from Operations | | | |
| Coffee Systems | $ | 272 |
| | $ | 293 |
|
| Packaged Beverages | 189 |
| | 149 |
|
| Beverage Concentrates | 197 |
| | 201 |
|
| Latin America Beverages | 27 |
| | 11 |
|
| Unallocated corporate costs | (219 | ) | | (156 | ) |
| Income from operations | $ | 466 |
| | $ | 498 |
|
COFFEE SYSTEMS
The following table detailsprovides selected information about our Coffee Systems segment's net sales, income from operations, operating margin, Adjusted income from operations and Adjusted operating margin for the first quarter of 2020 and 2019:results:
| | | | First Quarter | | Dollar | | Percent | | First Quarter | | Dollar | | Percent |
| (in millions) | 2020 | | 2019 | | Change | | Change | (in millions) | 2021 | | 2020 | | Change | | Change |
| Net sales | $ | 973 |
| | $ | 968 |
| | $ | 5 |
| | 0.5 | % | Net sales | $ | 1,142 | | | $ | 973 | | | $ | 169 | | | 17.4 | % |
| Income from operations | 272 |
| | 293 |
| | (21 | ) | | (7.2 | ) | Income from operations | 336 | | | 272 | | | 64 | | | 23.5 | |
| Operating margin | 28.0 | % | | 30.3 | % | | | | (230 bps) |
| Operating margin | 29.4 | % | | 28.0 | % | | 140 bps |
| Adjusted income from operations | 347 |
| | 335 |
| | 12 |
| | 3.6 |
| Adjusted income from operations | 389 | | | 347 | | | 42 | | | 12.1 | |
| Adjusted operating margin | 35.7 | % | | 34.6 | % | | | | 110 bps |
| Adjusted operating margin | 34.1 | % | | 35.7 | % | | (160 bps) |
Sales Volume. TheSales volume growth in the first quarter of 20202021 compared to the prior year period for the Coffee Systems segment reflectedincluded strong K-Cup pod volume growth of 5.6% despite a significant decline late13.7%, reflecting strength in the quarterat-home consumption which was tempered by continued softness in the away-from-home coffee business due to both office closures and hospitality slowdown caused by COVID-19.the COVID-19 pandemic. Brewer volume declinedincreased 61.4% in the first quarter of 2021, as compared to a decline of 2.4% in the quarter, reflecting comparison to the double-digit growth recorded in the prior yearyear-ago period, driven by our successful brewer innovation program as well as the expected shift of brewer shipmentsa benefit from the first quarter to later in the year as a result of the timing impact of COVID-19 on brewer supply from certain regions in Asia.shipment timing.
Net Sales.Net sales increased $5 million, or 0.5%,17.4% to $973$1,142 million for the first quarter of 20202021 compared to $968$973 million forin the prior year period, due todriven by strong volume/mix growth of 3.7%, driven by the increase in K-Cup pod volume19.5% and partially offset by unfavorable pod sales mix. This growth wasfavorable FX translation of 0.5%, partially offset by lower net price realization of 3.3%. Favorable foreign currency translation also impacted the period by 0.1%2.6%.
Income from Operations. Income from operations decreased $21increased $64 million, or 7.2%23.5%, to $272$336 million for the first quarter of 2020,2021, compared to $293$272 million in the prior year period, driven by expenses associated withstrong volume/mix and the continued benefit of productivity projects and strategic pricing.merger synergies, as well as reduced costs to achieve those productivity and merger synergies. These impactsbenefits were partially offset by strong productivity and merger synergies, which impacted both SG&A and cost of sales,declines due to strategic pricing initiatives, the unfavorable comparison to a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility in the prior year period, inflation in packaging and strong growth in K-Cup pod volume.raw materials and $10 million of increased charges due to COVID-19. Operating margin declined 230grew 140 bps versus the year ago period to 28.0% during the first quarter of 2020.29.4%.
Adjusted Income from Operations. Adjusted income from operations increased $12$42 million, or 3.6%12.1%, to $347$389 million for the first quarter of 2020,2021, compared to $335$347 million in the prior year period, driven by strong volume/mix and the continued benefit of productivity and merger synergies, which impacted both SG&A and cost of sales,synergies. These benefits were partially offset by declines due to strategic pricing initiatives, the unfavorable comparison to a network optimization program gain of $16 million on an asset sale-leaseback of a manufacturing facility in the prior year period, and strong growthinflation in K-Cup pod volume. Partially offsetting these factors was strategic pricing, tariffspackaging and an increase in other operatingcoffee costs. Adjusted operating margin grew 110declined 160 bps versus the year ago period to 35.7%.34.1%, primarily reflecting unfavorable mix due to the strong brewer growth and the unfavorable comparison to the gain on an asset sale-leaseback in the prior year.
PACKAGED BEVERAGES
The following table detailsprovides selected information about our Packaged Beverages segment's net sales, income from operations, operating margin, Adjusted income from operations and Adjusted operating margin for the first quarter of 2020 and 2019:results:
| | | | First Quarter | | Dollar | | Percent | | First Quarter | | Dollar | | Percent |
| (in millions) | 2020 | | 2019 | | Change | | Change | (in millions) | 2021 | | 2020 | | Change | | Change |
| Net sales | $ | 1,217 |
| | $ | 1,116 |
| | $ | 101 |
| | 9.1 | % | Net sales | $ | 1,307 | | | $ | 1,217 | | | $ | 90 | | | 7.4 | % |
| Income from operations | 189 |
| | 149 |
| | 40 |
| | 26.8 |
| Income from operations | 175 | | | 189 | | | (14) | | | (7.4) | |
| Operating margin | 15.5 | % | | 13.4 | % | |
|
| | 210 bps |
| Operating margin | 13.4 | % | | 15.5 | % | | (210 bps) |
| Adjusted income from operations | 203 |
| | 160 |
| | 43 |
| | 26.9 |
| Adjusted income from operations | 197 | | | 203 | | | (6) | | | (3.0) | |
| Adjusted operating margin | 16.7 | % | | 14.3 | % | | | | 240 bps |
| Adjusted operating margin | 15.1 | % | | 16.7 | % | | (160 bps) |
Sales Volume. Sales volume for the first quarter of 20202021 increased 3.8% compared to the prior year period, increased 7.0% duedriven by strength in CSDs which was partially offset by the unfavorable comparison to higher water sales, led by evian and Core Hydration, higher CSD volume, and growth in Mott's. The increase in volumethe stock-up behavior in the first quarter was partially driven by heightened consumer demand due to stock-up behavior late in the quarterof 2020 related to COVID-19.
Net Sales. Net sales increased $1017.4% to $1,307 million in the first quarter of 2021, compared to $1,217 million in the prior year period, driven by volume/mix of 6.8%, net price realization of 0.4% and favorable FX translation of 0.2%.
Income from Operations.Income from operations decreased $14 million, or 9.1%7.4%, to $1,217$175 million for the first quarter of 20202021 compared to $1,116$189 million for the prior year period, driven primarily by the unfavorable comparison to a network optimization gain of $26 million in the prior year period related to the asset sale-leaseback of three facilities, inflation, led by commodity costs and logistics, increased operating costs due to higher volumes and expenses associated with productivity projects. These decreases were partially offset by strong volume/mix growth and the benefit of 8.7%productivity and merger synergies. Operating margin declined 210 bps versus the year ago period to 13.4%.
Adjusted Income from Operations.Adjusted income from operations decreased $6 million, or 3.0%, to $197 million for the first quarter of 2021 compared to $203 million for the prior year period, driven primarily by the unfavorable comparison to a network optimization gain of $26 million in partthe prior year period related to the asset sale-leaseback of three facilities, inflation, led by commodity costs and logistics, and increased operating costs due to higher volumes. These decreases were partially offset by strong volume/mix growth and productivity and merger synergies. Adjusted operating margin declined 160 bps versus the year ago period to 15.1%, primarily reflecting the aforementioned asset sale-leaseback gain in the year-ago period.
BEVERAGE CONCENTRATES
The following table provides selected information about our Beverage Concentrates segment's results:
| | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Dollar | | Percent |
| (in millions) | 2021 | | 2020 | | Change | | Change |
| Net sales | $ | 328 | | | $ | 306 | | | $ | 22 | | | 7.2 | % |
| Income from operations | 238 | | | 197 | | | 41 | | | 20.8 | |
| Operating margin | 72.6 | % | | 64.4 | % | | | | 820 bps |
| Adjusted income from operations | 239 | | | 197 | | | 42 | | | 21.3 | |
| Adjusted operating margin | 72.9 | % | | 64.4 | % | | | | 850 bps |
Sales Volume. Sales volume for the first quarter of 2021 increased 1.0% compared to the prior year period. Sales to our bottlers and distributors increased compared to the prior year period. This increase was partially offset by declines in sales volume for our fountain foodservice business, which services restaurants and hospitality, which continue to experience softness as a result of COVID-19 with sequential improvements over recent periods as businesses begin to reopen.
Net Sales. Net sales increased 7.2% to $328 million in the COVID-19 impact, and higherfirst quarter of 2021, compared to $306 million in the prior year period, reflecting net price realization of 0.4%7.2% and favorable FX translation of 0.7%, partially offset by lower volume/mix of 0.7%.
Income from Operations. Income from operations increased $40$41 million, or 26.8%20.8%, to $189$238 million for the first quarter of 20202021 compared to $149$197 million for the prior year period, reflecting strong net sales growth, continued productivity and merger synergies and a network optimization program gain of $26 million on the asset sale-leaseback of three facilities. These growth drivers were partially offset by higher operating costs associated with the surge in consumer demand late in the quarter, inflation in input costs, primarily in packaging, and labor and logistics, the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year periodperiod. This performance reflected higher net price realization and an increaselower marketing expenses in other operating costs.relation to the prior year pre-COVID-19 levels of spending. Operating margin grew 210increased 820 bps versus the prior year ago period to 15.5%72.6%.
Adjusted Income from Operations. Adjusted income from operations increased $43$42 million, or 26.9%21.3%, to $203$239 million for the first quarter of 20202021 compared to $160$197 million for the prior year period, largely driven by strong volume/mix, partially driven by increased shipment volume as a result of COVID-19. Other favorable drivers included productivity and merger synergies and a network optimization program gain of $26 million on the asset sale-leaseback of three facilities. These drivers were partially offset by higher operating costs associated with the surge in consumer demand late in the quarter, inflation in input costs, primarily in packaging, and labor and logistics, the unfavorable comparison to a $10 million net gain on a renegotiation of a manufacturing contract in the prior year periodperiod. This performance reflected higher net price realization and an increaselower marketing expenses in other operating costs.relation to the prior year pre-COVID-19 levels of spending. Adjusted operating margin grew 240increased 850 bps versus the year ago period to 16.7%.72.9%, primarily reflecting the favorable net price realization.
BEVERAGE CONCENTRATESLATIN AMERICA BEVERAGES
The following table detailsprovides selected information about our Beverage ConcentratesLatin America Beverages segment's net sales, income from operations, operating margin, Adjusted income from operations and Adjusted operating margin for the first quarter of 2020 and 2019:results:
| | | | First Quarter | | Dollar | | Percent | | First Quarter | | Dollar | | Percent |
| (in millions) | 2020 | | 2019 | | Change | | Change | (in millions) | 2021 | | 2020 | | Change | | Change |
| Net sales | $ | 306 |
| | $ | 304 |
| | $ | 2 |
| | 0.7 | % | Net sales | $ | 125 | | | $ | 117 | | | $ | 8 | | | 6.8 | % |
| Income from operations | 197 |
| | 201 |
| | (4 | ) | | (2.0 | ) | Income from operations | 22 | | | 27 | | | (5) | | | (18.5) | |
| Operating margin | 64.4 | % | | 66.1 | % | | | | (170 bps) |
| Operating margin | 17.6 | % | | 23.1 | % | | (550 bps) |
| Adjusted income from operations | 197 |
| | 201 |
| | (4 | ) | | (2.0 | ) | Adjusted income from operations | 23 | | | 27 | | | (4) | | | (14.8) | |
| Adjusted operating margin | 64.4 | % | | 66.1 | % | | | | (170 bps) |
| Adjusted operating margin | 18.4 | % | | 23.1 | % | | (470 bps) |
Sales Volume. Sales volume for the first quarter of 20202021 as compared to the prior year period declined 2.4% reflecting an immediate impact of COVID-19 on the fountain foodservice business latedecreased 0.4%, as increases in the quarter, partially offset by growth in the concentrate shipment volume for retail product.
Net Sales.Net sales increased $2 million, or 0.7%, to $306 million for the first quarter of 2020 compared to $304 million in the prior year period, driven by net price realization of 2.4%, partially offset by unfavorable volume/mix of 1.7% reflecting a significant channel shift away from on-premise business, which is shipped directly, as demand dropped off quickly late in the quarter due to COVID-19, partially offset by a slower build of the at-home business, as inventories in our partner bottling networkPeñafiel were worked down.
Income from Operations.Income from operations decreased $4 million, or 2.0%, to $197 million for the first quarter of 2020 compared to $201 million in the prior year period. This performance reflected the benefit of the net sales growth, which was more than offset by increased marketing investment. Operating margin declined 170 bps versus the year ago period to 64.4%.
Adjusted Income from Operations.Income from operations decreased $4 million, or 2.0%, to $197 million for the first quarter of 2020 compared to $201 milliondeclines in the prior year period. This performance reflected the benefit of the net sales growth, which was more than offset by increased marketing investment. Operating margin declined 170 bps versus the year ago period to 64.4%.
LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales, income from operations, operating margin, Adjusted income from operationsAguafiel and Adjusted operating margin for the first quarter of 2020 and 2019:
|
| | | | | | | | | | | | | | |
| | First Quarter | | Dollar | | Percent |
| (in millions) | 2020 | | 2019 | | Change | | Change |
| Net sales | $ | 117 |
| | $ | 116 |
| | $ | 1 |
| | 0.9 | % |
| Income from operations | 27 |
| | 11 |
| | 16 |
| | 145.5 |
|
| Operating margin | 23.1 | % | | 9.5 | % | | | | 1,360 bps |
|
| Adjusted income from operations | 27 |
| | 12 |
| | 15 |
| | 125.0 |
|
| Adjusted operating margin | 23.1 | % | | 10.3 | % | | | | 1,280 bps |
|
Sales Volume. Sales volume for the first quarter of 2020 as compared to the prior year period increased 1.5%, driven by Squirt.Crush.
Net Sales. Net sales increased $1 million, or 0.9%,grew 6.8% to $117$125 million for the first quarter of 20202021, compared to $116$117 million in the prior year period, driven by higherreflecting net price realization of 5.9%,10.3%. This growth was partially offset by unfavorable volume/mix of 0.7%. Unfavorable foreign currency2.6% and unfavorable FX translation also impacted the period by 4.3%of 0.9%.
Income from Operations. Income from operations increased $16decreased $5 million, or 145.5%18.5%, to $27$22 million for the first quarter of 20202021 compared to $11$27 million in the prior year period, driven by a favorable F/X transaction impact, net sales growthunfavorable FX effects (FX translation and continued productivity. These benefits weretransaction) and unfavorable volume/mix, partially offset by inflation in input costs, manufacturing and logistics.higher net price realization. Operating margin increased 1,360decreased 550 bps versus the year ago period to 23.1%17.6%.
Adjusted Income from Operations. Adjusted income from operations increased $15decreased $4 million, or 125.0%14.8%, to $23 million for the first quarter of 2021 compared to $27 million in the first quarter of 2020 compared to $12 million in the prior year period. This performance reflected a favorable F/X transaction impact, net sales growthperiod, driven by unfavorable FX effects (FX translation and continued productivity, which wastransaction) and unfavorable volume/mix, partially offset by inflation on input costs, manufacturing, and logistics.higher net price realization. Adjusted operating margin grew 1,280declined 470 bps versus the year ago period to 23.1%.18.4%, primarily reflecting the unfavorable impact of FX transaction.
UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS
We believe the North American beverage market is influenced by certain key trends and uncertainties. Some of these items, such as the recentongoing outbreak of COVID-19, increased health consciousness and changes in consumer preferences and economic factors, have previously created and may continue in the future to create category headwinds for a number of our products. Refer to Item 1A, "Risk Factors", of our Annual Report, and this Quarterly Report on Form 10-Q, combined with the Uncertainties and Trends Affecting Liquidity section below, for more information about risks and uncertainties facing us.
The impacts and volatility of COVID-19 are expected to be significant in 2020, and the timing and pacing of re-opening the economy and ultimately transitioning into what is likely to be a new normal are highly uncertain. Nevertheless, given our broad portfolio and unmatched distribution network that spans seven distinct routes to market, we are reaffirming our guidance for 2020.
Specifically, for the full-year 2020, we expect constant currency net sales growth in the range of 3% to 4%, with performance likely at the low end of the range. We expect full-year 2020 Adjusted diluted EPS growth in the range of 13% to 15%, or $1.38 to $1.40 per diluted share, given the significant visibility and control we maintain over our cost structure, including aggressive cost management, productivity programs and merger synergies. As such, we continue to expect our management leverage ratio in the range of 3.5x to 3.8x at year end 2020 and our management leverage ratio to be below 3.0x in two to three years from the July 2018 merger closing.
COVID-19 Pandemic Disclosures
Our priorities during the COVID-19 pandemic are protecting the health and safety of our employees, maximizing the availability of our products for our consumers and Fueling the Frontline to provide our products to first responders who are fighting the COVID-19 pandemic. Because we sell products that are essential to the daily lives of consumers, the COVID-19 pandemic has not had a material net impact to our consolidated operating results for the first quarter of 2020. However, the pandemic is having offsetting impacts within our business. For example, we experienced a significant increase in demand and consumption of our products in our at-home business caused in part by changing consumer habits and pantry stocking in response to COVID-19, contributing to increases in net sales. At the same time, we experienced declines in our away-from-home business due to office closures and the slowdown of hospitality and fountain foodservice. In the future, the economic effects of the pandemic, including higher levels of unemployment, lower wages or a recessionary environment, may cause reduced demand for our products. It could also lead to volatility in demand due to government actions, such as shelter-in-place notices, which impact consumers’ movements and access to our products.
While we believe that there will continue to be strong long-term demand for our products, the timing and extent of economic recovery, and the uncertainties in short-term demand trends, make it difficult to predict the overall effects of the pandemic on our business. We expect that there will be heightened volatility in net sales during and subsequent to the duration of the pandemic that may impact interim periods.
Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our critical frontline employees and our supply chain. As food and agriculture is deemed part of the critical infrastructure by the Department of Homeland Security, our frontline employees have been identified as critical workers in maintaining the U.S. food and beverage supply. As a result, we have strived to follow recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our manufacturing and distribution facilities, which also includes additional incentive pay programs and benefits. We intend to continue to work with government authorities and implement our employee safety measures; however, disruptions to our supply chain, measures taken to protect employees or other local effects of the pandemic could impact our operations. For our corporate employees, participating in a remote work environment is familiar to us as we work in a multi-location environment, and we do not believe that the remote work environment has had any significant impact on our internal controls over financial reporting.
The pandemic has not materially impacted our liquidity position. We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets enabled by our debt ratings. Refer to Uncertainties and Trends Affecting Liquidity and Capital Resources for more information.
We do not believe our operating and intangible assets are impaired as a result of COVID-19.
For additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-Q.
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 our Annual Report on Form 10-K for the year ended December 31, 2019..
LIQUIDITY AND CAPITAL RESOURCES
Overview and Our Financing Arrangements
Our financial condition and liquidity remain strong. Net cash provided by operations was $414$546 million for the first quarter of 20202021 compared to $591$414 million for the prior year period. Although there is continued uncertainty related to the anticipated impact of the recentongoing COVID-19 pandemic on our future results, we believe we are uniquely positioned, with our broad portfolio and unmatched distribution network, to successfully navigate through this pandemic, and the recent steps we have taken over the course of the pandemic to strengthen our balance sheet leave us well positioned to manage our business as the crisis continues to unfold.business. We continue to manage all aspects of our business, including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies through our integration and productivity initiatives, and developing new opportunities for growth.growth such as innovation and agreements with partners to distribute brands that are accretive to our portfolio.
The following summarizes our cash activity for the first quarter of 2021 and 2020:
Cash, cash equivalents, restricted cash and restricted cash equivalents increased $94 million from December 31, 2020 to March 31, 2021 as cash generated from our operations outpaced the impact of dividends and deleveraging.
Cash generated by our foreign operations is generally repatriated to the U.S. periodically as working capital funding requirements in those jurisdictions allow. Foreign cash balances were $177 million and $165 million as of March 31, 2021 and December 31, 2020, respectively.
Principal Sources of Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalents, as well as cash generated from our operations and borrowing capacity currently available under our existing KDP Revolver and 20192021 364-Day Credit Agreement. Additionally, we have an uncommitted commercial paper program where we can issue unsecured commercial paper notes on a private placement basis. Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of these financing arrangements.
During March 2020, as a result of market stress and a dislocation in the commercial paper market driven by the COVID-19 pandemic, we chose to repay $1,000 million of commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver. In April 2020, we took steps to further strengthen our balance sheet by increasing excess liquidity in order to better position us to navigate the uncertainty of the COVID-19 pandemic. On April 13, 2020, we issued $1,500 million of senior unsecured notes and used the net proceeds from these senior unsecured notes to repay $1,000 million on our KDP Revolver and $481 million towards commercial paper notes, effectively refinancing short-term borrowings with efficient long-term bonds to free up excess short-term liquidity. On April 14, 2020, we terminated the 2019 364-Day Credit Agreement and replaced it with the new 2020 364-Day Credit Agreement and increased total commitments under the facility from $750 million to $1,500 million. As a result of these two actions, we have increased our liquidity to a level that we believe enables us to more than meet our commitments, even in a prolonged economic downturn, as we continue to exercise financial discipline to ensure our long-term financial health. Refer to Note 19 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of these new financing arrangements.
As of March 31, 2020, we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.
Cash Flows
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.
The following table summarizes our cash activity for the first quarter
Sources of 2020 and 2019:
|
| | | | | | | |
| | First Quarter |
| (in millions) | 2020 | | 2019 |
| Net cash provided by operating activities | $ | 414 |
| | $ | 591 |
|
| Net cash provided by (used in) investing activities | 34 |
| | (45 | ) |
| Net cash used in financing activities | (328 | ) | | (556 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIESLiquidity - Operations
Net cash provided by operating activities decreased $177increased $132 million for the first quarter of 2020,2021, as compared to the first quarter of 2019,2020, driven by the decline in working capital primarily driven by the payment and deferral of customer incentives, offset by the slight increase in net income adjusted for non-cash items.
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 |
Our cash conversion cycle declined 12improved 19 days to approximately (47)66 days as of March 31, 20202021 as compared to (35)47 days in the prior year period. The change was primarily driven by a increase of 8 days infollowing table summarizes our DPO as the DPS operations had significantly shorter terms than the legacy KGM business, which have been steadily increasing as we continue to focus on our accounts payable program. DIO and DSO were relatively consistent as compared to the prior year period.cash conversion cycle:
| | | | | March 31, | | March 31, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| DIO | | 52 |
| | 53 |
| DIO | | 55 | | | 52 | |
| DSO | | 34 |
| | 37 |
| DSO | | 33 | | | 34 | |
| DPO | | 133 |
| | 125 |
| DPO | | 154 | | | 133 | |
| Cash conversion cycle | | (47 | ) | | (35 | ) | Cash conversion cycle | | (66) | | | (47) | |
In future periods, DPO is expected to continue to have a positive impact on our cash conversion cycle as a result of our supplier terms initiative, which has set our customary terms as we integrate our legacy businesses.
Accounts payable programPayable Program
As part of our ongoing efforts to improve our cash flow and related liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. Excluding our suppliers who require cash at date of purchase or sale, our current payment terms with our suppliers generally range from 10 to 360 days. We also entered into an agreement with a third party administrator 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. AsWe have been informed by the third party administrator that as of March 31, 20202021 and December 31, 2019, $2,3222020, $2,777 million and $2,097$2,578 million, respectively, of our outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions. The amounts settled through the program and paid to the financial institutions were $698 million and $557 million for the first quarter of 2021 and $3522020, respectively.
Impact of the Cares Act
Beginning in the second quarter of 2020, we deferred payments of employer-related payroll taxes as allowed under the U.S. Coronavirus Aid, Relief and Economic Security Act, commonly known as the CARES Act. Payment of at least 50% of the deferred amount is due on January 3, 2022, with the remainder due by January 3, 2023. As of March 31, 2021, we have deferred a total of $59 million in such payments.
Sources of Liquidity - Financing
During the first quarter of 2021, we undertook a strategic refinancing and issued $2,150 million aggregate face value of Notes, consisting of $1,150 million aggregate principal amount of 0.750% 2024 Notes, $500 million aggregate principal amount of 2.250% 2031 Notes, and $500 million aggregate principal amount of 3.350% 2051 Notes. The proceeds from the issuance were used to voluntarily prepay several tranches of our existing Notes and our 2019 KDP Term Loan in order to take advantage of current market conditions to refinance our debt maturities at more attractive interest rates, while also extending the duration of our debt.
In March 2021, we also terminated our 2020 364-Day Credit Agreement, which would have expired in April 2021, and replaced it with our 2021 364-Day Credit Agreement, which has a term-out option allowing us to extend the maturity date by converting the facility into a term loan agreement for an additional one-year term.
Additionally, in March 2021, we filed a prospectus supplement with the SEC in order to sell up to 4,300,000 shares to or through Goldman in at-the-market offerings, known as an ATM Program. The ATM Program was completed effective March 15, 2021, and the net proceeds of approximately $140 million were primarily used to cover our obligation to remit cash to local, state and federal tax authorities in connection with the net settlement of vesting restricted stock units during the first quarter of 2021. Commissions and fees paid under the ATM program were less than $1 million for the first quarter of 2021.
Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of our financing arrangements.
We also have an active shelf registration statement, filed with the SEC on August 27, 2019, which allows us to issue an indeterminate number or amount of common stock, preferred stock, debt securities and warrants from time to time in one or more offerings at the direction of our Board of Directors.
Debt Ratings
As of March 31, 2021, our credit ratings were as follows:
| | | | | | | | | | | | | | |
| Rating Agency | Long-Term Debt Rating | Commercial Paper Rating | Outlook | Date of Last Change |
| Moody's | Baa2 | P-2 | Stable | February 26, 2021 |
| S&P | BBB | A-2 | Stable | May 14, 2018 |
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 March 31, 2021, 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
Our principal uses of our capital resources following the DPS Merger are deleveraging, providing shareholder return to our investors through dividends, and investing in KDP to capture market share and drive growth through innovation and routes to market.
Deleveraging and Other Debt Repayments
In 2018, management set deleveraging targets for a 2-3 year time period following the DPS Merger in order to optimize our balance sheet, and we continue to be focused on achieving those targets within that time frame. Since the DPS Merger, we have made net repayments of $3,295 million of our Notes, our commercial paper and our other credit agreements, including $120 million for the first quarter of 2021.
In May 2021, our $1,750 million 2021 Merger Notes will be repaid at maturity, using cash generated from operations and, as needed, issuance of variable-rate debt available to us through the various KDP Credit Agreements, including commercial paper.
Dividends
In February 2021, we announced that our Board of Directors approved a 25% increase in our annualized dividend rate to $0.75 per share, from the current annualized rate of $0.60 per share, effective with the Company’s regular quarterly dividend to be announced in the second quarter of 2021, subject to official declaration by the Board of Directors. We additionally announced that our Board of Directors declared a regular quarterly cash dividend of $0.15 per share, payable in U.S. dollars, on our common stock. The regular quarterly dividend was paid on April 15, 2021 to shareholders of record on April 1, 2021.
Capital Expenditures
We have significantly invested in state-of-the-art manufacturing and warehousing facilities, including expansive investments in new facilities in Spartanburg, South Carolina; Newbridge, Ireland; and Allentown, Pennsylvania, in order to optimize our supply chain network through integration and productivity projects.
Purchases of property, plant and equipment were $95 million and $151 million for the first quarter of 2021 and 2020, respectively.
Capital expenditures, which includes both purchases of property, plant and equipment and amounts included in accounts payable and accrued expenses, for the first quarter of 2021 primarily related to our continued investment in the build-out of our Allentown manufacturing facility, the build out of the Ireland facility and build-out of our Spartanburg manufacturing facility. Capital expenditures included in accounts payable and accrued expenses were $259 million for the first quarter of 2021, which primarily related to these investments.
Capital expenditures for the first quarter of 2020 primarily related to manufacturing equipment, our continued investment in the build-out of our Spartanburg facility and Allentown facility, the purchase of real estate in Ireland and logistics equipment. Capital expenditures included in accounts payable and accrued expenses was $177 million for the first quarter of 2020, which primarily related to these investments.
As we begin to move past the three-year period after the DPS Merger, we expect that total capital expenditures will be approximately 3% of net sales on an annualized basis.
Purchases of Intangible Assets
We have invested in the expansion of our DSD network through transactions with strategic independent bottlers to ensure competitive distribution scale for our brands. These transactions are generally accounted for as an asset acquisition, as the majority of the transaction price represents the reacquisition of our distribution rights. Purchases of intangible assets were $12 million and 2019, respectively.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Cash provided by investing activities$15 million for the first quarter of 2021 and 2020, consisted primarily of proceeds of $201 million from sales of property, plant and equipment, primarily driven by our asset sale-leaseback transactions, partially offset by purchases of property, plant and equipment of $151 million.respectively.
Cash used in investing activities for the first quarter of 2019 consisted primarily of purchases of property, plant and equipment of $62 million.
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Cash used in financing activities for the first quarter of 2020 consisted primarily of the net repayment of $387 million for commercial paper notes, which was primarily a result of the decision to repay $1,000 million of commercial paper notes with an equivalent amount of borrowings under our KDP Revolver as the costs and ability to issue commercial paper became inefficient versus borrowings under our KDP Revolver. Additionally we made voluntary and mandatory repayments on the term loan facility of $405 million, repayment of the 2020 Notes of $250 million, dividend payments of $212 million and net payments on structured payables of $63 million.
Net cash used in financing activities for the first quarter of 2019 consisted primarily of the voluntary and mandatory repayments on the term loan facility of $758 million, repayment of the 2019 Notes of $250 million and dividend payments of $211 million. These cash outflows from financing activities were partially offset by net issuance of commercial paper notes of $594 million and net proceeds from structured payables of $69 million.
Uncertainties and Trends Affecting Liquidity
Disruptions in financial and credit markets, including those caused by the ongoing COVID-19 pandemic, 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 all risk factors discussed under "Risk Factors" in Part 1, Item 1A of our Annual Report, andas well as subsequent filings with the SEC, that could have a material effect on production, delivery and consumption of our products in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume.
We believe that the following events, trends and uncertainties may also impact liquidity:
•Our intention to drive significant cash flow generation to enable rapid deleveraging within three years from the DPS Merger;
•Our ability to access our committed financing arrangements, including our KDP Revolver and our 20202021 364-Day Credit Agreement which have availability of $3,900 million as of April 30, 2020;;
•Our ability to issue unsecured uncommitted commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $2,400 million;
Our intention•A significant downgrade in our credit ratingscould limit i) a financial institution's willingness to drive significant cash flow generationparticipate in our accounts payable program and reduce the attractiveness of the accounts payable program to enable rapid deleveraging within three yearsparticipating suppliers who may sell payment obligations from the DPS Merger;us to financial institutions, which could impact our accounts payable program; or ii) our ability to issue debt at terms that are favorable to us;
| |
• | A significant downgrade in our credit ratingscould limit a financial institution's willingness to participate in our accounts payable program and reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions, which could impact our accounts payable program;
|
Our continued integration of DPS;
Our continued capital expenditures;
Our continued payment of dividends;
Seasonality of our operating cash flows, which could impact short-term liquidity;•Our continued capital expenditures;
Fluctuations in our tax obligations;
Future equity investments; and
•Future mergers or acquisitions, ofwhich may include brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.coverage;
•Future equity investments; Debt Ratings
As of March 31, 2020, our credit ratings were as follows:
|
| | | | |
Rating Agency | Long-Term Debt Rating | Commercial Paper Rating | Outlook | Date of Last Change |
Moody's | Baa2 | P-2 | Negative | May 11, 2018 |
S&P | BBB | A-2 | Stable | May 14, 2018 |
These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both•Seasonality of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.
Capital Expenditures
Capital expenditures were $151 million and $62 million for the first quarter of 2020 and 2019, respectively.
Capital expenditures for the first quarter of 2020 primarily related to manufacturing equipment, our continued investment in the build-out of our Spartanburg facility and Allentown facility, the purchase of real estate in Ireland and logistics equipment. Capital expenditures included in accounts payable and accrued expenses were $177 million for the first quarter of 2020, which primarily related to our investment in the build-out of our new Allentown manufacturing facility and Spartanburg manufacturing facility.
Capital expenditures for the first quarter of 2019 primarily related to machinery and equipment, logistics equipment, information technology infrastructure and replacement of existing cold drink equipment.
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents increased $112 million from December 31, 2019 to March 31, 2020 due to the Company's focus on preserving liquidity rather than making voluntary prepayments on our term loan.
Our cash balances are used to fund working capital requirements, scheduled debt and interest payments, capital expenditures, income tax obligations, dividend payments and business combinations. Cash generated by our foreign operations is generally repatriated to the U.S. periodically as working capital funding requirements in those jurisdictions allow. Foreign cash balances were $110 million and $70 million as of March 31, 2020 and December 31, 2019, respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.
Contractual Commitments and Obligations
We enter into various contractual obligations that impact, or could impact, our liquidity. Based on our current and anticipated level of operations, we believe that our proceeds from operating cash flows, combined with cash on handwhich could impact short-term liquidity; and amounts available under our financing arrangements will be sufficient to meet our anticipated obligations.
The following table summarizes our contractual obligations and contingencies, as of March 31, 2020, that have significantly changed from the amounts disclosed•Fluctuations in our Annual Report:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due in Year |
| (in millions) | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
Long-term obligations(1) | $ | 12,700 |
| | $ | 75 |
| | $ | 2,350 |
| | $ | 350 |
| | $ | 3,200 |
| | $ | — |
| | $ | 6,725 |
|
| Interest payments | 4,687 |
| | 481 |
| | 457 |
| | 410 |
| | 353 |
| | 295 |
| | 2,691 |
|
Operating leases(2) | 732 |
| | 60 |
| | 85 |
| | 74 |
| | 66 |
| | 64 |
| | 383 |
|
Purchase obligations(3) | 1,531 |
| | 1,001 |
| | 158 |
| | 111 |
| | 93 |
| | 84 |
| | 84 |
|
| |
(1) | Amounts represent payments for the senior unsecured notes issued by us and the term loan credit agreement. Refer to Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information. |
| |
(2) | Amounts represent minimum rental commitments under our non-cancelable operating leases. Refer to Note 8 for additional information. |
| |
(3) | Amounts represent payments under agreements to purchase goods or services that are legally binding and that specify all significant terms, including capital obligations and long-term contractualtax obligations. |
Through March 31, 2020, there have been no other material changes to the amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
OFF-BALANCE SHEET ARRANGEMENTS
There are no material changes in off-balance sheet arrangements from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 of the Notes to our Unaudited Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP.
SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
The Notes are fully and unconditionally guaranteed by certain of our direct and indirect subsidiaries (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by us and jointly and severally guarantee, subject to the release provisions described below, our obligations under the Notes. None of our subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries held by Maple Parent Holdings Corp. prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of our other indebtedness, our exercise of the legal defeasance option with respect to the Notes and the discharge of our obligations under the applicable indenture.
The following schedules present the summarized financial information for (i) the ParentKeurig Dr Pepper Inc. (the “Parent”) and the Guarantors on a combined basis after intercompany eliminations, (ii)eliminations; the Parent and the Guarantors' amounts due from and amounts due to Non-Guarantors and (iii) the eliminations necessary to arrive at our consolidated results.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 consolidating results of operationsfinancial information for the Parent and Guarantors were as follows:
| | | | | |
| (in millions) | For the First Quarter of 2021 |
| Net sales | $ | 1,617 | |
| |
| Income from operations | 317 | |
| Net income attributable to KDP | 325 | |
|
| | | | | | | | | | | | | | | |
| | For the First Quarter of 2020 |
| (in millions) | Parent and Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | 1,523 |
| | $ | 1,122 |
| | $ | (32 | ) | | $ | 2,613 |
|
| Gross profit | 891 |
| | 561 |
| | — |
| | 1,452 |
|
| Income before equity in earnings of consolidated subsidiaries | 97 |
| | 108 |
| | — |
| | 205 |
|
| Equity in earnings of subsidiaries, net of tax | 75 |
| | 81 |
| | — |
| | 156 |
|
| Net income | $ | 156 |
| | $ | 81 |
| | $ | (81 | ) | | $ | 156 |
|
| | | | | | | | | | | |
| (in millions) | March 31, 2021 | | December 31, 2020 |
Current assets(1) | $ | 2,047 | | | $ | 1,810 | |
| Non-current assets | 43,636 | | | 43,333 | |
Current liabilities(2) | $ | 4,621 | | | $ | 5,148 | |
| Non-current liabilities | 16,991 | | | 16,164 | |
The summarized consolidating balance sheets were as follows:
|
| | | | | | | | | | | | | | | |
| | March 31, 2020 |
| (in millions) | Parent and Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| ASSETS | | | | | | | |
| Current assets | $ | 1,584 |
| | $ | 1,175 |
| | $ | (482 | ) | | $ | 2,277 |
|
| Non-current assets | 28,059 |
| | 19,752 |
| | (1,245 | ) | | 46,566 |
|
| Investments in Non-Guarantors | 14,824 |
| | — |
| | (14,824 | ) | | — |
|
| Total assets | $ | 44,467 |
| | $ | 20,927 |
| | $ | (16,551 | ) | | $ | 48,843 |
|
| | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | |
| Current liabilities | $ | 4,520 |
| | $ | 2,820 |
| | $ | (482 | ) | | $ | 6,858 |
|
| Non-current liabilities | 17,307 |
| | 3,283 |
| | (1,245 | ) | | 19,345 |
|
| Total liabilities | 21,827 |
| | 6,103 |
| | (1,727 | ) | | 26,203 |
|
| Stockholders' equity | 22,640 |
| | 14,824 |
| | (14,824 | ) | | 22,640 |
|
| Total liabilities and equity | $ | 44,467 |
| | $ | 20,927 |
| | $ | (16,551 | ) | | $ | 48,843 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 |
| (in millions) | Parent and Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| ASSETS | | | | | | | |
| Current assets | $ | 1,404 |
| | $ | 1,273 |
| | $ | (404 | ) | | $ | 2,273 |
|
| Non-current assets | 28,180 |
| | 20,430 |
| | (1,365 | ) | | 47,245 |
|
| Investments in Non-Guarantors | 15,321 |
| | — |
| | (15,321 | ) | | — |
|
| Total assets | $ | 44,905 |
| | $ | 21,703 |
| | $ | (17,090 | ) | | $ | 49,518 |
|
| | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | |
| Current liabilities | $ | 3,942 |
| | $ | 2,936 |
| | $ | (404 | ) | | $ | 6,474 |
|
| Non-current liabilities | 17,707 |
| | 3,445 |
| | (1,365 | ) | | 19,787 |
|
| Total liabilities | 21,649 |
| | 6,381 |
| | (1,769 | ) | | 26,261 |
|
| Stockholders' equity | 23,256 |
| | 15,322 |
| | (15,321 | ) | | 23,257 |
|
| Total liabilities and equity | $ | 44,905 |
| | $ | 21,703 |
| | $ | (17,090 | ) | | $ | 49,518 |
|
The tables above reflect $273(1)Includes $408 million and $241$423 million of current intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of March 31, 20202021 and December 31, 2019,2020, respectively. Additionally, the tables above reflect $22
(2)Includes $32 million and $20$30 million of current intercompany payables due to the Non-Guarantors from the Parent and Guarantors within current assets held and used as of March 31, 20202021 and December 31, 2019.
NON-GAAP FINANCIAL MEASURES
To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented for the first quarter of 20202021 and 20192020 (i) Adjusted income from operations, (ii) Adjusted interest expense, (iii) Adjusted provision for income taxes, (iv) Adjusted net income attributable to KDP and (iii)(v) Adjusted diluted EPS, 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 adjusted 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. The Company uses these non-GAAP financial measures, in addition to U.S. GAAP financial measures, to evaluate its operating and financial performance and to compare such performance to that of prior periods and to the performance of its competitors. Additionally, the Company uses these non-GAAP financial measures in making operational and financial decisions and in the Company’s budgeting and planning process. The Company believes that providing these non-GAAP financial measures to investors helps investors evaluate the Company’s 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 the Company.
For the first quarter of 20202021 and 2019,2020, we define our Adjusted non-GAAP financial measures as certain financial statement captions and metrics adjusted for certain items affecting comparability. The items affecting comparability are defined below.
Items affecting comparability: Defined as certain items that are excluded for comparison to prior year periods, adjusted for the tax impact as applicable. Tax impact is determined based upon an approximate rate for each item. For each period, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S. GAAP and do not have an offsetting risk reflected within the financial results; (ii) the amortization associated with definite-lived intangible assets; (iii) the amortization of the deferred financing costs associated with the DPS Merger and the Keurig Acquisition;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 the EOP, the 2009 Incentive Plan or the 2019 Incentive Plan;KDP; and (vi) other certain items that are excluded for comparison purposes to prior year periods.
PriorFor the first quarter of 2021, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant non-routine legal matters; (iv) the loss on early extinguishment of debt related to the second quarterredemption of 2019, we did not add backdebt; (v) incremental costs to our operations related to risks associated with the amortization of the fair value adjustment of the senior unsecured debt recognized as a result of the purchase price allocation for the DPS Merger. As this item is similarCOVID-19 pandemic; and (vi) gains from insurance recoveries related to the amortization of intangibles, we changed our method of computing Adjusted results to exclude the amortization of the fair value adjustment of the senior unsecured notes in order to reflect how management viewsFebruary 2019 organized malware attack on our business results on a consistent basis.operation networks in the Coffee Systems segment.
For the first quarter of 2020, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition;significant business combinations; (ii) productivity expenses; (iii) transaction costs for significant business combinations (completed or abandoned) excluding the DPS Merger; (iv) costs related to significant nonroutinenon-routine legal matters; (v) the loss on early extinguishment of debt related to the redemption of debt;debt, (vi) incremental costs to our operations related to risks associated with the COVID-19 pandemic and (vii) impairment recognized on equity method investment with Bedford.
Incremental costs to our operations related to risks associated with the COVID-19 pandemic include incremental expenses incurred to either maintain the health and safety of our front-line employees or temporarily increase compensation to such employees to ensure essential operations continue during the pandemic. We believe removing these costs reflects how management views our business results on a consistent basis. See Impact of COVID-19 on our Financial Statements for further information.
For the first quarter of 2019, the other certain items excluded for comparison purposes include (i) restructuring2021 and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) transaction costs for significant business combinations (completed or abandoned) excluding the DPS Merger; (iv) costs related to significant nonroutine legal matters; (v) the impact of the step-up of acquired inventory not associated with the DPS Merger; (vi) the loss on early extinguishment of debt related to the redemption of debt and (vii) the loss related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment.
For first quarter of 2020, and 2019, the supplemental financial data set forth below includes reconciliations of Adjusted income from operations, Adjusted interest expense, Adjusted provision for income taxes, Adjusted net income attributable to KDP and Adjusted diluted EPS to the applicable financial measure presented in the unaudited condensed consolidated financial statement for the same period.
KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
For the First Quarter of 20202021
(Unaudited, in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | | | Income from operations | | Operating margin |
| Reported | | | $ | 1,302 | | | $ | 1,600 | | | 55.1 | % | | $ | 961 | | | | | $ | 640 | | | 22.1 | % |
| Items Affecting Comparability: | | | | | | | | | | | | | | | |
| Mark to market | | | 9 | | | (9) | | | | | 29 | | | | | (38) | | | |
| Amortization of intangibles | | | — | | | — | | | | | (33) | | | | | 33 | | | |
| Stock compensation | | | — | | | — | | | | | (6) | | | | | 6 | | | |
| Restructuring and integration costs | | | — | | | — | | | | | (43) | | | | | 43 | | | |
| Productivity | | | (8) | | | 8 | | | | | (25) | | | | | 33 | | | |
| Nonroutine legal matters | | | — | | | — | | | | | (10) | | | | | 10 | | | |
| COVID-19 | | | (12) | | | 12 | | | | | (4) | | | | | 16 | | | |
| Malware incident | | | — | | | — | | | | | 2 | | | | | (2) | | | |
| Adjusted | | | $ | 1,291 | | | $ | 1,611 | | | 55.5 | % | | $ | 871 | | | | | $ | 741 | | | 25.5 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | Income from operations | | Operating margin |
| Reported | $ | 1,161 |
| | $ | 1,452 |
| | 55.6 | % | | $ | 1,028 |
| | $ | 466 |
| | 17.8 | % |
| Items Affecting Comparability: | | | | | | | | | | | |
| Mark to market | (15 | ) | | 15 |
| | | | (43 | ) | | 58 |
| | |
| Amortization of intangibles | — |
| | — |
| | | | (33 | ) | | 33 |
| | |
| Stock compensation | — |
| | — |
| | | | (7 | ) | | 7 |
| | |
| Restructuring and integration costs | — |
| | — |
| | | | (52 | ) | | 52 |
| | |
| Productivity | (16 | ) | | 16 |
| | | | (38 | ) | | 54 |
| | |
| Nonroutine legal matters | — |
| | — |
| | | | (9 | ) | | 9 |
| | |
| COVID-19 | (1 | ) | | 1 |
| | | | (4 | ) | | 5 |
| | |
| Adjusted GAAP | $ | 1,129 |
| | $ | 1,484 |
| | 56.8 | % | | $ | 842 |
| | $ | 684 |
| | 26.2 | % |
| | | | Interest expense | | Loss on early extinguishment of debt | | Impairment on investment and note receivable | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | Net income | | Weighted Average Diluted shares | | Diluted earnings per share | | Interest expense | | Loss on early extinguishment of debt | | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | | Net income attributable to KDP | | | Diluted earnings per share |
| Reported | $ | 153 |
| | $ | 2 |
| | $ | 86 |
| | $ | 205 |
| | $ | 49 |
| | 23.9 | % | | $ | 156 |
| | 1,420.1 | | $ | 0.11 |
| Reported | $ | 140 | | | $ | 105 | | | | $ | 398 | | | $ | 73 | | | 18.3 | % | | | $ | 325 | | | | $ | 0.23 | |
| Items Affecting Comparability: | | | | | | | | | | | | |
| | | Items Affecting Comparability: | | | | | | | |
| Mark to market | (24 | ) | | — |
| | — |
| | 82 |
| | 21 |
| | | | 61 |
| | 0.04 |
| Mark to market | 8 | | | — | | | | (46) | | | (11) | | | | (35) | | | | (0.02) | |
| Amortization of intangibles | — |
| | — |
| | — |
| | 33 |
| | 9 |
| | | | 24 |
| | 0.02 |
| Amortization of intangibles | — | | | — | | | | 33 | | | 8 | | | | 25 | | | | 0.02 | |
| Amortization of deferred financing costs | (3 | ) | | — |
| | — |
| | 3 |
| | 1 |
| | | | 2 |
| | — |
| Amortization of deferred financing costs | (3) | | | — | | | | 3 | | | — | | | | 3 | | | | — | |
| Amortization of fair value debt adjustment | (6 | ) | | — |
| | — |
| | 6 |
| | 2 |
| | | | 4 |
| | — |
| Amortization of fair value debt adjustment | (6) | | | — | | | | 6 | | | 2 | | | | 4 | | | | — | |
| Stock compensation | — |
| | — |
| | — |
| | 7 |
| | 1 |
| | | | 6 |
| | — |
| Stock compensation | — | | | — | | | | 6 | | | 12 | | | | (6) | | | | — | |
| Restructuring and integration costs | — |
| | — |
| | — |
| | 52 |
| | 14 |
| | | | 38 |
| | 0.03 |
| Restructuring and integration costs | — | | | — | | | | 43 | | | 11 | | | | 32 | | | | 0.02 | |
| Productivity | — |
| | — |
| | — |
| | 54 |
| | 15 |
| | | | 39 |
| | 0.03 |
| Productivity | — | | | — | | | | 33 | | | 8 | | | | 25 | | | | 0.02 | |
| | Loss on early extinguishment of debt | — |
| | (2 | ) | | — |
| | 2 |
| | — |
| | | | 2 |
| | — |
| Loss on early extinguishment of debt | — | | | (105) | | | | 105 | | | 25 | | | | 80 | | | | 0.06 | |
| Investment impairment | — |
| | — |
| | (86 | ) | | 86 |
| | 21 |
| | | | 65 |
| | 0.05 |
| |
| | Nonroutine legal matters | — |
| | — |
| | — |
| | 9 |
| | 2 |
| | | | 7 |
| | — |
| Nonroutine legal matters | — | | | — | | | | 10 | | | 2 | | | | 8 | | | | 0.01 | |
| COVID-19 | — |
| | — |
| | — |
| | 5 |
| | 1 |
| | | | 4 |
| | — |
| COVID-19 | — | | | — | | | | 16 | | | 4 | | | | 12 | | | | 0.01 | |
| Adjusted GAAP | $ | 120 |
| | $ | — |
| | $ | — |
| | $ | 544 |
| | $ | 136 |
| | 25.0 | % | | $ | 408 |
| | 1,420.1 | | $ | 0.29 |
| |
| Malware incident | | Malware incident | — | | | — | | | | (2) | | | — | | | | (2) | | | | — | |
| Adjusted | | Adjusted | $ | 139 | | | $ | — | | | | $ | 605 | | | $ | 134 | | | 22.1 | % | | | $ | 471 | | | | $ | 0.33 | |
Diluted earnings per common share may not foot due to rounding.
KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
For the First Quarter of 20192020
(Unaudited, in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | | | Income from operations | | Operating margin |
| Reported | | | $ | 1,161 | | | $ | 1,452 | | | 55.6 | % | | $ | 1,028 | | | | | $ | 466 | | | 17.8 | % |
| Items Affecting Comparability: | | | | | | | | | | | | | | | |
| Mark to market | | | (15) | | | 15 | | | | | (43) | | | | | 58 | | | |
| Amortization of intangibles | | | — | | | — | | | | | (33) | | | | | 33 | | | |
| Stock compensation | | | — | | | — | | | | | (7) | | | | | 7 | | | |
| Restructuring and integration costs | | | — | | | — | | | | | (52) | | | | | 52 | | | |
| Productivity | | | (16) | | | 16 | | | | | (38) | | | | | 54 | | | |
| Nonroutine legal matters | | | — | | | — | | | | | (9) | | | | | 9 | | | |
| COVID-19 | | | (1) | | | 1 | | | | | (4) | | | | | 5 | | | |
| Adjusted | | | $ | 1,129 | | | $ | 1,484 | | | 56.8 | % | | $ | 842 | | | | | $ | 684 | | | 26.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Cost of sales | | Gross profit | | Gross margin | | Selling, general and administrative expenses | | Income from operations | | Operating margin |
| Reported | $ | 1,106 |
| | $ | 1,398 |
| | 55.8 | % | | $ | 911 |
| | $ | 498 |
| | 19.9 | % |
| Items Affecting Comparability: | | | | | | | | | | | |
| Mark to market | (12 | ) | | 12 |
| | | | 12 |
| | — |
| | |
| Amortization of intangibles | — |
| | — |
| | | | (31 | ) | | 31 |
| | |
| Stock compensation | — |
| | — |
| | | | (7 | ) | | 7 |
| | |
| Restructuring and integration costs | (1 | ) | | 1 |
| | | | (60 | ) | | 61 |
| | |
| Productivity | (3 | ) | | 3 |
| | | | (6 | ) | | 9 |
| | |
| Nonroutine legal matters | — |
| | — |
| | | | (7 | ) | | 7 |
| | |
| Inventory step-up | (3 | ) | | 3 |
| | | | — |
| | 3 |
| | |
| Malware incident | (2 | ) | | 2 |
| | | | (3 | ) | | 5 |
| | |
| Adjusted GAAP | $ | 1,085 |
| | $ | 1,419 |
| | 56.7 | % | | $ | 809 |
| | $ | 621 |
| | 24.8 | % |
| | | | Interest expense | | Loss on early extinguishment of debt | | Other expense (income), net | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | Net income | | Weighted Average Diluted shares | | Diluted earnings per share | | Interest expense | | Loss on early extinguishment of debt | | Impairment of investment and note receivable | | Income before provision for income taxes | | Provision for income taxes | | Effective tax rate | | Net income attributable to KDP | | | Diluted earnings per share |
| Reported | $ | 169 |
| | $ | 9 |
| | $ | 5 |
| | $ | 315 |
| | $ | 85 |
| | 27.0 | % | | $ | 230 |
| | 1,417.7 | | $ | 0.16 |
| Reported | $ | 153 | | | $ | 2 | | | $ | 86 | | | $ | 205 | | | $ | 49 | | | 23.9 | % | | $ | 156 | | | | $ | 0.11 | |
| Items Affecting Comparability: | | | | | | | | | | | | |
| | | Items Affecting Comparability: | | | |
| Mark to market | (29 | ) | | — |
| | 2 |
| | 27 |
| | 7 |
| | | | 20 |
| | 0.01 |
| Mark to market | (24) | | | — | | | — | | | 82 | | | 21 | | | 61 | | | | 0.04 | |
| Amortization of intangibles | — |
| | — |
| | — |
| | 31 |
| | 8 |
| | | | 23 |
| | 0.02 |
| Amortization of intangibles | — | | | — | | | — | | | 33 | | | 9 | | | 24 | | | | 0.02 | |
| Amortization of deferred financing costs | (4 | ) | | — |
| | — |
| | 4 |
| | 1 |
| | | | 3 |
| | — |
| Amortization of deferred financing costs | (3) | | | — | | | — | | | 3 | | | 1 | | | 2 | | | | — | |
| Amortization of fair value debt adjustment | (7 | ) | | — |
| | — |
| | 7 |
| | 1 |
| | | | 6 |
| | — |
| Amortization of fair value debt adjustment | (6) | | | — | | | — | | | 6 | | | 2 | | | 4 | | | | — | |
| Stock compensation | — |
| | — |
| | — |
| | 7 |
| | 2 |
| | | | 5 |
| | — |
| Stock compensation | — | | | — | | | — | | | 7 | | | 1 | | | 6 | | | | — | |
| Restructuring and integration costs | — |
| | — |
| | — |
| | 61 |
| | 15 |
| | | | 46 |
| | 0.03 |
| Restructuring and integration costs | | — | | | — | | | 52 | | | 14 | | | 38 | | | | 0.03 | |
| Productivity | — |
| | — |
| | — |
| | 9 |
| | 2 |
| | | | 7 |
| | — |
| Productivity | — | | | — | | | — | | | 54 | | | 15 | | | 39 | | | | 0.03 | |
| Transaction costs | (5 | ) | | — |
| | — |
| | 5 |
| | 1 |
| | | | 4 |
| | — |
| |
| Loss on early extinguishment of debt | — |
| | (9 | ) | | — |
| | 9 |
| | 2 |
| | | | 7 |
| | — |
| Loss on early extinguishment of debt | — | | | (2) | | | — | | | 2 | | | — | | | 2 | | | | — | |
| Impairment of investment and note receivable | | Impairment of investment and note receivable | — | | | — | | | (86) | | | 86 | | | 21 | | | 65 | | | | 0.05 | |
| Nonroutine legal matters | — |
| | — |
| | — |
| | 7 |
| | 2 |
| | | | 5 |
| | — |
| Nonroutine legal matters | — | | | — | | | — | | | 9 | | | 2 | | | 7 | | | | — | |
| Inventory step-up | — |
| | — |
| | — |
| | 3 |
| | 1 |
| | | | 2 |
| | — |
| |
| Malware incident | — |
| | — |
| | — |
| | 5 |
| | 1 |
| | | | 4 |
| | — |
| |
| Adjusted GAAP | $ | 124 |
| | $ | — |
| | $ | 7 |
| | $ | 490 |
| | $ | 128 |
| | 26.1 | % | | $ | 362 |
| | 1,417.7 | | $ | 0.25 |
| |
| COVID-19 | | COVID-19 | — | | | — | | | — | | | 5 | | | 1 | | | 4 | | | | — | |
| Adjusted | | Adjusted | $ | 120 | | | $ | — | | | $ | — | | | $ | 544 | | | $ | 136 | | | 25.0 | % | | $ | 408 | | | | $ | 0.29 | |
Diluted earnings per common share may not foot due to rounding.
KEURIG DR PEPPER INC.
RECONCILIATION OF SEGMENT ITEMS TO CERTAIN NON-GAAP ADJUSTED SEGMENT ITEMS
(Unaudited)
| | | | | | | | | | | | | | | | | |
| (in millions) | Reported | | Items Affecting Comparability | | Adjusted GAAP |
| For the first quarter of 2021: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Income from Operations | | | | | |
| Coffee Systems | $ | 336 | | | $ | 53 | | | $ | 389 | |
| Packaged Beverages | 175 | | | 22 | | | 197 | |
| Beverage Concentrates | 238 | | | 1 | | | 239 | |
| Latin America Beverages | 22 | | | 1 | | | 23 | |
| Unallocated corporate costs | (131) | | | 24 | | | (107) | |
| Total income from operations | $ | 640 | | | $ | 101 | | | $ | 741 | |
| | | | | |
| For the first quarter of 2020: | | | | | |
| Income from Operations | | | | | |
| Coffee Systems | $ | 272 | | | $ | 75 | | | $ | 347 | |
| Packaged Beverages | 189 | | | 14 | | | 203 | |
| Beverage Concentrates | 197 | | | — | | | 197 | |
| Latin America Beverages | 27 | | | — | | | 27 | |
| Unallocated corporate costs | (219) | | | 129 | | | (90) | |
| Total income from operations | $ | 466 | | | $ | 218 | | | $ | 684 | |
|
| | | | | | | | | | | |
| (in millions) | Reported | | Items Affecting Comparability | | Adjusted GAAP |
| For the first quarter of 2020: | | | | | |
| Income from Operations | | | | | |
| Coffee Systems | $ | 272 |
| | $ | 75 |
| | $ | 347 |
|
| Packaged Beverages | 189 |
| | 14 |
| | 203 |
|
| Beverage Concentrates | 197 |
| | — |
| | 197 |
|
| Latin America Beverages | 27 |
| | — |
| | 27 |
|
| Unallocated corporate costs | (219 | ) | | 129 |
| | (90 | ) |
| Total income from operations | $ | 466 |
| | $ | 218 |
| | $ | 684 |
|
|
| | | | | | | | | | | |
| (in millions) | Reported | | Items Affecting Comparability | | Adjusted GAAP |
| For the first quarter of 2019: | | | | | |
| Income from Operations | | | | | |
| Coffee Systems | $ | 293 |
| | $ | 42 |
| | $ | 335 |
|
| Packaged Beverages | 149 |
| | 11 |
| | 160 |
|
| Beverage Concentrates | 201 |
| | — |
| | 201 |
|
| Latin America Beverages | 11 |
| | 1 |
| | 12 |
|
| Unallocated corporate costs | (156 | ) | | 69 |
| | (87 | ) |
| Total income from operations | $ | 498 |
| | $ | 123 |
| | $ | 621 |
|
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency exchange rates, interest rates and commodity prices. From time to time, we may enter into derivatives or other financial instruments to hedge or mitigate commercial risks. We do not enter into derivative instruments for speculation, investing or trading.
FOREIGN EXCHANGE RISK
The majority of our net sales, expenses and capital purchases are transacted in U.S. dollars. However, we have exposure with respect to foreign exchange rate fluctuations. Our primary exposure to foreign exchange rates is the Canadian dollar and Mexican peso against the U.S. dollar. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred. As of March 31, 2020,2021, the impact to our income from operations of a 10% change (up or down) in exchange rates is estimated to be an increase or decrease of approximately $25$41 million on an annual basis.
We use derivative instruments such as foreign exchange forward contracts to manage a portion of our exposure to changes in foreign exchange rates. As of March 31, 2020,2021, we had derivative contracts outstanding with a notional value of $471$874 million maturing at various dates through September 25, 2024.
INTEREST RATE RISK
We centrally manage our debt portfolio through the use of interest rate swaps and monitor our mix of fixed-rate and variable-rate debt. As of March 31, 2020,2021, the carrying value of our fixed-rate debt, excluding lease obligations, was $11,559$13,465 million and ourwe had no variable-rate debt. Although we had no variable-rate debt was $2,829 million, inclusive of commercial paper.
Additionally,outstanding as of March 31, 2020,2021, we held variable-rate debt throughout the first quarter of 2021 in the form of commercial paper, and we intend to continue utilizing variable-rate debt throughout 2021. As of March 31, 2021, the total notional value of receive-variable, pay-fixed interest rate swaps was $450 million.
The following table is an estimate As a result of the impact to ourthese factors, there was no interest rate expense based uponrisk associated with our variable rate debt and derivative instruments that could result from hypothetical interest rate changes during the term of the financial instruments,balances based on debt levels as of March 31, 2020:2021.
|
| | |
| | |
Hypothetical Change in Interest Rates(1)
| | Annual Impact to Interest Expense |
1-percent decrease | | $24 million decrease |
1-percent increase | | $24 million increase |
| |
(1) | We pay an average floating rate, which fluctuates periodically, based on LIBOR and a credit spread, as a result of variable rate debt instruments. See Notes 2 and 7 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information. |
COMMODITY RISKS
We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. Our principal commodities risks relate to our purchases of coffee beans, PET, aluminum, diesel fuel, corn (for high fructose corn syrup), apple juice concentrate, apples, sucrose and natural gas (for use in processing and packaging), resin, PET, corn (for high fructose corn syrup), pulp, coffee beans, diesel fuel, apple juice concentrate, apples and sucrose..
We utilize commodities derivative instruments and supplier pricing agreements to hedge the risk of adverse movements in commodity prices for limited time periods for certain commodities. As of March 31, 2020,2021, we had derivative contracts outstanding with a notional value of $317$450 million maturing at various dates through June 30, 2022.January 8, 2024. The fair market value of these contracts as of March 31, 20202021 was a net liabilityasset of $37$87 million.
As of March 31, 2020,2021, the impact of a 10% change (up or down) in market prices for these commodities where the risk of adverse movements has not been hedged is estimated to have a $9$8 million impact to our income from operations for the remainder of the year ending December 31, 2020.
ITEM 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, as of March 31, 2020,2021, our disclosure controls and procedures are effective to (i) provide reasonable assurance that information required to be disclosed in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and (ii) ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the quarter ended March 31, 20202021 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
We are occasionally subject to litigation or other legal proceedings relating to our business.
See Note 15 of the Notes to our Unaudited Condensed Consolidated Financial Statements for more information related to commitments and contingencies, which is incorporated herein by reference.
There have been no other material changes that we are awareBODYARMOR LITIGATION
On March 6, 2019, ABC, a subsidiary of fromKDP, filed suit against BodyArmor and Mike Repole in the legal proceedings set forth in Item 3 of our Annual Report on Form 10-KSuperior Court for the year endedState of Delaware. The complaint asserted claims for breach of contract and promissory estoppel against BodyArmor and asserted a claim for tortious interference against Mr. Repole, in each case in connection with BodyArmor's attempted early termination of the distribution contract between BodyArmor and ABC. The complaint seeks monetary damages relating to lost distribution revenues, disgorgement of profits, liquidated and punitive damages, attorneys' fees and costs. ABC filed an amended complaint, which added Coca-Cola as a defendant to the suit and asserted a claim for tortious interference against Coca-Cola. In December 31, 2019.2020, the court dismissed the individual claim against Mr. Repole, but ABC's claims against BodyArmor and Coca-Cola continue. Fact and expert discovery in the case is ongoing and a trial date is set for February 2022. ABC intends to continue to vigorously prosecute the action. We are unable to predict the outcome of the lawsuit, the potential recovery, if any, associated with the resolution of the lawsuit or any potential effect it may have on us or our operations.
ITEM 1A. Risk Factors
Widespread health developments and economic uncertainty resulting from the recent global COVID-19 pandemic, could materially and adversely affect our business, financial condition and results of operations.
Our business has been, and may continue to be, impacted by the fear of exposure to, or actual effects, of the COVID-19 pandemic in countries where we operate or our customers and suppliers are located, such as recommendations or mandates from governmental authorities to close businesses, limit travel, avoid large gatherings or to self-quarantine, as well as temporary closures or decreased operations of the facilities of our customers, distributors or suppliers. These impacts include, but are not limited to:
Significant reductions in demand or significant volatility in demand for one or more of our products, which may be caused by, among other things: the temporary inability of consumers to purchase our products due to illness, quarantine or other restrictions, store closures, or financial hardship, shifts in demand away from one or more of our higher priced products to lower priced products, or stockpiling or similar activity, reduced options for marketing and promotion of products or other restrictions in connection with the COVID-19 pandemic; if prolonged, such impacts can further increase the difficulty of operating our business, including accurately planning and forecasting;
Inability to meet our consumers' and customers’ needs and achieve cost targets due to disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements, such as raw materials or purchased finished goods, logistics, reduction or loss of workforce due to the insufficiency or failure of our safety protocols, or other manufacturing and distribution capability;
Failure of third parties, including those located in international locations, on which we rely, including our suppliers, bottlers, distributors, contract manufacturers, third-party service providers, contractors, commercial banks and external business partners, to meet their obligations to us or to timely meet those obligations, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties; or
Significant changes in the conditions in markets in which we manufacture, sell or distribute our products, including quarantines, governmental or regulatory actions, closures or other restrictions that limit or close our operating and manufacturing facilities, restrict our employees’ ability to perform necessary business functions, restrict or prevent consumers from having access to our products, or otherwise prevent our third-party bottlers, distributors, partners, suppliers, or customers from sufficiently staffing operations, including operations necessary for the production, distribution, sale, and support of our products.
All of these impacts could place limitations on our ability to execute on our business plan and materially and adversely affect our business, financial condition and results of operations. We continue to monitor the situation, have actively implemented policies and procedures to address the situation, and as the pandemic continues to further unfold, we may adjust our current policies and procedures as regulations are implemented or more information and guidance become available. The impact of COVID-19 may also exacerbate other risks discussed in Item 1A of our Annual Report, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.
There have been no other material changes that we are aware of from the risk factors set forth in Part I, Item 1A ofin our Annual Report.
ITEM 6. Exhibits
|
| | | | |
| Agreement and Plan of Merger, dated as of November 21, 2016, by and among Bai Brands LLC, Dr Pepper Snapple Group, Inc., Superfruit Merger Sub, LLC and Fortis Advisors LLC, (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K (filed on November 23, 2016) and incorporated herein by reference). |
| Amendment No. 1, dated as of January 31, 2017, to the Agreement and Plan of Merger, dated as of November 21, 2016, by and among Bai Brands LLC, Dr Pepper Snapple Group, Inc., Superfruit Merger Sub, LLC and Fortis Advisors LLC, (filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K (filed on January 31, 2017) and incorporated herein by reference). |
| Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference). |
| Certificate of Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 17, 2012 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (filed July 26, 2012) and incorporated herein by reference). |
| Certificate of Second Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 19, 2016 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed May 20, 2016) and incorporated herein by reference). |
| Certificate of Third Amendment to the Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of July 9, 2018 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed July 9, 2018) and incorporate herein by reference). |
| Amended and Restated By-Laws of Keurig Dr Pepper Inc. effective as of July 9, 2018 (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K (filed July 9, 2018) and incorporated herein by reference. |
| Indenture, dated April 30, 2008, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). |
| Form of 7.45% Senior Notes due 2038 (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). |
| Registration Rights Agreement, dated April 30, 2008, between Dr Pepper Snapple Group, Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, UBS Securities LLC, BNP Paribas Securities Corp., Mitsubishi UFJ Securities International plc, Scotia Capital (USA) Inc., SunTrust Robinson Humphrey, Inc., Wachovia Capital Markets, LLC and TD Securities (USA) LLC (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). |
| Registration Rights Agreement Joinder, dated May 7, 2008, by the subsidiary guarantors named therein (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference). |
| Supplemental Indenture, dated May 7, 2008, among Dr Pepper Snapple Group, Inc., the subsidiary guarantors named therein and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference). |
| Second Supplemental Indenture dated March 17, 2009, to be effective as of December 31, 2008, among Splash Transport, Inc., as a subsidiary guarantor, Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company's Annual Report on Form 10-K (filed on March 26, 2009) and incorporated herein by reference). |
| Third Supplemental Indenture, dated October 19, 2009, among 234DP Aviation, LLC, as a subsidiary guarantor; Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q (filed November 5, 2009) and incorporated herein by reference). |
| Fourth Supplemental Indenture, dated as of January 31, 2017, among Bai Brands LLC, a New Jersey limited liability company, 184 Innovations Inc., a Delaware corporation (each as a new subsidiary guarantors under the Indenture dated April 30, 2008 (as referenced in Item 4.1 in this Exhibit Index), Dr Pepper Snapple Group, Inc., each other then-existing Guarantor under the Indenture and Wells Fargo, National Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed February 2, 2017) and incorporated herein by reference). |
| Indenture, dated as of December 15, 2009, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference). |
| Second Supplemental Indenture, dated as of January 11, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on January 11, 2011) and incorporated herein by reference). |
| Third Supplemental Indenture, dated as of November 15, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference). |
| 3.20% Senior Note due 2021 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference). |
| Fourth Supplemental Indenture, dated as of November 20, 2012, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference). |
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| 2.00% Senior Note due 2020 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference). |
| 2.70% Senior Note due 2022 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference). |
| Fifth Supplemental Indenture, dated as of November 9, 2015, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference). |
| 3.40% Senior Note due 2025 (in global form), dated November 9, 2015, in the principal amount of $500,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference). |
| 4.50% Senior Note due 2045 (in global form), dated November 9, 2015, in the principal amount of $250,000,000 (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference). |
| Sixth Supplemental Indenture, dated as of September 16, 2016, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on September 16, 2016) and incorporated herein by reference). |
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| 2.55% Senior Note due 2026 (in global form), dated September 16, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on September 16, 2016) and incorporated herein by reference). |
| Seventh Supplemental Indenture, dated as of December 14, 2016, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| 2.53% Senior Note due 2021 (in global form), dated December 14, 2016, in the principal amount of $250,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| 3.13% Senior Note due 2023 (in global form), dated December 14, 2016, in the principal amount of $500,000,000 (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| 3.43% Senior Note due 2027 (in global form), dated December 14, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| 4.42% Senior Note due 2046 (in global form), dated December 14, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference). |
| Eighth Supplemental Indenture, dated as of January 31, 2017, among Bai Brands LLC, a New Jersey limited liability company, 184 Innovations Inc., a Delaware corporation (each as a new subsidiary guarantor under the Indenture dated April 30, 2008 (as referenced in Item 4.1 in this Exhibit Index), Dr Pepper Snapple Group, Inc., each other then-existing Guarantor under the Indenture) and Wells Fargo, National Bank, N.A., as trustee (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on February 2, 2017) and incorporated herein by reference). |
| Ninth Supplemental Indenture, dated as of June 15, 2017, among Dr Pepper Snapple Group, Inc., the guarantors party thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on June 15, 2017) and incorporated herein by reference). |
| Investor Rights Agreement by and among Keurig Dr Pepper Inc. and The Holders Listed on Schedule A thereto, dated as of July 9, 2018 (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Base Indenture, dated as of May 25, 2018 between Maple Escrow Subsidiary and Wells Fargo Bank, N.A. as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| First Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2021 Notes (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Second Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2023 Notes (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Third Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2025 Notes (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Fourth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2028 Notes (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
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| Fifth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2038 Notes (filed as Exhibit 4.6 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Sixth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2048 Notes (filed as Exhibit 4.7 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Seventh Supplemental Indenture, dated as of July 9, 2018, among Keurig Dr Pepper Inc., the subsidiary guarantors thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Registration Rights Agreement, dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., as representative of the several purchasers of the Notes (filed as Exhibit 4.9 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Joinder to the Registration Rights Agreement, dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., as representative of the several purchasers of the Notes (filed as Exhibit 4.10 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference). |
| Description of registered securities (filed as Exhibit 4.40 to the Company's Annual Report on Form 10-K (filed on February 27, 2020) and incorporated herein by reference). |
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| Tenth Supplemental Indenture (including 3.20% Senior Notes Due 2030 and 3.80% Senior Notes Due 2050 (in global form)), dated as of April 13, 2020, among Keurig Dr Pepper Inc., the subsidiary guarantors thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on April 13, 2020) and incorporated herein by reference). |
| Term Loan Agreement,Eleventh Supplemental Indenture (including 0.750% Senior Notes Due 2024, 2.250% Senior Notes Due 2031, and 3.350% Senior Notes Due 2051 (in global form)), dated as of February 8, 2019,March 15, 2021, among Keurig Dr Pepper Inc., the banks partysubsidiary guarantors thereto, and JPMorgan Chase,Wells Fargo Bank, N.A., as administrative agenttrustee (filed as Exhibit 10.14.1 to the Company'sCompany’s Current Report on Form 8-K (filed on February 11, 2019)March 15, 2021) and incorporated herein by reference). |
| Credit Agreement, dated as of May 29, 2019, among Keurig Dr Pepper Inc., the banks party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on May 29, 2019) and incorporated herein by reference).
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| Amended and Restated Employment Agreement, dated as of July 2, 2018, by and between Keurig Green Mountain, Inc. and Robert J. Gamgort (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Employment Agreement, dated as of April 12, 2016, by and between Keurig Green Mountain, Inc. and Ozan Dokmecioglu (filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Matching Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Directors' Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++ |
| Keurig Dr Pepper Inc. Omnibus Stock Incentive Plan of 2019 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on June 11, 2019) and incorporated herein by reference).++ |
| Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019 (filed as Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q (filed on August 8, 2019) and incorporated herein by reference).++ |
| Matching Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019 (filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q (filed on August 8, 2019) and incorporated herein by reference).++ |
| Keurig Dr Pepper Inc. Severance Pay Plan for Executives, effective as of January 1, 2020 (filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K (filed on February 27, 2020) and incorporated herein by reference).++ |
| Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019 (retention incentive awards for three of the Company’s Named Executive Officers) (filed as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q (filed on October 29, 2020) and incorporated herein by reference). |
| Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019, amended and restated as of December 7, 2020 (retention incentive award for one of the Company’s Named Executive Officers) (filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K (filed on February 25, 2021) and incorporated herein by reference).++ |
| Credit Agreement, dated as of April 14, 2020,March 24, 2021, among Keurig Dr Pepper Inc., the bankslenders party thereto, and JPMorgan Chase Bank of America, N.A., as administrative agent (filed as Exhibit 10.1 to the Company'sCompany’s Current Report on Form 8-K (filed on April 15, 2020)March 26, 2021) and incorporated herein by reference). |
| List of Guarantor Subsidiaries |
| Certification of Chief Executive Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act. |
| Certification of Chief Financial Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act. |
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| Certification of Chief Executive Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| Certification of Chief Financial Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| 101* | The following financial information from Keurig Dr Pepper Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020,2021, formatted in XBRL (eXtensible Business Reporting Language):Inline XBRL: (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statement of Changes in Stockholders' Equity, and (vi) the Notes to Condensed Consolidated Financial Statements. The Instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 104* | The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL. |
* Filed herewith.
** Furnished herewith.
++ Indicates a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Keurig Dr Pepper Inc. | |
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| By: | | /s/ Ozan Dokmecioglu | |
| | | |
| Name: | | Ozan Dokmecioglu | |
| Title: | | Chief Financial Officer of Keurig Dr Pepper Inc. | |
| | | (Principal Financial Officer) | |
Date: April 30, 202029, 2021 | | | | |
