KEURIG DR PEPPER INC. This section of this Annual Report on Form 10-K generally discusses the years endedDecember 31, 2020 and 2019 and year-over-year comparisons between the years endedDecember 31, 2020 and 2019. Discussions of the periods prior to the year endedDecember 31, 2019 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and the discussion therein for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 is incorporated by reference into this Annual Report. This Annual Report on Form 10-K 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 Annual Report on Form 10-K are either our registered trademarks or those of our licensors. OVERVIEW KDP is a leading beverage company inNorth 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 brewers. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands includeKeurig, 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 inNorth America , with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. KDP offers more than 125 owned, licensed and partner brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in theU.S. according to IRi, 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 website. 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. SEGMENTS As ofDecember 31, 2020 , we report our business in four operating segments: •The Coffee Systems segment reflects sales in theU.S. andCanada of the manufacture and distribution of finished goods relating to the Company's single-serve brewers, K-Cup pods and other coffee products. •The Packaged Beverages segment reflects sales in theU.S. andCanada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third-party brands, through our DSD and WD systems. •The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third-party bottlers, primarily in theU.S. andCanada . Most of the brands in this segment are CSDs. •The Latin America Beverages segment reflects sales inMexico , theCaribbean , and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages. VOLUME In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, pods or brewers. Coffee Systems K-Cup Pod and Appliance Sales Volume In our Coffee Systems segments, we measure our sales volume as the number of appliances and the number of individual K-Cup pods sold to our 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. 23 -------------------------------------------------------------------------------- Table of Contents Beverage Concentrates Sales Volume In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales for concentrates 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, the equivalent of 24 twelve ounce servings. It does not include any other component of the finished beverage other than concentrate. USE OF NON-GAAP FINANCIAL MEASURES Non-GAAP financial measures are provided in addition toU.S. GAAP measures, including adjusted income from operations, adjusted net income and adjusted diluted earnings per share. See Non-GAAP Financial Measures for more information, including reconciliations to the correspondingU.S. GAAP measures. 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 ongoing outbreak of COVID-19, changes in consumer preferences and macroeconomic changes, have previously created and may continue to create category headwinds for a number of our products. Refer to Item 1A, "Risk Factors", combined with the Uncertainties and Trends Affecting Liquidity section below, for more information about the risks and uncertainties we face. COVID-19 Pandemic Disclosures Our first priority, always, is to keep our employees safe and healthy. We have taken extraordinary precautions to do this and to provide the support our employees and their families may need during this unprecedented time. We continue to deliver for our customers and consumers, working hard to fulfill strong demand. We are finding innovative ways to quickly adapt to changes in shopping behaviors, with the vast majority ofNorth America impacted by a mix of occupancy limitations, stay-at-home or shelter-in-place orders, and closures of non-essential businesses. We are also focused on providing for our communities by supporting frontline healthcare workers who are fighting this crisis day in and day out. We don't make masks or medical equipment at our Company, but we do make beverages and, through our Fueling The Frontline program, we donated Keurig brewers, coffee and other beverages to hospitals in need, as our way to say thank you for the unwavering commitment and courage of the entire medical community. The COVID-19 pandemic has had divergent 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 in response to COVID-19, contributing to increases in net sales. At the same time, we experienced significant declines in net sales in our away-from-home business due to office closures and the slowdown of hospitality and fountain foodservice as a result of shelter-in-place guidelines and restaurant capacity limits. In the future, the economic effects of the COVID-19 pandemic, including higher levels of unemployment, lower wages or a recessionary environment, may result in reduced demand for our products. It could also lead to volatility in demand due to government actions, such as shelter-in-place notices, in response to increases in reported cases and hospitalizations in certain regions. These government actions could 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 COVID-19 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 theDepartment of Homeland Security , our frontline employees have been identified as critical workers in maintaining theU.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 included temporary 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, increased absenteeism or other local effects of the COVID-19 pandemic have impacted and could continue to impact our operations. For our corporate employees, we do not believe that the remote work environment has had any significant impact on our internal controls over financial reporting. With the health and safety of our employees remaining our top priority, we are diligently working on plans to safely bring our employees back to office locations with enhanced safety and health protocols. We do not believe these plans will impact our near-term liquidity needs. The COVID-19 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 within the Liquidity and Capital Resources section below for more information. 24 -------------------------------------------------------------------------------- Table of Contents EXECUTIVE SUMMARY Impact of COVID-19 on our Financial Statements The impact of COVID-19 on our net sales performance presented 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 us to successfully navigate these mix impacts posed by the COVID-19 pandemic to drive overall performance. •Coffee Systems experienced growth in K-Cup coffee pods for at-home consumption and strong double-digit growth in brewers, which more than offset the significant decline in away-from-home consumption due to weaknesses in the office coffee channel, as many companies shifted to a work-from-home model during 2020. Sales in the e-commerce channel were very strong, as consumers shifted purchases to the online channel, including at the Keurig.com retail site. •Packaged Beverages experienced a net benefit from strong in-market execution, driven by net sales and market share growth in the majority of the segment's beverage portfolio. Performance in large-format channels continued to be strong across multi-pack and take-home packages, which was partially offset by softness in the convenience and gas channels due to decreased consumer mobility. •Beverage Concentrates experienced a significant decline in net sales due to the fountain foodservice component of the business, which services restaurants and hospitality, as a result of the impact of shutdowns and reductions in occupant capacity, which improved throughout the year, reflecting a modest reopening of quick-serve and other fast-casual restaurants. •Latin America Beverages experienced limited growth in sales volumes, driven by reduced consumer mobility and tourism inMexico . 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, given the current COVID-19 landscape which has impacted the effectiveness and return on marketing investments; and •Reduced other discretionary costs, such as travel and entertainment expenses, within our business. As a result of these items, COVID-19 impacted our results, both positively and negatively, and should be taken into account when reviewing this Management's Discussion and Analysis. Refer to the section Uncertainties and Trends Affecting our Business - COVID-19 Pandemic Disclosures above for further information. 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 non-GAAP financial measures. In addition, reported amounts underU.S. GAAP also include additional costs, not included in the COVID-19 item affecting comparability, as presented in tables below. Items Affecting Comparability(1) Allowances for Employee Expected Employee Compensation Protection Credit Inventory (in millions) Expense(2) Costs(3) Losses(4) Write-Downs(5) Total For the year ended December 31, 2020 Coffee Systems $ 15 $ 10 $ 2 $ 8$ 35 Packaged Beverages 76 25 8 - 109 Beverage Concentrates - - 4 - 4 Latin America Beverages - 2 - - 2 Total $ 91 $ 37$ 14 $ 8$ 150 (1)Employee compensation expense and employee protection costs are both included as the COVID-19 item affecting comparability in the reconciliation of our Adjusted Non-GAAP financial measures. (2)Primarily reflects temporary incremental frontline incentive pay and the associated taxes in order to maintain essential operations during the COVID-19 pandemic. Impacts both cost of sales and SG&A expenses. Inmid-September 2020 , we discontinued the incremental frontline incentive pay program. (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. (5)Inventory write-downs represent obsolescence charges, which impact cost of sales. 25 -------------------------------------------------------------------------------- Table of Contents Financial Overview The following table details our net income and diluted EPS for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31, Dollar Percent (in millions, except per share data) 2020 2019 Change Change Net income attributable to KDP $ 1,325$ 1,254 $ 71 5.7 % Adjusted net income attributable to KDP 1,988 1,727 261 15.1 % Diluted EPS 0.93 0.88 0.05 5.7 % Adjusted diluted EPS 1.40 1.22 0.18 14.8 % Net income attributable to KDP increased$71 million , or 5.7%, to$1,325 million for the year endedDecember 31, 2020 , compared to$1,254 million in the prior year, reflecting strong growth in income from operations, driven primarily by the continued benefit of productivity and merger synergies, volume/mix growth and lower discretionary expenses, primarily marketing, partially offset by$150 million of additional pre-tax expenses associated with COVID-19 and a non-cash impairment on our Bai brand intangible asset. Other favorable drivers included lower interest expense due to continued deleveraging and the impact of a lower effective tax rate, partially offset by a non-cash impairment on equity investments and a related party note receivable. Adjusted net income attributable to KDP increased$261 million , or 15.1%, to$1,988 million , compared to$1,727 million in the prior year, reflecting the continued benefit of productivity and merger synergies, volume/mix growth and lower discretionary expenses, primarily marketing, which were partially offset by lower net price realization and higher operating and manufacturing costs associated with increased consumer retail demand for our products. Other drivers included lower Adjusted interest expense due to continued deleveraging and the impact of a lower Adjusted effective tax rate. During the year endedDecember 31, 2020 , we made net repayments of$951 million related to our Notes, our 2019 KDP Term Loan, and our commercial paper notes. Additionally, we repaid$341 million and added$171 million of structured payables. InFebruary 2021 , our Board has approved an increase of 25% in our quarterly dividend, which will begin with the second quarter dividend announcement. 26 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees. References in the financial tables to percentage changes that are not meaningful are denoted by "NM". Consolidated Operations The following table sets forth our consolidated results of operations for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31, Dollar Percentage (in millions, except per share amounts) 2020 2019 Change Change Net sales$ 11,618 $ 11,120 $ 498 4.5 % Cost of sales 5,132 4,778 354 7.4 Gross profit 6,486 6,342 144 2.3 Selling, general and administrative expenses 3,978 3,962 16 0.4 Impairment of intangible assets 67 - 67 NM Other operating (income) expense, net (39) 2 (41) NM Income from operations 2,480 2,378 102 4.3 Interest expense 604 654 (50) (7.6) Loss on early extinguishment of debt 4 11 (7) (63.6) Impairment of investments and note receivable 102 - 102 NM Other expense (income), net 17 19 (2) (10.5) Income before provision for income taxes 1,753 1,694 59 3.5 Provision for income taxes 428 440 (12) (2.7) Net income 1,325 1,254 71 5.7 Less: Net income attributable to non-controlling interest - - - NM Net income attributable to KDP$ 1,325 $ 1,254 $ 71 5.7 % Earnings per common share: Basic$ 0.94 $ 0.89 $ 0.05 5.6 % Diluted 0.93 0.88 0.05 5.7 % Gross margin 55.8 % 57.0 % (120 bps) Operating margin 21.3 % 21.4 % (10 bps) Effective tax rate 24.4 % 26.0 % (160 bps) Sales Volume. The following table sets forth changes in sales volume for the year endedDecember 31, 2020 compared to the prior year: K-Cup pod volume 6.3 % Brewer volume 21.2 % CSD sales volume 0.1 % NCB sales volume 1.4 %Net Sales . Net sales for the year endedDecember 31, 2020 increased$498 million to$11,618 million compared with net sales of$11,120 million in the prior year. This performance reflected higher volume/mix of 5.6%, partially offset by lower net price realization of 0.6% and unfavorable foreign currency translation of 0.5%, primarily in our Latin America Beverages segment. Gross Profit. Gross profit for the year endedDecember 31, 2020 was$6,486 million , or 55.8% of net sales as compared to$6,342 million , or 57.0% of net sales in the prior year. This performance primarily reflected the impact of higher volume/mix and the benefit of productivity and merger synergies. These benefits were partially offset by unfavorable net price realization, unfavorable FX translation,$52 million in COVID-19 charges and an increase in other manufacturing costs, associated with the strong consumer demand. Gross margin decreased 120 bps from the prior year to 55.8%. 27 -------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expenses. SG&A expenses for the year endedDecember 31, 2020 increased$16 million to$3,978 million , compared with$3,962 million in the prior year. The increase was driven by$98 million in COVID-19 charges, expenses associated with productivity projects, inflation in logistics, and higher operating costs associated with the strong consumer demand, such as logistics and labor. These increases were partially offset by the benefit of strong productivity and merger synergies and lower discretionary expenses, primarily marketing. Impairment of Intangible Assets. Impairment of intangible assets reflects a$67 million non-cash impairment charge recorded for the Bai brand as a result of our annual impairment analysis as ofOctober 1, 2020 . Refer to Note 4 of the Notes to our Consolidated Financial Statements for further information regarding the impairment analysis. Other Operating (Income) Expense, Net. Other operating (income) expense, net had a favorable change of$41 million for the year endedDecember 31, 2020 compared with the prior year, largely driven by the comparison to unfavorable fair value adjustments on real estate assets in the prior year. Additionally, we had an incremental gain from our network optimization program in the current year, with a gain of$42 million from the sale-leaseback of four facilities in the current year, compared to a gain of$30 million in the prior year from the sale-leaseback of three facilities. Income from Operations. Income from operations increased$102 million to$2,480 million for the year endedDecember 31, 2020 , driven by the increase in gross profit and the favorable change in other operating (income) expense, net, partially offset by the non-cash impairment of the Bai brand intangible asset and the increase in SG&A expenses. Operating margin decreased 10 bps versus the prior year to 21.3%. Interest Expense. Interest expense decreased$50 million or 7.6%, to$604 million for the year endedDecember 31, 2020 compared to$654 million in the prior year. This change was primarily the result of the benefit of lower indebtedness due to continued deleveraging. Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt decreased$7 million to$4 million for the year endedDecember 31, 2020 compared to$11 million for the prior year. This change was primarily the result of the Company's focus on repaying commercial paper during the current year, versus our focus on voluntary repayments on our term loan in the prior year. Impairment on Investments and Note Receivable. Impairment on investments and note receivable reflected a non-cash impairment charge of$102 million for the year endedDecember 31, 2020 associated with ourBedford investment and the related note receivable and our LifeFuels investment. Refer to Note 5 of the Notes to our Consolidated Financial Statements for additional information regarding the impairment charges. Effective Tax Rate. The effective tax rates for the years endedDecember 31, 2020 and 2019 were 24.4% and 26.0%, respectively. The decrease from prior year primarily related to the tax benefit received in the current year due to a decrease in our uncertain tax positions as a result of examination settlements and the reversal of a valuation allowance related to the carryforward of net operating losses in a wholly-owned subsidiary. Net Income Attributable to KDP. Net income attributable to KDP increased$71 million , or 5.7%, to$1,325 million for the year endedDecember 31, 2020 as compared to$1,254 million in the prior year, driven by improved income from operations, reduced interest expense and reduced losses on early extinguishment of debt, as well as the decrease in the effective tax rate, which were partially offset by the non-cash impairment on investments and note receivable during the year endedDecember 31, 2020 . Diluted EPS. Diluted EPS increased 5.7% to$0.93 per diluted share as compared to$0.88 in the prior year. 28 -------------------------------------------------------------------------------- Table of Contents Adjusted Results of Operations The following table sets forth selected consolidated adjusted results of operations for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31, Dollar Percentage (in millions, except per share amounts) 2020 2019 Change Change Adjusted income from operations$ 3,191 $ 2,890 $ 301 10.4 % Adjusted interest expense 542 553 (11) (2.0) Adjusted provision for income taxes 644 591 53 9.0 Adjusted net income attributable to KDP 1,988 1,727 261 15.1 Adjusted diluted EPS 1.40 1.22 0.18 14.8 Adjusted operating margin 27.5 % 26.0 % 150 bps Adjusted effective tax rate 24.5 % 25.5 % (100 bps) Adjusted Income from Operations. Adjusted income from operations increased$301 million , or 10.4%, to$3,191 million for the year endedDecember 31, 2020 compared to$2,890 million in the prior year. Driving this performance in the current year was the benefit of productivity and merger synergies, which impacted both SG&A and cost of sales, higher volume/mix, and lower discretionary expenses, primarily marketing. Partially offsetting these positive drivers were unfavorable net price realization,$22 million of COVID-19 charges and higher operating and manufacturing costs associated with the strong consumer demand. Adjusted operating margin grew 150 bps to 27.5%. Adjusted Interest Expense. Adjusted interest expense decreased$11 million , or 2.0%, to$542 million for the year endedDecember 31, 2020 compared to$553 million in the prior year. This benefit was primarily driven by lower indebtedness resulting from continued deleveraging, which was partially offset by the unfavorable comparison to realized gains in the prior year resulting from the termination of interest rate swaps and amortization of deferred financing costs incurred since the DPS Merger. Adjusted Effective Tax Rate. The Adjusted effective tax rate decreased 100 bps to 24.5% for the year endedDecember 31, 2020 compared to 25.5% in the prior year. The decrease from prior year primarily related to the tax benefit received in the current year due to a decrease in our uncertain tax positions as a result of examination settlements and the reversal of a valuation allowance related to the carryforward of net operating losses in a wholly-owned subsidiary. Adjusted Net Income Attributable to KDP. Adjusted net income increased 15.1% to$1,988 million for the year endedDecember 31, 2020 as compared to$1,727 million in the prior year. This performance was driven primarily by strong growth in Adjusted income from operations. Adjusted Diluted EPS. Adjusted diluted EPS increased 14.8% to$1.40 per diluted share as compared to$1.22 per diluted share in the prior year. 29 -------------------------------------------------------------------------------- Table of Contents Results of Operations by Segment The following tables set forth net sales and income from operations for our segments for the years endedDecember 31, 2020 and 2019, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance withU.S. GAAP: (in millions) For the Year Ended December 31, Segment Results - Net sales 2020 2019 Coffee Systems $ 4,433$ 4,233 Packaged Beverages 5,363 4,945 Beverage Concentrates 1,325 1,414 Latin America Beverages 497 528 Net sales $ 11,618$ 11,120 For the Year Ended December 31, (in millions) 2020 2019 Segment Results - Income from Operations Coffee Systems $ 1,268$ 1,219 Packaged Beverages 822 757 Beverage Concentrates 932 955 Latin America Beverages 105 85 Unallocated corporate costs (647) (638) Income from operations $ 2,480$ 2,378 COFFEE SYSTEMS The following table provides selected information for our Coffee Systems segment for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31, Dollar Percentage (in millions) 2020 2019 Change Change Net sales$ 4,433 $ 4,233 $ 200 4.7 % Income from operations 1,268 1,219 49 4.0 % Operating margin 28.6 % 28.8 % (20 bps) Adjusted income from operations 1,514 1,403 111 7.9 % Adjusted operating margin 34.2 % 33.1 % 110 bps Sales Volume. Sales volume growth for the year endedDecember 31, 2020 compared to the prior year for the Coffee Systems segment included strong K-Cup pod volume growth of 6.3%, reflecting strength in at-home consumption which was significantly offset by softness in the away-from-home business due to the COVID-19 pandemic. Brewer volume increased 21.2% in the year endedDecember 31, 2020 , as compared to 8.2% growth in the prior year, reflecting successful innovation introduced over the past two years and investments to drive household penetration.Net Sales . Net sales increased$200 million , or 4.7%, to$4,433 million for the year endedDecember 31, 2020 , compared to$4,233 million in the prior year due to volume/mix growth of 7.2%, driven by strong sales volume growth in both pods and brewers. This growth was partially offset by lower net price realization of 2.4% and unfavorable foreign currency translation of 0.1%. Income from Operations. Income from operations increased$49 million , or 4.0%, to$1,268 million for the year endedDecember 31, 2020 , compared to$1,219 million in the prior year, driven by the continued benefit of strong productivity and merger synergies, which impacted both cost of sales and SG&A, strong volume/mix growth and lower discretionary expenses, primarily marketing. These benefits were partially offset by strategic pricing,$35 million in COVID-19 charges, and expenses associated with productivity projects. Operating margin declined 20 bps to 28.6%. Adjusted Income from Operations. Adjusted income from operations increased$111 million , or 7.9%, to$1,514 million for the year endedDecember 31, 2020 , compared to$1,403 million in the prior year, driven by the continued benefit of strong productivity and merger synergies, which impacted both cost of sales and SG&A, strong volume/mix, and lower discretionary expenses, primarily marketing. Partially offsetting these factors was strategic pricing and$10 million in COVID-19 charges. Adjusted operating margin grew 110 bps to 34.2%. 30 -------------------------------------------------------------------------------- Table of Contents PACKAGED BEVERAGES The following table provides selected information for our Packaged Beverages segment for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31, Dollar Percentage (in millions) 2020 2019 Change Change Net sales$ 5,363 $ 4,945 $ 418 8.5 % Income from operations 822 757 65 8.6 % Operating margin 15.3 % 15.3 % 0 bps Adjusted income from operations 1,021 783 238 30.4 % Adjusted operating margin 19.0 % 15.8 % 320 bps Sales Volume. Sales volume for the year endedDecember 31, 2020 increased 7.3% compared to the prior year, reflecting the impact of COVID-19 and our strong in-market execution, which displayed strength in CSDs, juice and juice drinks, premium water and apple sauce. These increases were partially offset by lower volume in enhanced flavored water, driven by Bai, due to continued softness in convenience and gas channels during the current year.Net Sales . Net sales increased$418 million , or 8.5%, to$5,363 million for the year endedDecember 31, 2020 , compared to$4,945 million in the prior year, driven by higher volume/mix of 8.2% and favorable price realization of 0.3%. Income from Operations. Income from operations increased$65 million , or 8.6%, to$822 million for the year endedDecember 31, 2020 , compared to$757 million in the prior year, driven primarily by strong volume/mix. Other favorable drivers included the benefit of continued productivity and merger synergies and lower discretionary expenses, primarily marketing. These growth drivers were partially offset by$109 million in COVID-19 charges, a non-cash impairment charge of$67 million related to the Bai brand, higher manufacturing and operating costs, such as logistics and labor, associated with the strong consumer demand, inflation in logistics, the unfavorable comparison to a$10 million net gain on a renegotiation of a manufacturing contract in the prior year and increased expenses associated with productivity projects. Operating margin was flat versus the prior year at 15.3%. Adjusted Income from Operations. Adjusted income from operations increased$238 million , or 30.4%, to$1,021 million for the year endedDecember 31, 2020 compared to$783 million in the prior year, largely driven by strong volume/mix. Other favorable drivers included the benefit of continued productivity and merger synergies and lower discretionary expenses, primarily marketing. These drivers were partially offset by higher manufacturing and operating costs, such as logistics and labor, associated with the strong consumer demand, inflation in logistics, and the unfavorable comparison to a$10 million net gain on a renegotiation of a manufacturing contract in the prior year. Adjusted operating margin grew 320 bps versus the prior year to 19.0%. BEVERAGE CONCENTRATES The following table provides selected information for our Beverage Concentrates segment for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31, Dollar Percentage (in millions) 2020 2019 Change Change Net sales$ 1,325 $ 1,414 $ (89) (6.3) % Income from operations 932 955 (23) (2.4) % Operating margin 70.3 % 67.5 % 280 bps Adjusted income from operations 938 957 (19) (2.0) % Adjusted operating margin 70.8 % 67.7 % 310 bps Sales Volume. Sales volume for the year endedDecember 31, 2020 declined 5.1% compared to the prior year, primarily reflecting the decline in our fountain foodservice component of the business, which services restaurants and hospitality, reflecting the impact of shutdowns and reductions in occupant capacity.Net Sales . Net sales decreased$89 million , or 6.3% to$1,325 million for the year endedDecember 31, 2020 , compared to$1,414 million in the prior year, driven by unfavorable volume/mix of 5.8%, lower net price realization of 0.4% and unfavorable foreign currency translation of 0.1%. 31 -------------------------------------------------------------------------------- Table of Contents Income from Operations. Income from operations decreased$23 million , or 2.4% to$932 million for the year endedDecember 31, 2020 , compared to$955 million in the prior year, driven by the net sales decline and higher compensation costs, partially offset by lower discretionary expenses, primarily marketing. Operating margin increased 280 bps versus the prior year to 70.3%. Adjusted Income from Operations. Adjusted income from operations decreased$19 million , or 2.0%, to$938 million for the year endedDecember 31, 2020 compared to$957 million in the prior year, driven by the net sales decline, partially offset by lower discretionary expenses, primarily marketing. Adjusted operating margin grew 310 bps versus the prior year to 70.8%.LATIN AMERICA BEVERAGES The following table provides selected information for ourLatin America Beverages segment for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31, Dollar Percentage (in millions) 2020 2019 Change Change Net sales $ 497$ 528 $ (31) (5.9) % Income from operations 105 85 20 23.5 % Operating margin 21.1 % 16.1 % 500 bps Adjusted income from operations 108 82 26 31.7 % Adjusted operating margin 21.7 % 15.5 % 620 bps Sales Volume. Sales volume for the year endedDecember 31, 2020 increased 0.4% compared to the prior year, driven by Squirt.Net Sales . Net sales decreased$31 million , or 5.9% to$497 million for the year endedDecember 31, 2020 , compared to$528 million in the prior year, driven primarily by unfavorable FX translation of 9.7%. Excluding the unfavorable impact of FX translation, net sales increased as a result of higher net price realization of 5.8%, partially offset by unfavorable volume/mix of 2.0%. Income from Operations. Income from operations increased$20 million , or 23.5%, to$105 million for the year endedDecember 31, 2020 , compared to$85 million in the prior year, driven by higher net price realization, continued productivity and lower discretionary expenses, primarily marketing, partially offset by unfavorable FX effects (FX translation and transaction), unfavorable volume/mix, inflation in logistics and the comparison to a real estate gain in the prior year. Operating margin increased 500 bps versus the prior year to 21.1%. Adjusted Income from Operations. Adjusted income from operations increased$26 million , or 31.7%, to$108 million for the year endedDecember 31, 2020 , compared to$82 million in the prior year. This performance reflected higher net price realization, continued productivity and lower marketing expense, partially offset by unfavorable FX effects (FX translation and transaction), unfavorable volume/mix and inflation in logistics. Adjusted operating margin grew 620 bps versus the prior year to 21.7%. LIQUIDITY AND CAPITAL RESOURCES Overview Our financial condition and liquidity remain strong. Net cash provided by operations was$2,456 million for the year endedDecember 31, 2020 compared to$2,474 million for the prior year. Although there is uncertainty related to the anticipated impact of the ongoing 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 steps we have taken to strengthen our balance sheet leave us well positioned to manage our business as the crisis continues to unfold. 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 and developing new opportunities for growth. Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations and our$3.9 billion borrowing capacity currently available under our existing KDP Revolver and 2020 364-Day Credit Agreement. Additionally, we have an uncommitted commercial paper program where we can issue up to$2.4 billion of unsecured commercial paper notes on a private placement basis, which provides us significant flexibility and short-term liquidity. We believe this level of liquidity 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 3 of the Notes to our Consolidated Financial Statements for management's discussion of these financing arrangements. As ofDecember 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. 32 -------------------------------------------------------------------------------- Table of Contents 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 additionally be impacted by all risk factors discussed in Item 1A, "Risk Factors" that could have a material effect on production, delivery and consumption of our products in theU.S. ,Mexico and theCaribbean orCanada , which could result in a reduction in our sales volume. Similarly, disruptions in financial and credit markets 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. 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 two to three years from the DPS Merger; •Our ability to issue unsecured commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of$2,400 million ; •Our ability to access our other financing arrangements, including the KDP Revolver and the 2020 364-Day Credit Agreement, which have availability of$3,900 million as ofDecember 31, 2020 ; •A significant downgrade in our credit ratings could 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; •Our continued payment of dividends; •Our continued capital expenditures; •Future mergers or acquisitions of brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage; •Future equity investments; •Seasonality of our operating cash flows, which could impact short-term liquidity; and •Fluctuations in our tax obligations. LIBOR Considerations In 2017, theU.K. Financial Conduct Authority announced that LIBOR will no longer be published after 2021. In theU.S. , the Alternative Reference Rates Committee selected the Secured Overnight Financing Rate as the preferred alternative reference rate to LIBOR. InDecember 2020 , it was announced that certain LIBOR rates will continue to be published throughJune 30, 2023 . We have a number of financing arrangements which incorporate LIBOR as a benchmark rate and which extend past 2021, including the 2019 KDP Term Loan and the KDP Revolver. The agreements related to such financing arrangements contain provisions for alternative reference rates, and we do not expect a significant change to our cost of debt as a result of the transition from LIBOR to an alternative reference rate. Liquidity 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: Year Ended December 31, (in millions) 2020 2019
2018
Net cash provided by operating activities$ 2,456 $ 2,474 $ 1,613 Net cash used in investing activities (316)
(150) (19,131) Net cash (used in) provided by financing activities (1,990) (2,364) 17,577
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NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities decreased $18 million for the year
ended December 31, 2020 as compared to year ended December 31, 2019 , driven by
the decline in working capital and an increase in income tax payments, partially
offset by the increase in net income adjusted for non-cash items.
As of December 31, 2020 , we had no deferred estimated tax payments, as compared
to deferred estimated tax payments as of December 31, 2019 of $59 million , which
were paid in January 2020 .
Beginning in the second quarter of 2020 and continuing through the rest of the
year, 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 December
31, 2021 with the remainder due by December 31, 2022 . As of December 31, 2020 ,
we have deferred a total of $59 million in such payments.
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
(Accounts payable * Number of days in the period) divided by cost of sales
DPO and SG&A expenses
Our cash conversion cycle declined (17) days to approximately (63) days as of
December 31,
2020 2019
DIO 54 52
DSO 33 35
DPO 150 133
Cash conversion cycle (63) (46)
For the year ending December 31, 2021 , DPO is expected 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 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. We have been informed
by the third party administrator that as of December 31, 2020 and December 31,
2019 , $2,578 million and $2,097 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 $2,770 million and $1,745 million for the years
ended December 31, 2020 and 2019, respectively.
NET CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities for the year ended December 31, 2020 was
primarily driven by our purchases of property, plant and equipment of $461
million and purchases of intangible assets of $56 million , which was partially
offset by proceeds of $203 million from sales of property, plant and equipment,
primarily driven by our asset sale-leaseback transactions.
Cash used in investing activities for the year ended December 31, 2019 was
primarily driven by our purchases of property, plant and equipment of $330
million , partially offset by proceeds of $247 million from sales of property,
plant and equipment, primarily driven by our asset sale-leaseback transactions.
Other drivers of cash used investing activities included $35 million for
purchases of intangible assets, primarily the reacquisition of distribution
rights, and advances of $32 million to Bedford under its line of credit with us.
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NET CASH USED IN FINANCING ACTIVITIES
Cash used in financing activities for the year ended December 31, 2020 consisted
primarily of the net repayment of $1,246 million for commercial paper notes. We
made the decision to repay commercial paper notes with an equivalent amount of
borrowings under our KDP Revolver, as the costs and ability to issue commercial
paper became inefficient at the onset of the COVID-19 pandemic versus borrowings
under our KDP Revolver. The KDP Revolver was subsequently repaid through the
issuance of our 2030 Notes and 2050 Notes. Additionally, we made voluntary and
mandatory repayments on the term loan facility of $955 million , dividend
payments of $846 million , the repayment of the 2020 Notes of $250 million and
net payments on structured payables of $170 million . We also received $29
million from controlling shareholder stock transactions, which related to the
disgorgement of short-swing profits pursuant to Section 16(b) of the Exchange
Act.
Net cash used in financing activities for the year ended December 31, 2019
consisted primarily of the voluntary and mandatory repayments on the 2018 KDP
Term Loan and 2019 KDP Term Loan of $1,203 million , dividend payments of $844
million , repayments of structured payables of $531 million and the repayment of
the 2019 Notes of $250 million . These cash outflows from financing activities
were partially offset by net issuance of commercial paper notes of $167 million
and proceeds from structured payables of $330 million .
Debt Ratings
As of December 31, 2020 , our credit ratings were as follows:
Rating Agency Long-Term Debt Rating Commercial Paper Rating Outlook
Moody's Baa2 P-2 Negative
S&P BBB A-2 Stable
These debt and commercial paper ratings impact the interest we pay on our
financing arrangements. A downgrade of one or both of our debt and commercial
paper ratings could increase our interest expense and decrease the cash
available to fund anticipated obligations.
Capital Expenditures
Purchases of property, plant and equipment were $461 million and $330 million
for the years ended December 31, 2020 and 2019, respectively.
Capital expenditures, which includes purchases of property, plant and equipment
and amounts reflected in accounts payable and accrued expenses, for the year
ended December 31, 2020 primarily related to our continued investment in
state-of-the-art manufacturing facilities and equipment through the build-out of
our Spartanburg manufacturing facility, the purchase of real estate in Ireland
and the associated build out of the manufacturing facility and the build-out of
our Allentown manufacturing facility.
Capital expenditures for the year ended December 31, 2019 primarily related to
manufacturing equipment, our continued investment in the construction of our new
Spartanburg facility in South Carolina and information technology
infrastructure.
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents
increased $144 million to $255 million as of December 31, 2020 compared to $111
million as of December 31, 2019 .
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 $165
million and $70 million as of December 31, 2020 and December 31, 2019 ,
respectively. We accrue tax costs for repatriation, as applicable, as cash is
generated in those foreign jurisdictions.
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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 will be sufficient to meet our
anticipated obligations. 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. Refer to Note 3 of the
Notes to our Consolidated Financial Statements for obligations related to our
senior unsecured notes and our KDP Credit Agreements. Refer to Note 9 of the
Notes to our Consolidated Financial Statements for future minimum lease
commitments.
The following table summarizes our contractual obligations as of December 31,
2020 :
Payments Due in Year
(in millions) Total 2021 2022 2023 2024 2025 After 2025
Interest payments $ 5,266 $ 504 $ 457 $ 406 $ 349 $ 326 $ 3,224
Purchase obligations(1) 1,893 1,131 296 178 110 91 87
(1)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 contractual obligations.
Amounts excluded from our table
As of December 31, 2020 , we had $11 million of non-current unrecognized tax
benefits, related interest and penalties classified as a long-term liability.
The table above does not reflect any payments related to these amounts as it is
not possible to make a reasonable estimate of the amount or timing of the
payment. Refer to Note 7 of the Notes to our Consolidated Financial Statements
for further information.
The total accrued benefit liability representing the underfunded position for
pension recognized as of December 31, 2020 was approximately $25 million . This
amount is impacted by, among other items, funding levels, plan amendments,
changes in plan assumptions and the investment return on plan assets. We did not
include estimated payments related to our total accrued benefit liability in the
table above. The Pension Protection Act of 2006 was enacted in August 2006 and
established, among other things, new standards for funding of U.S. defined
benefit pension plans. We generally expect to fund all future contributions with
cash flows from operating activities. Our international pension plans are
generally funded in accordance with local laws and income tax regulations. We
did not include our estimated contributions to our various single employer plans
in the table above.
We have a deferred compensation plan where the assets are maintained in a rabbi
trust and the corresponding liability related to the plan is recorded in other
non-current liabilities. We did not include estimated payments related to the
deferred compensation liability as the timing and payment of these amounts are
determined by the participants and outside our control.
In general, we are covered under conventional insurance programs with high
deductibles or are self-insured for large portions of many different types of
claims. Our accrued liabilities for our losses related to these programs are
estimated through actuarial procedures of the insurance industry and by using
industry assumptions, adjusted for our specific expectations based on our claim
history. As of December 31, 2020 , our accrued liabilities for our losses related
to these programs totaled approximately $107 million .
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. We have
not made any material changes in the accounting methodology we use to assess or
measure our critical accounting estimates. We have identified the items
described below as our critical accounting estimates. We do not believe there is
a reasonable likelihood that there will be a material change in the future
estimates or assumptions we use in our critical accounting estimates. However,
if actual results are not consistent with our estimates or assumptions, we may
be exposed to gains or losses that could be material to our consolidated
financial statements. See Note 2 of the Notes to our Consolidated Financial
Statements for a discussion of these and other accounting policies.
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Goodwill and Other Indefinite Lived Intangible Assets
We conduct tests for impairment of our goodwill and our other indefinite lived
intangible assets annually, as of October 1 , or more frequently if events or
circumstances indicate the carrying amount may not be recoverable. We use
present value and other valuation techniques to make this assessment. If the
carrying amount of goodwill or an intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess. For purposes of
impairment testing, we assign goodwill to the reporting unit that benefits from
the synergies arising from each business combination, and we also assign
indefinite lived intangible assets to our reporting units.
We define our six reporting units as the following:
Segments Reporting Units
Packaged Beverages DSD
WD
Coffee Systems Coffee Systems US
Coffee Systems Canada
Beverage Concentrates Beverage Concentrates
Latin America Beverages Latin America Beverages
For both goodwill and other indefinite lived intangible assets, we have the
option to first assess qualitative factors to determine whether the fair value
of either the reporting unit or indefinite lived intangible asset is not "more
likely than not" less than its carrying value, also known as a Step 0 analysis.
If a quantitative analysis is required, the following would be required:
•The impairment test for indefinite lived intangible assets encompasses
calculating a fair value of an indefinite lived intangible asset and comparing
the fair value to its carrying value. If the carrying value exceeds the
estimated fair value, impairment is recorded.
•The impairment tests for goodwill include comparing fair value of the
respective reporting unit with its carrying value, including goodwill and
considering any indefinite lived intangible asset impairment charges.
For the year ended December 31, 2020 , we performed a quantitative analysis,
whereby we used an income approach, or in some cases a combination of income and
market based approaches, to determine the fair value of our assets, as well as
an overall consideration of market capitalization and enterprise value. These
types of analyses contain uncertainties because they require management to make
assumptions and to apply judgment to estimate industry and economic factors and
the profitability of future business strategies. These assumptions could be
negatively impacted by various risks discussed in Item 1A, Risk Factors, in this
Annual Report on Form 10-K.
Critical assumptions for quantitative analyses include revenue growth and profit
performance, including the achievability of productivity and synergies, over the
next five year period, as well as an appropriate discount rate, long term growth
rate and royalty rates, as applicable. Discount rates are based on a weighted
average cost of equity and cost of debt, adjusted with various risk premiums.
Long term growth rates are based on the long-term inflation forecast, industry
growth and the long-term economic growth potential. Royalty rates are based on
observable market participant information.
The following table provides the range of rates used in the analysis as of
October 1, 2020 :
Rate Minimum Maximum
Discount rates 6.0 % 10.0 %
Long-term growth rates - % 3.5 %
Royalty rates 1.0 % 10.0 %
The carrying values of goodwill and indefinite lived intangible assets as of
December 31, 2020 , were $20,184 million and $22,534 million , respectively.
During the year ended December 31, 2020 , the Company recorded an impairment of
$67 million for the indefinite lived brand asset of Bai. No other impairment of
goodwill or indefinite lived intangible assets was identified during the year
ended December 31, 2020 , and no impairment was identified in each of the years
ended December 31, 2019 and 2018.
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Sensitivity Analysis - Discount Rate
For goodwill, holding all other assumptions in the analysis constant, including
the revenue and profit performance assumption, the effect of a 0.50% increase in
the discount rate used to determine the fair value of the reporting units as of
October 1, 2020 , would not change our conclusion.
For the indefinite-lived intangible assets, holding all other assumptions in the
analysis constant, including the revenue and profit performance assumption, the
effect of a 0.50% increase in the discount rate used to determine the fair value
of our brands and trade names as of October 1, 2020 , would impact the amount of
headroom over the carrying value of our brands and trade names as follows (in
millions):
Selected Discount Rate Discount Rate Increase of 0.50%
Headroom Percentage Carrying Value Fair Value Carrying Value Fair Value
Brands
Potential impairment(1) $ 482 $ 415 $ 1,070 $ 948
0 - 10% 588 625 3,575 3,693
11 - 25% 4,464 5,150 2,986 3,492
26 - 50% 2,261 2,993 10,916 15,867
In excess of 50% 11,946 19,835 1,194 2,130
$ 19,741 $ 29,018 $ 19,741 $ 26,130
Trade Names
Potential impairment $ - $ - $ - $ -
0 - 10% 1 1 1 1
11 - 25% - - - -
26 - 50% - - - -
In excess of 50% 2,479 6,990 2,479 6,420
$ 2,480 $ 6,991 $ 2,480 $ 6,421
(1)The amounts listed in the Selected Discount Rate columns represent the
carrying value of Bai as of the October 1, 2020 measurement date, prior to the
$67 million impairment recorded during the fourth quarter of 2020.
Sensitivity Analysis - Long-Term Growth Rate
For goodwill, holding all other assumptions in the analysis constant, including
the discrete period revenue and profit performance assumptions as well as the
discount rates, the effect of a 0.50% decrease in the long-term growth rate used
to determine the fair value of the reporting units as of October 1, 2020 , would
not change our conclusion.
For the indefinite-lived intangible assets, holding all other assumptions in the
analysis constant, including the discrete period revenue and profit performance
assumptions as well as the discount rates, the effect of a 0.50% decrease in the
long-term revenue growth rate used to determine the fair value of our brands and
trade names as of October 1, 2020 , would impact the amount of headroom over the
carrying value of our brands and trade names as follows (in millions):
Selected Long-Term Growth Rate Long-Term Growth Rate Decrease of 0.50%
Headroom Percentage Carrying Value Fair Value Carrying Value Fair Value
Brands
Potential impairment(1) $ 482 $ 415 $ 1,070 $ 968
0 - 10% 588 625 3,603 3,805
11 - 25% 4,464 5,150 2,644 3,142
26 - 50% 2,261 2,993 3,060 4,269
In excess of 50% 11,946 19,835 9,364 14,570
$ 19,741 $ 29,018 $ 19,741 $ 26,754
Trade Names
Potential impairment $ - $ - $ - $ -
0 - 10% 1 1 1 1
11 - 25% - - - -
26 - 50% - - - -
In excess of 50% 2,479 6,990 2,479 6,540
$ 2,480 $ 6,991 $ 2,480 $ 6,541
(1)The amounts listed in the Selected Long-Term Growth Rate columns represent
the carrying value of Bai as of the October 1, 2020 measurement date, prior to
the $67 million impairment recorded during the fourth quarter of 2020.
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Revenue Recognition
We recognize revenue when performance obligations under the terms of a contract
with the customer are satisfied. Accruals for customer incentives, sales returns
and marketing programs are established for the expected payout based on
contractual terms, volume-based metrics and/or historical trends.
Our customer incentives, sales returns and marketing accrual methodology
contains uncertainties because it requires management to make assumptions and to
apply judgment regarding our contractual terms in order to estimate our customer
participation and volume performance levels which impact the expense
recognition. Our estimates are based primarily on a combination of known or
historical transaction experiences. Differences between estimated expenses and
actual costs are normally insignificant and are recognized to earnings in the
period differences are determined.
Additionally, judgment is required to ensure the classification of the spend is
correctly recorded as either a reduction from gross sales or advertising and
marketing expense, which is a component of our SG&A expenses.
A 10% change in the accrual for our customer incentives, sales returns and
marketing programs would have affected our income from operations by $38 million
for the year ended December 31, 2020 .
Income Taxes
We establish income tax liabilities to remove some or all of the income tax
benefit of any of our income tax positions based upon one of the following:
•the tax position is not "more likely than not" to be sustained,
•the tax position is "more likely than not" to be sustained, but for a lesser
amount, or
•the tax position is "more likely than not" to be sustained, but not in the
financial period in which the tax position was originally taken.
Our liability for uncertain tax positions contains uncertainties because
management is required to make assumptions and to apply judgment to estimate the
exposures associated with our various tax positions.
Our income tax returns, like those of most companies, are periodically audited
by domestic and foreign tax authorities. These audits include questions
regarding our tax positions, including the timing and amount of deductions and
the allocation of income among various tax jurisdictions. As these audits
progress, events may occur that cause us to change our liability for uncertain
tax positions. To the extent we prevail in matters for which a liability for
uncertain tax positions has been established, or are required to pay amounts in
excess of our established liability, our effective tax rate in a given financial
statement period could be materially affected. An unfavorable tax settlement
generally would require use of our cash and may result in an increase in our
effective tax rate in the period of resolution. A favorable tax settlement may
be recognized as a reduction in our effective tax rate in the period of
resolution.
We also assess the likelihood of realizing our deferred tax assets. Valuation
allowances reduce deferred tax assets to the amount more likely than not to be
realized. We base our judgment of the recoverability of our deferred tax assets
primarily on historical earnings, our estimate of current and expected future
earnings and prudent and feasible tax planning strategies.
If results differ from our assumptions, a valuation allowance against deferred
tax assets may be increased or decreased which would impact our effective tax
rate.
Business Combinations
We record acquisitions using the purchase method of accounting. All of the
assets acquired and liabilities assumed are recorded at fair value as of
the acquisition date. The excess of the purchase price over the estimated fair
values of the net tangible and intangible assets acquired is recorded as
goodwill.
The application of the purchase method of accounting for business combinations
requires management to make significant estimates and assumptions in the
determination of the fair value of assets acquired and liabilities assumed, in
order to properly allocate purchase price consideration between assets that are
depreciated and amortized from goodwill. The fair value assigned to tangible and
intangible assets acquired and liabilities assumed are based on management's
estimates and assumptions, as well as other information compiled by management,
including valuations that utilize customary valuation procedures and techniques.
Significant assumptions and estimates include, but are not limited to, the cash
flows that an asset is expected to generate in the future, the appropriate
weighted-average cost of capital, and the cost savings expected to be derived
from acquiring an asset, if applicable.
If the actual results differ from the estimates and judgments used in these
estimates, the amounts recorded in the consolidated financial statements may be
exposed to potential impairment of the intangible assets and goodwill, as
discussed in the Goodwill and Other Indefinite Lived Intangible Assets critical
accounting estimate section above.
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OFF-BALANCE SHEET ARRANGEMENTS
Distribution Rights Associated with Residual Value Guarantee
On December 28, 2020 , one of our third-party bottlers sold their manufacturing
and distribution rights to Veyron SPE. Subsequently, we entered into a
distribution arrangement with Veyron SPE, which provided us access to distribute
certain CSD beverages, such as Canada Dry, 7UP and A&W in a number of counties
in New York and New Jersey in exchange for a fixed service fee and a residual
value guarantee. As a result of the residual value guarantee, Veyron SPE was
determined to be a VIE; however, we did not consolidate the VIE as we were not
the primary beneficiary. Since the agreement provided us immediate distribution
access without reacquiring ownership of the distribution rights asset and
includes a guarantee on the assets of Veyron SPE, we believe this is an
off-balance sheet arrangement. Revenues and expenses related to the arrangement
for the year ended December 31, 2020 were not significant. Refer to Note 16 of
the Notes to our Consolidated Financial Statements for additional information.
Multi-Employer Pension Plans
We currently participate, and have in the past participated, in multi-employer
pension plans in the U.S. If, in the future, we choose to withdraw from
participation in one of these plans, or we are deemed to have withdrawn from any
of the multi-employer pension plans in which we currently participate or have
participated in the past, the plan will assess us a withdrawal liability for
exiting the plan, and U.S. GAAP would require us to record the withdrawal charge
as an expense in our consolidated statements of income and as a liability on our
consolidated balance sheets once the multi-employer pension withdrawal charge is
probable and estimable. Refer to Note 10 of the Notes to our Consolidated
Financial Statements for additional information regarding our multi-employer
pension plans.
There are no other off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on our results of operations,
financial condition, liquidity, capital expenditures or capital resources other
than letters of credit outstanding. Refer to Note 3 of the Notes to our
Consolidated Financial Statements for additional information regarding
outstanding letters of credit.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 of the Notes to our Consolidated Financial Statements for a
discussion of recently issued accounting standards and recently adopted
provisions of U.S. GAAP.
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SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Notes are fully and unconditionally guaranteed by certain of our direct and
indirect subsidiaries (the "Guarantors"), as defined in the indentures governing
the Notes. The Guarantors are 100% owned either directly or indirectly by us and
jointly and severally guarantee, subject to the release provisions described
below, our obligations under the Notes. None of our subsidiaries organized
outside of the U.S. , immaterial subsidiaries used for charitable purposes, any
of the subsidiaries held by Maple Parent Holdings Corp. prior to the DPS Merger
or any of the subsidiaries acquired after the DPS Merger (collectively, the
"Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to
the Notes are subject to release upon the occurrence of certain events,
including the sale of all or substantially all of a subsidiary's assets, the
release of the subsidiary's guarantee of our other indebtedness, our exercise of
the legal defeasance option with respect to the Notes and the discharge of our
obligations under the applicable indenture.
The following schedules present the summarized financial information for the
Parent and the Guarantors on a combined basis after intercompany eliminations;
the Parent and the Guarantors' amounts due from; amounts due to, and
transactions with Non-Guarantors are disclosed separately. The consolidating
schedules are provided in accordance with the reporting requirements of Rule
13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.
The summarized financial information for the Parent and Guarantors were as
follows:
(in millions) For the Year Ended December 31, 2020
Net sales $ 6,636
Income from operations 1,262
Net income attributable to KDP 1,325
(in millions) December 31, 2020 December 31, 2019
Current assets(1) $ 1,810 $ 1,404
Non-current assets 43,333 43,501
Current liabilities(2) $ 5,148 $ 3,942
Non-current liabilities 16,164 17,707
(1)Includes $423 million and $241 million of current intercompany receivables
due to the Parent and Guarantors from the Non-Guarantors as of December 31, 2020
and December 31, 2019 , respectively.
(2)Includes $30 million and $20 million of current intercompany payables due to
the Non-Guarantors from the Parent and Guarantors as of December 31, 2020 and
December 31, 2019 , respectively.
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Non-GAAP Financial Measures
To supplement the consolidated financial statements presented in accordance with
U.S. GAAP, we have presented for the years ended December 31, 2020 and 2019 (i)
Adjusted income from operations, (ii) Adjusted interest expense, (iii) Adjusted
provision for income taxes, (iv) Adjusted net income attributable to KDP and (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.
For the years ended December 31, 2020 and 2019, 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 the prior year,
adjusted for the tax impact as applicable. Tax impact is determined based upon
an approximate rate for each item. For each year, 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; (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
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; and
(vi) other certain items that are excluded for comparison purposes to the prior
year.
For the year ended December 31, 2020 , the other certain items excluded for
comparison purposes include (i) restructuring and integration expenses related
to significant business combinations; (ii) productivity expenses; (iii) costs
related to significant non-routine legal matters; (iv) the loss on early
extinguishment of debt related to the redemption of debt; (v) incremental
temporary costs to our operations related to risks associated with the COVID-19
pandemic; (vi) impairment recognized on the equity method investments with
Bedford and LifeFuels; and (vii) impairment recognized on the Bai brand.
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 year ended December 31, 2019 , the other certain items excluded for
comparison purposes include (i) restructuring and integration expenses related
to 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 non-routine 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 the years ended December 31, 2020 and 2019, the supplemental financial data
set forth below includes reconciliations of Adjusted income from operations,
Adjusted net income and Adjusted diluted EPS to the applicable financial measure
presented in the consolidated financial statement for the same year.
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KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
For the Year Ended December 31, 2020
(Unaudited, in millions, except per share data)
Selling, general and
Cost of Gross administrative Impairment of Income from Operating
sales Gross profit margin expenses intangible assets operations margin
Reported $ 5,132 $ 6,486 55.8 % $ 3,978 $ 67 $ 2,480 21.3 %
Items Affecting Comparability:
Mark to market 33 (33) (5) - (28)
Amortization of intangibles - - (133) - 133
Stock compensation - - (27) - 27
Restructuring and integration
costs - - (199) - 199
Productivity (29) 29 (99) - 128
Impairment of intangible assets - - - (67) 67
Non-routine legal matters - - (57) - 57
COVID-19 (44) 44 (84) - 128
Adjusted $ 5,092 $ 6,526 56.2 % $ 3,374 $ - $ 3,191 27.5 %
Impairment on Loss on early Income before Diluted
Interest investments and extinguishment of provision for Provision for Effective tax Weighted Average earnings per
expense note receivable debt income taxes income taxes rate Net income Diluted shares share
Reported $ 604 $ 102 $ 4 $ 1,753 $ 428 24.4 % $ 1,325 1,422.1 $ 0.93
Items Affecting Comparability:
Mark to market (27) - - (1) (1) - -
Amortization of intangibles - - - 133 35 98 0.07
Amortization of deferred
financing costs (11) - - 11 3 8 0.01
Amortization of fair value debt
adjustment (24) - - 24 6 18 0.01
Stock compensation - - - 27 5 22 0.02
Restructuring and integration
costs - - - 199 49 150 0.11
Productivity - - - 128 33 95 0.07
Impairment on intangible asset - - 67 15 52 0.04
Loss on early extinguishment of debt - - (4) 4 1 3 - Investment impairment - (102) - 102 25 77 0.05 Non-routine legal matters - - - 57 14 43 0.03 COVID-19 - - - 128 31 97 0.07 Adjusted$ 542 $ - $ -$ 2,632 $ 644 24.5 %$ 1,988 1,422.1$ 1.40
Diluted EPS may not foot due to rounding.
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KEURIG DR PEPPER INC.
RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS
For the Year Ended December 31, 2019
(Unaudited, in millions, except per share data)
Other
Selling, general and operating
Cost of administrative (income) Income from
sales Gross profit Gross margin expenses expense, net operations Operating margin
Reported $ 4,778 $ 6,342 57.0 % $ 3,962 $ 2 $ 2,378 21.4 %
Items Affecting
Comparability:
Mark to market 35 (35) 10 - (45)
Amortization of intangibles - - (126) - 126
Stock compensation - - (24) - 24
Restructuring and
integration costs (1) 1 (216) (25) 242
Productivity (15) 15 (60) (22) 97
Transaction costs - - (9) - 9
Non-routine legal matters - - (48) - 48
Inventory step-up (3) 3 - - 3
Malware incident (2) 2 (6) - 8
Adjusted $ 4,792 $ 6,328 56.9 % $ 3,483 $ (45) $ 2,890 26.0 %
Weighted
Income before Average Diluted
Interest Loss on early provision for Provision for Effective tax Diluted earnings per
expense extinguishment of debt income taxes income taxes rate Net income shares share
Reported $ 654 $ 11 $ 1,694 $ 440 26.0 % $ 1,254 1,419.1 $ 0.88
Items Affecting Comparability:
Mark to market (47) - 2 (1) 3 -
Amortization of intangibles - - 126 34 92 0.06
Amortization of deferred
financing costs (13) - 13 4 9 0.01
Amortization of fair value debt
adjustment (26) - 26 6 20 0.01
Stock compensation - - 24 6 18 0.01
Restructuring and integration
costs 1 - 241 55 186 0.13
Productivity - - 97 24 73 0.05
Transaction costs (16) - 25 7 18 0.01
Loss on early extinguishment of
debt - (11) 11 2 9 0.01
Non-routine legal matters - - 48 11 37 0.02
Inventory step-up - - 3 1 2 -
Malware incident - - 8 2 6 -
Adjusted $ 553 $ - $ 2,318 $ 591 25.5 % $ 1,727 1,419.1 $ 1.22 Diluted EPS may not foot due to rounding.
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KEURIG DR PEPPER INC.
RECONCILIATION OF SEGMENT ITEMS TO CERTAIN NON-GAAP ADJUSTED SEGMENT ITEMS
(Unaudited)
Items Affecting
(in millions) Reported Comparability Adjusted
For the Year Ended December 31, 2020
Income from Operations
Coffee Systems $ 1,268 $ 246 $ 1,514
Packaged Beverages 822 199 1,021
Beverage Concentrates 932 6 938
Latin America Beverages 105 3 108
Unallocated corporate costs (647) 257 (390)
Total income from operations $ 2,480 $ 711 $ 3,191
Items Affecting
(in millions) Reported Comparability Adjusted
For the Year Ended December 31, 2019
Income from Operations
Coffee Systems $ 1,219 $ 184 $ 1,403
Packaged Beverages 757 26 783
Beverage Concentrates 955 2 957
Latin America Beverages 85 (3) 82
Unallocated corporate costs (638) 303 (335)
Total income from operations $ 2,378 $ 512 $ 2,890
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