The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto in our Annual Report, as filed onFebruary 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 "outlook," "guidance," "anticipate," "expect," "believe," "could," "estimate," "feel," "forecast," "intend," "may," "plan," "potential," "project," "should," "target," "will," "would," and similar words, phrases or expressions and variations or negatives of these words in this Quarterly Report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report, as well as our subsequent filings with theSEC . 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 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 brewing systems. 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, 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. 27
--------------------------------------------------------------------------------
TABLE OF CONTENTS
COFFEE SYSTEMS Our Coffee Systems segment is primarily a producer of innovative single serve brewers and specialty coffee in theU.S. andCanada . Our Coffee Systems segment manufactures over 75% of the pods in the single-serve K-Cup pod format in theU.S. We manufacture and sell 100% of the K-Cup pods of the following brands to 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 manufacture and sell K-Cup pods for the following brands to our partners, who in turn sell them to retailers: Starbucks, Smuckers, Peet's,Dunkin' Donuts , Folgers, Newman's Own Organics, Caribou Coffee, Eight O'Clock, Maxwell House, andTim Hortons , as well as private label arrangements. Generally, we are able to sell these brands to our away from home channel participants and end-use consumers. We also have agreements for manufacturing, distributing, and selling K-Cup pods for tea under brands such asCelestial 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, including under our own brand, Mott's. Our Coffee Systems segment manufactures its K-Cup pods in facilities inNorth 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 brewers, where we then utilize third-party contract manufacturers located in various countries inAsia for brewer appliance manufacturing. We distribute our brewers using third-party distributors, retail partners and through 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 partner brands and manufacture packaged beverages for other third parties in theU.S. andCanada . The larger NCB brands in this segment includeSnapple , Mott's, Bai, Clamato, Hawaiian Punch, Core, Yoo-Hoo, ReaLemon, evian,Vita Coco and Mr and Mrs T mixers. The larger CSD brands in this segment include Dr Pepper, Canada Dry, A&W, 7UP, Sunkist, Squirt, Big Red, RC Cola, and Vernors. The majority of our 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. We also recognize net sales in this segment from the distribution of our partner brands such as evian,Vita Coco , Peet's RTD Coffee, A Shoc energy drinks, Runa energy 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 theU.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. BEVERAGE CONCENTRATES Our Beverage Concentrates segment is principally a brand ownership business where we manufacture and sell beverage concentrates in theU.S. andCanada . 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 inSt. Louis, Missouri . We are expanding our manufacturing capabilities to include a concentrate manufacturing facility inIreland 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 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 through our FFS operating segment. Dr Pepper represents most of our FFS volume. Our Beverage Concentrates brands are sold by our bottlers through all major retail channels. 28
--------------------------------------------------------------------------------
TABLE OF CONTENTS
LATIN AMERICA BEVERAGES Our Latin America Beverages segment is a brand ownership, manufacturing and distribution business, with operations inMexico representing approximately 90% of the segment's 2020 net sales. This segment participates mainly in the carbonated mineral water, flavored CSD, bottled water and vegetable juice categories. The largest brands include Peñafiel, Clamato, Squirt, Aguafiel and Crush. VOLUME In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, K-Cup 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. 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. 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 underU.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. 29
--------------------------------------------------------------------------------
TABLE OF CONTENTS
EXECUTIVE SUMMARY Financial Overview - Second Quarter of 2021 as compared to Second Quarter of 2020 As Reported, in millions (except EPS)
[[Image Removed: kdp-20210630_g2.jpg]][[Image Removed: kdp-20210630_g3.jpg]][[Image Removed: kdp-20210630_g4.jpg]][[Image Removed: kdp-20210630_g5.jpg]]
As Adjusted, in millions (except EPS)
[[Image Removed: kdp-20210630_g6.jpg]][[Image Removed: kdp-20210630_g7.jpg]] [[Image Removed: kdp-20210630_g8.jpg]]
Key Events During the Second Quarter of 2021 OnMay 25, 2021 , we repaid our 2021 Merger Notes at maturity using commercial paper. During the second quarter of 2021, we made net repayments of our Notes, our commercial paper and our other credit agreements of$427 million . Additionally, onMay 25, 2021 , our Board of Directors declared a regular quarterly dividend of$0.1875 per share, an increase of 25% compared to the previous quarterly dividend, which was paid onJuly 15, 2021 to shareholders of record as ofJuly 1, 2021 . 30
--------------------------------------------------------------------------------
TABLE OF CONTENTS
Impact of COVID-19 on our Financial Statements The following table sets forth our reconciliation of significant COVID-19-related expenses. Employee compensation expense and employee protection costs, which impact our SG&A expenses and cost of sales, are included as the COVID-19 item affecting comparability and are excluded in our Adjusted financial measures. In addition, reported amounts underU.S. GAAP also include additional costs, not included as the COVID-19 item affecting comparability, as presented in tables below. Items Affecting Comparability(1) Allowances for Expected Employee Compensation Employee Protection Credit Inventory (in millions) Expense(2) Costs(3) Losses(4) Write-Downs(5) Total For the second quarter of 2021: Coffee Systems $ 1 $ 4$ (2) $ -$ 3 Packaged Beverages 3 3 (8) - (2) Beverage Concentrates - - (3) - (3) Latin America Beverages - - - - - Total $ 4 $ 7$ (13) $ -$ (2) For the second quarter of 2020: Coffee Systems $ 7 $ 2 $ - $ 8$ 17 Packaged Beverages 38 16 - - 54 Beverage Concentrates - - 4 - 4 Latin America Beverages - - - - - Total $ 45 $ 18$ 4 $ 8$ 75 For the first six months of 2021: Coffee Systems $ 2 $ 13$ (2) $ -$ 13 Packaged Beverages 6 5 (8) - 3 Beverage Concentrates - - (3) - (3) Latin America Beverages - 1 - - 1 Total $ 8 $ 19$ (13) $ -$ 14 For the first six months of 2020: Coffee Systems $ 7 $ 2$ 2 $ 8$ 19 Packaged Beverages 41 18 8 - 67 Beverage Concentrates - - 4 - 4 Latin America Beverages - - - - - Total $ 48 $ 20$ 14 $ 8$ 90 (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, amounts include pay for temporary employees, including the associated taxes, as well as incremental benefits provided to frontline workers such as extended sick leave, in order to maintain essential operations during the COVID-19 pandemic. In 2020, amounts 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)In 2020, allowances reflected 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. In 2021, reversals of those previously recorded allowances reflect improving economic conditions. Impacts SG&A expenses. (5)Impacts cost of sales. 31
--------------------------------------------------------------------------------
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". Non-GAAP financial measures are provided in addition toU.S. GAAP measures. Such non-GAAP financial measures are excluded from the Results of Operations by Segment when there is no difference between the non-GAAP and the correspondingU.S. GAAP measure. See Non-GAAP Financial Measures for more information, including reconciliations to the correspondingU.S. GAAP measures. Second Quarter of 2021 Compared to Second Quarter of 2020 Consolidated Operations The following table sets forth our unaudited condensed consolidated results of operations for the second quarter of 2021 and 2020:
© Edgar Online, source