Keurig Dr Pepper Inc. - Quarter Report: 2019 June (Form 10-Q)

(in millions)

Fair Value

Estimated Life (in years)

Contractual arrangements⁽²⁾

Total other intangible assets

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission file number 001-33829



	Keurig Dr Pepper Inc.
	(Exact name of registrant as specified in its charter)



Delaware		98-0517725
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

	53 South Avenue
	Burlington,	Massachusetts
	01803
(Address of principal executive offices)
	(802)	244-5621
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Securities Exchange Act of 1934.

Large Accelerated Filer ☒ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	KDP	New York Stock Exchange

As of August 6, 2019, there were 1,406,735,468 shares of the registrant's common stock, par value $0.01 per share, outstanding.

KEURIG DR PEPPER INC.

FORM 10-Q TABLE OF CONTENTS



				Page
Part I.	Financial Information
	Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Statements of Income		1
		Condensed Consolidated Statements of Comprehensive Income		2
		Condensed Consolidated Balance Sheets		3
		Condensed Consolidated Statements of Cash Flows		4
		Condensed Consolidated Statements of Changes in Stockholders' Equity		5
		Notes to Condensed Consolidated Financial Statements		6
		1	Background and Basis of Presentation	6
		2	Acquisitions and Investments in Unconsolidated Affiliates	8
		3	Leases	12
		4	Goodwill and Other Intangible Assets	14
		5	Restructuring and Integration Costs	15
		6	Income Taxes	16
		7	Long-Term Obligations and Borrowing Arrangements	16
		8	Derivatives	19
		9	Earnings Per Share	21
		10	Stock-Based Compensation	22
		11	Accumulated Other Comprehensive Income (Loss)	22
		12	Other Financial Information	23
		13	Supplemental Cash Flow Information	25
		14	Commitments and Contingencies	25
		15	Related Parties	26
		16	Segments	27
		17	Revenue Recognition	28
		18	Guarantor and Non-Guarantor Financial Information	29
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		34
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		63
	Item 4.	Controls and Procedures		64

Part II.	Other Information
	Item 1.	Legal Proceedings		65
	Item 1A.	Risk Factors		65
	Item 6.	Exhibits		66

Table of Contents

PART I - FINANCIAL INFORMATION


ITEM 1.	Financial Statements (Unaudited)

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Second Quarter and First Six Months of 2019 and 2018

(Unaudited)



	Second Quarter					First Six Months
(in millions, except per share data)	2019		2018			2019		2018
Net sales	$	2,812	$	949		$	5,316	$	1,897
Cost of sales	1,186		458			2,292		925
Gross profit	1,626		491			3,024		972
Selling, general and administrative expenses	1,028		321			1,939		621
Other operating expense, net	11		3			—		6
Income from operations	587		167			1,085		345
Interest expense	170		51			339		49
Interest expense - related party	—		26			—		51
Loss on early extinguishment of debt	—		—			9		2
Other expense (income), net	1		(8		)	6		5
Income before provision for income taxes	416		98			731		238
Provision for income taxes	102		13			187		64
Net income	314		85			544		174
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—		2			—		3
Net income attributable to KDP	$	314	$	83		$	544	$	171
Earnings per common share:
Basic	$	0.22	$	0.10		$	0.39	$	0.21
Diluted	0.22		0.10			0.38		0.21
Weighted average common shares outstanding:
Basic	1,406.7		790.5			1,406.5		790.5
Diluted	1,419.2		790.5			1,418.5		790.5

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

Table of Contents

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Second Quarter and First Six Months of 2019 and 2018

(Unaudited)



	Second Quarter				First Six Months
(in millions)	2019		2018		2019		2018
Comprehensive income	$	402	$	66	$	725	$	130

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

Table of Contents

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2019 and December 31, 2018

(Unaudited)



	June 30,		December 31,
(in millions, except share and per share data)	2019		2018
Assets
Current assets:
Cash and cash equivalents	$	106	$	83
Restricted cash and restricted cash equivalents	44		46
Trade accounts receivable, net	1,068		1,150
Inventories	686		626
Prepaid expenses and other current assets	317		254
Total current assets	2,221		2,159
Property, plant and equipment, net	2,290		2,310
Investments in unconsolidated affiliates	170		186
Goodwill	20,039		20,011
Other intangible assets, net	24,228		23,967
Other non-current assets	572		259
Deferred tax assets	27		26
Total assets	$	49,547	$	48,918
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	2,909	$	2,300
Accrued expenses	869		1,012
Structured payables	595		526
Short-term borrowings and current portion of long-term obligations	1,806		1,458
Other current liabilities	516		406
Total current liabilities	6,695		5,702
Long-term obligations	13,164		14,201
Deferred tax liabilities	6,034		5,923
Other non-current liabilities	771		559
Total liabilities	26,664		26,385
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued	—		—
Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,406,706,062 and 1,405,944,922 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	14		14
Additional paid-in capital	21,524		21,471
Retained earnings	1,294		1,178
Accumulated other comprehensive income (loss)	51		(130		)
Total stockholders' equity	22,883		22,533
Total liabilities and stockholders' equity	$	49,547	$	48,918

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

Table of Contents

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the First Six Months of 2019 and 2018

(Unaudited)



	First Six Months
(in millions)	2019			2018
Operating activities:
Net income	$	544		$	174
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	172			66
Amortization expense	172			65
Provision for sales returns	16			22
Deferred income taxes	(5		)	(38		)
Employee stock-based compensation expense	34			20
Loss on early extinguishment of debt	9			2
Unrealized (gain) loss on foreign currency	(25		)	13
Unrealized (gain) loss on derivatives	43			(39		)
Equity in earnings of unconsolidated affiliates	27			7
Other, net	(19		)	20
Changes in assets and liabilities:
Trade accounts receivable	68			119
Inventories	(56		)	(30		)
Income taxes receivable and payables, net	64			21
Other current and non-current assets	(149		)	(59		)
Accounts payable and accrued expenses	339			215
Other current and non-current liabilities	(31		)	—
Net change in operating assets and liabilities	235			266
Net cash provided by operating activities	1,203			578
Investing activities:
Acquisitions of businesses	(8		)	—
Issuance of related party note receivable	(14		)	(2		)
Investments in unconsolidated affiliates	(11		)	(22		)
Purchases of property, plant and equipment	(118		)	(44		)
Proceeds from sales of property, plant and equipment	19			—
Purchases of intangibles	(4		)	(12		)
Other, net	22			—
Net cash used in investing activities	(114		)	(80		)
Financing activities:
Proceeds from senior unsecured notes	—			8,000
Proceeds from term loan	2,000			—
Net issuance of commercial paper	381			—
Proceeds from structured payables	78			—
Payments on structured payables	(9		)	—
Payments on senior unsecured notes	(250		)	—
Repayment of term loan	(2,848		)	(254		)
Payments on finance leases	(19		)	(9		)
Deferred financing charges paid	—			(35		)
Cash contributions from redeemable non-controlling interest shareholders	—			12
Cash dividends paid	(423		)	(23		)
Other, net	10			(1		)
Net cash (used in) provided by financing activities	(1,080		)	7,690
Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from:
Operating, investing and financing activities	9			8,188
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents	12			1
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	139			95
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	160		$	8,284

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

Table of Contents

KEURIG DR PEPPER INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

For the Second Quarter and First Six Months of 2019 and 2018

(Unaudited)



	Common Stock Issued			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
(in millions, except per share data)	Shares	Amount		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balance as of January 1, 2019	1,405.9	$	14	$	21,471	$	1,178		$	(130	)	$	22,533
Adoption of new accounting standards	—	—		—		(5		)	—			(5		)
Net income attributable to KDP	—	—		—		230			—			230
Other comprehensive income	—	—		—		—			93			93
Dividends declared, $0.15 per share	—	—		—		(211		)	—			(211		)
Measurement period adjustment	—	—		11		—			—			11
Shares issued under employee stock-based compensation plans and other	0.8	—		—		—			—			—
Stock-based compensation and stock options exercised	—	—		23		—			—			23
Balance as of March 31, 2019	1,406.7	14		21,505		1,192			(37		)	22,674
Net income attributable to KDP	—	—		—		314			—			314
Other comprehensive income	—	—		—		—			88			88
Dividends declared, $0.15 per share	—	—		—		(212		)	—			(212		)
Stock-based compensation and stock options exercised	—	—		19		—			—			19
Balance as of June 30, 2019	1,406.7	$	14	$	21,524	$	1,294		$	51		$	22,883

Balance as of January 1, 2018	790.5	$	8	$	6,377	$	914		$	99		$	7,398
Adoption of new accounting standards	—	—		—		(4		)	—			(4		)
Net income attributable to KDP	—	—		—		88			—			88
Other comprehensive loss	—	—		—		—			(24		)	(24		)
Dividends declared	—	—		—		(11		)	—			(11		)
Adjustment of non-controlling interests to fair value	—	—		—		(13		)	—			(13		)
Balance as of March 31, 2018	790.5	8		6,377		974			75			7,434
Net income attributable to KDP	—	—		—		83			—			83
Other comprehensive loss	—	—		—		—			(16		)	(16		)
Dividends declared	—	—		—		(12		)	—			(12		)
Adjustment of non-controlling interests to fair value	—	—		—		(5		)	—			(5		)
Balance as of June 30, 2018	790.5	$	8	$	6,377	$	1,040		$	59		$	7,484

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

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

ORGANIZATION

On January 29, 2018, Dr Pepper Snapple Group, Inc. ("DPS") entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among DPS, Maple Parent Holdings Corp. (“Maple”) and Salt Merger Sub, Inc. (“Merger Sub”), whereby Merger Sub would be merged with and into Maple, with Maple surviving the merger as a wholly-owned subsidiary of DPS (the “DPS Merger”). The DPS Merger was consummated on July 9, 2018 (the "Merger Date"), at which time DPS changed its name to "Keurig Dr Pepper Inc.".

References in this Quarterly Report on Form 10-Q to "KDP" or "the Company" refer to Keurig Dr Pepper Inc. and all entities included in the unaudited condensed consolidated financial statements.

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

BASIS OF PRESENTATION

For financial reporting and accounting purposes, Maple was the acquirer of DPS upon completion of the DPS Merger. The unaudited condensed consolidated financial statements as of June 30, 2019 and December 31, 2018 and for the second quarter and first six months of 2019 and 2018 reflect the results of operations and financial position of Maple for the periods presented. Amounts reported as of June 30, 2019 and December 31, 2018, and for the second quarter and first six months of 2019, include the results of operations and financial position of DPS, as the DPS Merger was completed on July 9, 2018.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with KDP's consolidated financial statements and accompanying notes, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Except as otherwise specified, references to the "second quarter" indicate the Company's quarterly periods ended June 30, 2019 and 2018.

PRINCIPLES OF CONSOLIDATION

KDP consolidates all wholly owned subsidiaries. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes KDP's proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors or similar governing body, participation in policy-making decisions and material intercompany transactions.

The Company is also required to consolidate entities that are variable interest entities (“VIEs”) of which KDP is the primary beneficiary. Judgments are made in assessing whether KDP is the primary beneficiary, including determination of the activities that most significantly impact the VIE’s economic performance.

KDP eliminates from its financial results all intercompany transactions between entities included in the unaudited condensed consolidated financial statements.

USE OF ESTIMATES

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

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

RECLASSIFICATIONS

The Company reclassified the following amounts from the unaudited condensed consolidated balance sheets as of December 31, 2018 in connection with the adoption of Accounting Standards Codification ("ASC") Topic 842, Leases ("ASC 842"):



(in millions)	Prior Presentation	Revised Presentation	December 31, 2018
Capital lease and financing obligations	Current portion of capital lease and financing obligations	Other current liabilities	$	26
Capital lease and financing obligations	Capital lease and financing obligations, less current	Other non-current liabilities	305

Refer to Recently Adopted Provisions of U.S. GAAP below for further information about the adoption of ASC 842. Refer to Note 3 for information about the Company's leases and Note 12 for disclosure of the components of other current liabilities and other non-current liabilities.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The standard provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company is currently evaluating the impact of ASU 2016-13 on the Company's unaudited condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements ("ASU 2018-13"). The objective of the ASU is to improve the disclosures related to fair value measurement by removing, modifying, or adding disclosure requirements related to recurring and non-recurring fair value measurements. ASU 2018-13 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company is currently assessing the changes in disclosure requirements and does not believe there will be a material impact to KDP's unaudited condensed consolidated financial statements.

RECENTLY ADOPTED PROVISIONS OF U.S. GAAP

Leases

As of January 1, 2019, the Company adopted ASC 842. ASC 842 replaced the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures.

The Company elected to apply the optional transition method provided by ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which allows companies to adopt the standard on a modified retrospective basis and to apply the new leases standard as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, amounts reported in the unaudited condensed consolidated financial statements for all periods prior to January 1, 2019 have not been recast under ASC 842 and continue to be reported in accordance with ASC 840. The Company elected the package of practical expedients which allows the Company to carry forward its historical assessments of whether contracts contain leases, lease classification, and initial direct costs, for leases in existence prior to January 1, 2019.

The adoption of ASC 842 resulted in an increase to KDP's total assets of approximately $314 million, an increase to KDP's total liabilities of approximately $319 million, and an impact to KDP's retained earnings of approximately $5 million, as of January 1, 2019.

Refer to Note 3 for additional information.

Other Accounting Standards

As of January 1, 2019, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") on a prospective basis. The objective of the ASU is to improve the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance. The adoption of ASU 2017-12 did not have a material impact on the Company's unaudited condensed consolidated financial statements.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

As of January 1, 2019, the Company early adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. The ASU was adopted on a prospective basis and did not have a material impact on the Company's unaudited condensed consolidated financial statements.

2. Acquisitions and Investments in Unconsolidated Affiliates

ACQUISITION OF DR PEPPER SNAPPLE GROUP, INC.

Overview and Total Consideration Exchanged

As discussed in Note 1, General, Maple merged with DPS on July 9, 2018. The DPS Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations. Maple was considered to be the financial and accounting acquirer, and DPS was considered the legal acquirer. Under the acquisition method of accounting, total consideration exchanged was $22,482 million.

Allocation of Consideration

The Company's preliminary allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the DPS Merger is based on estimated fair values as of July 9, 2018. The following is a summary of the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the DPS Merger as of June 30, 2019:



(in millions)	Initial Allocation of Consideration			Measurement Period Adjustments			Allocation of Consideration as of June 30, 2019
Cash and cash equivalents	$	147		$	—		$	147
Investments in unconsolidated affiliates	90			—			90
Property, plant and equipment⁽¹⁾	1,549			(74		)	1,475
Other intangible assets	20,404			(326		)	20,078
Long-term obligations	(4,049		)	—			(4,049		)
Finance leases	(214		)	9			(205		)
Acquired assets, net of assumed liabilities⁽²⁾	107			(26		)	81
Deferred tax liabilities, net of deferred tax assets⁽³⁾	(4,959		)	(82		)	(5,041		)
Goodwill	9,407			499			9,906
Total consideration exchanged	$	22,482		$	—		$	22,482
Fair value of stock and replacement equity awards not converted to cash	3,643			—			3,643
Acquisition of business	$	18,839		$	—		$	18,839

(1)

The Company valued personal property using a combination of the market approach and the cost approach, which is based upon current replacement or reproduction cost of the asset as newly adjusted for any depreciation attributable to physical, functional and economic factors. The Company assigned personal property a useful life ranging from 1 year to 24 years. We valued real property using the cost approach and land using the sales comparison approach. The Company assigned real property a useful life between 1 year and 41 years.

(2)

The Company used existing carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as the Company determined that they represented the fair value of those items as of the Merger Date. The Company valued work-in-process ("WIP") and finished goods inventory using a net realizable value approach resulting in a step-up of $131 million which was recognized in the cost of goods sold for the third quarter of 2018 as the related inventory was sold during that period. Raw materials were carried at net book value.


(3)	Net deferred tax liabilities represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

The DPS Merger resulted in $9,906 million of goodwill as of June 30, 2019. The goodwill recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, direct procurement savings on overlapping materials, purchasing scale on indirect spend categories and optimization of duplicate positions and processes. The Company may also recognize revenue synergies, driven by a strong portfolio of brands with exposure to higher growth segments and the ability to leverage our collective distribution strength. The goodwill created in the DPS Merger is not deductible for tax purposes.

The preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:



(in millions)	Fair Value		Estimated Life (in years)
Brands⁽¹⁾	$	19,556	n/a
Contractual arrangements⁽²⁾	127		n/a
Customer relationships⁽³⁾	390		10-40
Favorable leases⁽⁴⁾	5		5-12
Total other intangible assets	$	20,078


(1)	The Company valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.


(2)	The Company valued contractual arrangements with bottlers and distributors utilizing the distributor method, a form of the income approach.


(3)	The Company identified two types of customer relationships, retail and food service. We preliminarily valued retail and food service customer relationships utilizing the distributor method, a form of the income approach.


(4)	The Company valued favorable leases utilizing the income approach.

Pro Forma Information

Assuming DPS had been acquired as of December 31, 2016, and the results of DPS had been included in operations beginning on January 1, 2017, the following tables provide estimated unaudited pro forma results of operations for the second quarter and first six months of 2018 under U.S. GAAP.

The estimated pro forma net income includes the alignment of accounting policies, the effect of fair value adjustments related to the DPS Merger, the associated tax effects and the impact of the additional debt to finance the DPS Merger.



	Second Quarter		First Six Months
(Unaudited, in millions)	2018		2018
Net sales	$	2,822	$	5,351
Net income	323		534

Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the DPS Merger been completed on the date indicated or the future operating results.

ACQUISITION OF BIG RED

Overview and Purchase Price

On July 9, 2018, KDP entered into an Agreement and Plan of Merger (the "Big Red Merger Agreement") with Big Red Group Holdings, LLC ("Big Red"), pursuant to which we agreed to acquire Big Red for an enterprise value of $300 million, subject to certain adjustments outlined in the Big Red Merger Agreement (the "Big Red Acquisition"). On August 31, 2018 (the "Big Red Merger Date"), the Company completed the Big Red Acquisition.

Allocation of Purchase Price

The Company's preliminary allocation of purchase price to the net tangible and intangible assets acquired and liabilities assumed in the Big Red Acquisition is based on estimated fair values as of the Big Red Acquisition Date.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

The following is a summary of the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the Big Red Acquisition as of June 30, 2019:



(in millions)	Initial Allocation of Consideration			Measurement Period Adjustments			Allocation of Consideration as of June 30, 2019
Cash and cash equivalents	$	3		—			$	3
Other intangible assets	240			(2		)	238
Assumed liabilities, net of acquired assets⁽¹⁾	(28		)	(20		)	(48		)
Goodwill	89			24			113
Total consideration exchanged⁽²⁾	$	304		$	2		$	306
Less: Company's previous ownership interest	22			—			22
Less: Holdback placed in escrow	15			—			15
Acquisition of business	$	267		$	2		$	269


(1)	The Company valued WIP and finished goods inventory using a net realizable value approach, which resulted in a step-up of $2 million which was recognized in the cost of goods sold for the year ended December 31, 2018 as the related inventory was sold during that period. Raw materials were carried at net book value.


(2)	The Company paid $2 million in additional consideration during the fourth quarter of 2018 as a result of working capital adjustments determined pursuant to the terms of the Big Red Acquisition Agreement.

The Big Red Acquisition resulted in $113 million of goodwill. The goodwill recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, purchasing scale on various spend categories and optimization of duplicate positions and processes. The goodwill created in the Big Red Acquisition is not deductible for tax purposes.

The preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:



(in millions)	Fair Value		Estimated Life (in years)
Brands⁽¹⁾	$	220	n/a
Brands⁽¹⁾	11		5
Contractual arrangements⁽²⁾	6		12
Customer relationships⁽³⁾	1		8-40
Total other intangible assets	$	238


(1)	The Company valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.


(2)	The Company valued contractual arrangements with bottlers and distributors utilizing the distributor method, a form of the income approach.


(3)	The Company identified two types of customer relationships, retail and industrial. We valued retail and industrial customer relationships utilizing the distributor method, a form of the income approach.

ACQUISITION OF CORE NUTRITION, LLC

Overview and Purchase Price

On September 27, 2018, KDP entered into a definitive agreement with Core Nutrition, LLC ("Core"), pursuant to which we agreed to acquire Core for merger consideration, which represented an enterprise value of $525 million (subject to customary post-closing working capital and other adjustments), comprised substantially of shares of common stock of KDP, subject to certain adjustments paid in cash (the "Core Acquisition"). On November 30, 2018 (the "Core Acquisition Date"), the Company completed the Core Acquisition.

Allocation of Purchase Price

The Company's preliminary allocation of purchase price to the net tangible and intangible assets acquired and liabilities assumed in the Core Acquisition is based on estimated fair values as of the Core Acquisition Date.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

The following is a summary of the preliminary allocation of purchase price to the estimated fair values of assets acquired and liabilities assumed in the Core Acquisition as of June 30, 2019:



(in millions)	Initial Allocation of Consideration			Measurement Period Adjustments			Allocation of Consideration as of June 30, 2019
Cash and cash equivalents	$	10		$	—		$	10
Other intangible assets	273			—			273
Assumed liabilities, net of acquired assets⁽¹⁾	(12		)	(3		)	(15		)
Goodwill	236			12			248
Total purchase price	$	507		$	9		$	516
Company's previous ownership interest	31			—			31
Less: Holdback placed in Escrow	27			(2		)	25
Acquisition of business	$	449		$	11		$	460


(1)	The Company preliminarily valued WIP and finished goods inventory using a net realizable value approach resulting in a step-up of $4 million, of which $1 million and $3 million was recognized in cost of goods sold in 2018 and 2019, respectively, due to the timing of the sale of the related inventory. Raw materials were carried at net book value.

The Core Acquisition preliminarily resulted in $248 million of goodwill. The preliminary goodwill to be recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, purchasing scale on various spend categories and optimization of duplicate positions and processes. The goodwill created in the Core Acquisition is expected to be deductible for tax purposes.

The preliminary allocation of purchase price to other intangible assets acquired is as follows:


(1)	The Company preliminarily valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.


(2)	The Company preliminarily valued contractual arrangements utilizing the distributor method, a form of the income approach.

OTHER ACQUISITIONS

The Company also spent an aggregate of $8 million in connection with other immaterial acquisitions during the first six months of 2019, which resulted in the recognition of fixed assets, intangible assets and goodwill. Pro forma financial information has not been presented for these acquisitions as the impact to our unaudited condensed consolidated financial statements was not material.

TRANSACTION EXPENSES

The following table provides information about the Company's transaction expenses incurred during the second quarter and first six months of 2019 and 2018:



	Second Quarter				First Six Months
(in millions)	2019		2018		2019		2018
DPS Merger	$	4	$	39	$	6	$	75
Other transaction expenses	4		—		7		—
Total transaction expenses incurred	$	8	$	39	$	13	$	75

Transaction expenses primarily consisted of professional fees for advisory and consulting services and other incremental costs related to the acquisitions.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The following table summarizes investments in unconsolidated affiliates as of June 30, 2019 and December 31, 2018:



			June 30,		December 31,
(in millions)	Ownership Interest		2019		2018
BA Sports Nutrition, LLC ("BA")	12.5	%	$	52	$	62
Bedford Systems, LLC	30.0	%	65		79
Dyla LLC	12.6	%	14		15
Force Holdings LLC	33.3	%	5		6
Beverage startup companies	(various)		28		19
Other	(various)		6		5
Investments in unconsolidated affiliates			$	170	$	186

3. Leases

The Company leases certain facilities and machinery and equipment, including fleet. These leases expire at various dates through 2044. Some lease agreements contain standard renewal provisions that allow us to renew the lease at rates equivalent to fair market value at the end of the lease term. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.

Operating leases are included within other non-current assets, other current liabilities, and other non-current liabilities within our unaudited Condensed Consolidated Balance Sheets. Refer to Note 12 for further information. Finance leases are included within property, plant and equipment, net, other current liabilities, and other non-current liabilities. Leases with an initial term of 12 months or less are not recognized on the balance sheet.

Right of use assets and lease liabilities are recognized in the unaudited Condensed Consolidated Balance Sheets at the present value of future minimum lease payments over the lease term on the commencement date. As the rate implicit in the lease is generally not provided to the Company, KDP uses its incremental borrowing rate based on information available at the commencement date to determine the present value of future minimum lease payments. KDP's incremental borrowing rate is determined using a portfolio of secured borrowing rates commensurate with the term of the lease and is reassessed on a quarterly basis.

KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

The following table presents the components of lease cost:



	Second Quarter			First Six Months
(in millions)	2019			2019
Operating lease cost	$	20		$	40
Finance lease cost
Amortization of right-of-use assets	10			20
Interest on lease liabilities	3			7
Variable lease cost⁽¹⁾	8			14
Short-term lease cost	2			3
Sublease income	(1		)	(1		)
Total lease cost	$	42		$	83


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

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

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



	First Six Months
(in millions)	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	38
Operating cash flows from finance leases	7
Financing cash flows from finance leases	19

The following table presents information about the Company's weighted average discount rate and remaining lease term as of June 30, 2019:



Weighted average discount rate
Operating leases	4.6	%
Finance leases	5.3	%
Weighted average remaining lease term
Operating leases	8 years
Finance leases	12 years

Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as follows:



(in millions)	Operating Leases			Finance Leases
Remainder of 2019	$	39		$	26
2020	70			49
2021	56			42
2022	47			36
2023	39			33
2024	37			30
Thereafter	133			171
Total future minimum lease payments	421			387
Less: imputed interest	(70		)	(97		)
Present value of minimum lease payments	$	351		$	290

Future minimum lease payments under non-cancellable leases as of December 31, 2018 under ASC 840 were as follows:



(in millions)	Operating Leases		Capital Leases			Financing Obligations
2019	$	58	$	35		$	10
2020	53		34			10
2021	44		33			10
2022	34		33			10
2023	25		30			10
Thereafter	98		189			62
Total future minimum lease payments	$	312	354			112
Less: imputed interest			(98		)	(37		)
Present value of minimum lease payments			$	256		$	75

SIGNIFICANT LEASES THAT HAVE NOT YET COMMENCED

As of June 30, 2019, the Company has entered into leases that have not yet commenced with estimated aggregated future lease payments of approximately $470 million. These leases will commence between 2020 and 2021, with initial lease terms ranging from 7 years to 16 years.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

4. Goodwill and Other Intangible Assets

GOODWILL

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



	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages			Unallocated			Total
Balance as of January 1, 2019	$	9,725	$	4,878	$	4,265	$	618		$	525		$	20,011
Foreign currency translation	46		27		16		14			—			103
Acquisitions⁽¹⁾	3		254		242		(73		)	(501		)	(75		)
Balance as of June 30, 2019	$	9,774	$	5,159	$	4,523	$	559		$	24		$	20,039


(1)	Amounts primarily represent measurement period adjustments for the DPS Merger, the Big Red Acquisition, and the Core Acquisition. Refer to Note 2 for further information.

INTANGIBLE ASSETS OTHER THAN GOODWILL

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



	June 30, 2019		December 31, 2018
Brands⁽¹⁾	$	20,025	$	19,712
Trade names	2,479		2,479
Contractual arrangements	122		119
Distribution rights	2		—
Total	$	22,628	$	22,310


(1)	Approximately $113 million of the increase in brands with indefinite lives was due to foreign currency translation during the period. The remaining change represents measurement period adjustments for the DPS Merger. Refer to Note 2 for further information.

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



	June 30, 2019							December 31, 2018
(in millions)	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Acquired technology	$	1,146	$	(218	)	$	928	$	1,146	$	(182	)	$	964
Customer relationships	638		(85		)	553		629		(67		)	562
Trade names	127		(47		)	80		127		(40		)	87
Contractual arrangements	25		(2		)	23		26		(1		)	25
Brands	11		(1		)	10		9		—			9
Distribution rights	6		—			6		—		—			—
Favorable leases⁽¹⁾	—		—			—		13		(3		)	10
Total	$	1,953	$	(353	)	$	1,600	$	1,950	$	(293	)	$	1,657


(1)	Amounts recorded as favorable lease intangible assets were reclassified to operating lease right-of-use assets in connection with the adoption of ASC 842 as of January 1, 2019. Refer to Note 3 for further information regarding the adoption of ASC 842.

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



	Second Quarter				First Six Months
(in millions)	2019		2018		2019		2018
Amortization expense for intangible assets with definite lives	$	32	$	29	$	63	$	59

Amortization expense of these intangible assets over the remainder of 2019 and the next five years is expected to be as follows:



	Remainder of 2019		For the Years Ending December 31,
(in millions)	Remainder of 2019		2020		2021		2022		2023		2024
Expected amortization expense for intangible assets with definite lives	$	63	$	126	$	126	$	126	$	126	$	121

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

IMPAIRMENT TESTING

KDP conducts impairment tests on goodwill and all indefinite lived intangible assets annually, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. The Company did not identify any circumstances that indicated that the carrying amount of any goodwill or any indefinite lived intangible asset may not be recoverable as of June 30, 2019.

5. Restructuring and Integration Costs

The Company implements restructuring programs from time to time and incurs costs that are designed to improve operating effectiveness and lower costs. When the Company implements these programs, the Company incurs expenses, such as employee separations, lease terminations and other direct exit costs, that qualify as exit and disposal costs under U.S. GAAP.

The Company also incurs expenses that are an integral component of, and directly attributable to, its restructuring activities, which do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments, implementation costs and other incremental costs. These costs are recorded within SG&A expenses on the income statement and are held primarily within unallocated corporate costs.

Restructuring and integration charges incurred were as follows:



	Second Quarter				First Six Months
(in millions)	2019		2018		2019		2018
Keurig 2.0 exit	$	—	$	7	$	1	$	12
Integration program	32		26		92		26
Other restructuring programs	—		1		—		2
Total restructuring and integration charges	$	32	$	34	$	93	$	40

Restructuring liabilities that qualify as exit and disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements. Restructuring liabilities as of June 30, 2019 and December 31, 2018 along with charges to expense, cash payments and non-cash charges for the period were as follows:



(in millions)	Workforce Reduction Costs			Other⁽¹⁾			Total
Balance as of December 31, 2018	$	28		$	1		$	29
Charges to expense	10			—			10
Cash payments	(34		)	—			(34		)
Non-cash adjustment items	1			(1		)	—
Balance as of June 30, 2019	$	5		$	—		$	5


(1)	Primarily reflects activities associated with the closure of certain facilities, excluding contract termination costs, which include any associated asset write-downs and accelerated depreciation.

RESTRUCTURING PROGRAMS

Integration Program

As part of the DPS Merger, the Company established a transformation management office to enable integration and maximize value capture. The Company developed a program to deliver $600 million in synergies over a three-year period through supply chain optimization, reduction of indirect spend through new economies of scale, elimination of duplicative support functions and advertising and promotion optimization. The Company expects to incur total cash expenditures of $750 million, comprised of both capital expenditures and expense, and expects to complete the program by 2021. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $247 million, primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through June 30, 2019.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

6. Income Taxes

Our effective tax rates were as follows:



	Second Quarter				First Six Months
	2019		2018		2019		2018
Effective tax rate	24.5	%	13.3	%	25.6	%	26.9	%

The increase in our effective tax rate from the second quarter of 2018 to the second quarter of 2019 was primarily due to the benefit received in the second quarter of 2018 from refining the estimated impact related to the legislation commonly known as the Tax Cuts and Jobs Act, which was enacted on December 22, 2017 (“TCJA”). The decrease in our effective tax rate from the first six months of 2018 to the first six months of 2019 was primarily due to reduction in the U.S. federal tax rate from 24.5% to 21% and exclusion of DPS Merger-related non-deductible transaction costs, partially offset by the loss of tax benefits associated with the U.S. domestic manufacturing deduction in 2019. The TCJA reduced the U.S. federal statutory tax rate from 35% to 21% and eliminated the domestic manufacturing deduction. Guidance under the TCJA for non-calendar year filers resulted in a 24.5% federal statutory rate for companies with a September tax year-end for the period ended June 30, 2018.

7. Long-term Obligations and Borrowing Arrangements

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



(in millions)	June 30, 2019			December 31, 2018
Senior unsecured notes	$	11,785		$	12,019
Term loans	1,724			2,561
Subtotal	13,509			14,580
Less - current portion	(345		)	(379		)
Long-term obligations	$	13,164		$	14,201

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



	Fair Value Hierarchy Level	June 30, 2019				December 31, 2018
(in millions)	Fair Value Hierarchy Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Commercial paper	2	$	1,461	$	1,461	$	1,079	$	1,079
Current portion of long-term obligations:
Senior unsecured notes	2	248		249		250		250
Term loans	2	97		97		129		129
Short-term borrowings and current portion of long-term obligations		$	1,806	$	1,807	$	1,458	$	1,458

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

SENIOR UNSECURED NOTES

The Company's senior unsecured notes (collectively, the "Notes") consisted of the following:



(in millions)			Fair Value Hierarchy Level	June 30, 2019					December 31, 2018
Issuance	Maturity Date	Rate	Fair Value Hierarchy Level	Carrying Value			Fair Value		Carrying Value			Fair Value
2019 Notes⁽¹⁾	January 15, 2019	2.600%	2	$	—		$	—	$	250		$	250
2020 Notes	January 15, 2020	2.000%	2	250			249		250			245
2021 Merger Notes	May 25, 2021	3.551%	2	1,750			1,823		1,750			1,742
2021-A Notes	November 15, 2021	3.200%	2	250			253		250			244
2021-B Notes	November 15, 2021	2.530%	2	250			250		250			240
2022 Notes	November 15, 2022	2.700%	2	250			249		250			237
2023 Merger Notes	May 25, 2023	4.057%	2	2,000			2,152		2,000			1,988
2023 Notes	December 15, 2023	3.130%	2	500			506		500			474
2025 Merger Notes	May 25, 2025	4.417%	2	1,000			1,072		1,000			999
2025 Notes	November 15, 2025	3.400%	2	500			509		500			467
2026 Notes	September 15, 2026	2.550%	2	400			383		400			346
2027 Notes	June 15, 2027	3.430%	2	500			505		500			458
2028 Merger Notes	May 25, 2028	4.597%	2	2,000			2,180		2,000			1,981
2038 Notes	May 1, 2038	7.450%	2	125			163		125			151
2038 Merger Notes	May 25, 2038	4.985%	2	500			548		500			483
2045 Notes	November 15, 2045	4.500%	2	550			554		550			478
2046 Notes	December 15, 2046	4.420%	2	400			398		400			342
2048 Merger Notes	May 25, 2048	5.085%	2	750			839		750			716
Principal amount				$	11,975		$	12,633	$	12,225		$	11,841
Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger				(190		)			(206		)
Carrying amount				$	11,785				$	12,019


(1)	On January 15, 2019, the Company repaid the 2019 Notes at maturity, using Commercial Paper.

The fair value amounts of the Notes were based on current market rates available to the Company. The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all the Notes and related unamortized costs to be incurred at such date. The carrying amount includes the unamortized discounts, debt issuance costs and the fair value adjustment for the DPS Merger.

BORROWING ARRANGEMENTS

Term Loan Agreements

On February 8, 2019, the Company terminated its term loan executed in conjunction with the DPS Merger ("KDP Term Loan") and entered into a new term loan agreement among the Company ("New KDP Term Loan"), the lenders party thereto (the "New Term Lenders"), and JP Morgan, as administrative agent (the "2019 New Term Loan Agreement"), pursuant to which the New Term Lenders provided $2 billion of the New KDP Term Loan to refinance the KDP Term Loan in order to achieve a more favorable interest rate. As a result of the extinguishment of the KDP Term Loan, the Company recorded approximately $3 million of loss on early extinguishment during the first six months of 2019.

The interest rate applicable to the 2019 Term Loan Agreement ranges from a rate equal to LIBOR plus a margin of 0.75% to 1.25% or a base rate plus a margin of 0.00% to 0.25%, depending on the rating of certain indexed debt of KDP. Under the 2019 New Term Loan Agreement, KDP must repay the unpaid principal amount quarterly commencing on March 29, 2019 in an amount equal to 1.25% of the aggregate principal amount made on the effective date of the New KDP Term Loan, resulting in annual mandatory repayments of $100 million. The 2019 Term Loan Agreement matures on February 8, 2023.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

364-Day Credit Agreement

The Company entered into a new credit agreement on May 29, 2019 (the "364-Day Credit Agreement") among the Company, the banks party thereto and JP Morgan, as administrative agent, pursuant to which the Company obtained a $750 million commitment. The 364-Day Credit Agreement is unsecured, and its proceeds may be used for general corporate purposes. Under this credit agreement, $750 million is available for issuance, none of which was utilized as of June 30, 2019.

The interest rate applicable to borrowings under the 364-Day Credit Agreement ranges from a rate equal to LIBOR plus a margin of 1.000% to 1.625% or a base rate plus a margin of 0.000% to 0.625%, depending on the rating of certain index debt of the Company. The 364-Day Credit Agreement will mature on May 27, 2020, subject to the Company’s option to extend the maturity date by one year so long as certain customary conditions are satisfied.

KDP Revolving Credit Facility

The following table provides amounts utilized and available under the Company's revolving credit facilities ("KDP Revolver") as of June 30, 2019:



(in millions)	Amount Utilized		Balances Available
KDP Revolver	$	—	$	2,400
Letters of credit	—		200

The Company's KDP Revolver, 364-Day Credit Agreement and term loans, collectively the ("KDP Credit Agreements"), consisted of the following carrying values and estimated fair values that are not required to be measured at fair value in the unaudited Condensed Consolidated Balance Sheets:



(in millions)		Fair Value Hierarchy Level	June 30, 2019					December 31, 2018
Issuance	Maturity Date	Fair Value Hierarchy Level	Carrying Value			Fair Value		Carrying Value			Fair Value
KDP Term Loan⁽¹⁾	February 2023	2	$	—		$	—	$	2,583		$	2,583
New KDP Term Loan⁽²⁾	February 2023	2	1,735			1,735		—			—
KDP Revolver	February 2023	2	—			—		—			—
364-Day Credit Agreement	May 2020	2	—			—		—			—
Principal amount			$	1,735		$	1,735	$	2,583		$	2,583
Unamortized discounts and debt issuance costs			(11		)			(22		)
Carrying amount			$	1,724				$	2,561

(1)

In January 2019, the Company borrowed $583 million of Commercial Paper to prepay a portion of its outstanding obligations under the KDP Term Loan, all of which was a voluntary prepayment. As a result of these voluntary prepayments, the Company recorded no loss on extinguishment of debt during the second quarter of 2019 and $5 million of loss on early extinguishment during the first six months of 2019. This KDP Term Loan was refinanced with the New KDP Term Loan in February 2019.

(2)

The Company borrowed $65 million and $215 million of Commercial Paper during the second quarter and first six months of 2019, respectively, to prepay a portion of its outstanding obligations under the 2019 New Term Loan Agreement, all of which were voluntary prepayments. As a result of these voluntary prepayments, the Company recorded no loss on extinguishment of debt during the second quarter of 2019 and $1 million of loss on early extinguishment during the first six months of 2019.

As of June 30, 2019, the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements.

Commercial Paper Program

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



	Second Quarter						First Six Months
	2019			2018			2019			2018
Weighted average commercial paper borrowings	$	2,074		$	—		$	1,911		$	—
Weighted average borrowing rates	2.76		%	—		%	2.83		%	—		%

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Letter of Credit Facility

In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility. Under this facility, $100 million is available for the issuance of letters of credit, $48 million of which was utilized as of June 30, 2019 and $52 million of which remains available for use.

8. Derivatives

KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and foreign exchange ("FX") rates.

KDP manages these risks through a variety of strategies, including the use of interest rate contracts, FX forward contracts, commodity forward, future, swap and option contracts and supplier pricing agreements. KDP does not designate these contracts as hedges for accounting purposes, and KDP does not hold or issue derivative financial instruments for trading or speculative purposes.

INTEREST RATES

The Company is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate swaps to provide predictability in the Company's overall cost structure, including both receive-fixed, pay-variable and receive-variable, pay-fixed swaps. A natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in interest expense in the unaudited Condensed Consolidated Statements of Income. These interest rate swap contracts have maturities between approximately 2 years and 19 years as of June 30, 2019.

FOREIGN EXCHANGE

The Company's Canadian and Mexican businesses purchase certain inventory through transactions denominated and settled in U.S. dollars, a currency different from the functional currency of those businesses. The Company additionally has a subsidiary in Canada with intercompany notes denominated and settled in U.S. dollars, a currency different from the functional currency of the Canadian business. These inventory purchases and intercompany notes are subject to exposure from movements in exchange rates. During the second quarter and first six months of 2019 and 2018, the Company held FX forward contracts to economically manage the exposures resulting from changes in these foreign currency exchange rates. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same caption of the unaudited Condensed Consolidated Statements of Income as the associated risk. These FX contracts have maturities ranging from less than 1 month to approximately 5 years as of June 30, 2019.

COMMODITIES

KDP centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. The intent of these contracts is to provide a certain level of predictability in the Company's overall cost structure. During the second quarter and first six months of 2019 and 2018, the Company held forward, future, swap and option contracts that economically hedged certain of its risks. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations. These commodity contracts have maturities ranging from less than 1 month to approximately 6 years as of June 30, 2019.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS

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



	June 30,		December 31,
(in millions)	2019		2018
Interest rate contracts
Receive-fixed, pay-variable interest rate swaps⁽¹⁾	$	50	$	1,070
Receive-variable, pay-fixed interest rate swaps⁽²⁾	575		2,125
FX contracts	475		348
Commodity contracts	271		296


(1)	During the first six months of 2019, the Company elected to terminate $920 million notional amount of receive-fixed, pay-variable interest rate swaps and received cash of $2 million.


(2)	During the first six months of 2019, the Company elected to terminate $1,400 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $38 million.

FAIR VALUE OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS

The following table summarizes the fair value hierarchy and the location of the fair value of the Company's derivative instruments not designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018:



(in millions)	Fair Value Hierarchy Level	Balance Sheet Location	June 30, 2019		December 31, 2018
Assets:
Interest rate contracts	2	Prepaid expenses and other current assets	$	1	$	2
FX contracts	2	Prepaid expenses and other current assets	1		4
Commodity contracts	2	Prepaid expenses and other current assets	8		3
Interest rate contracts	2	Other non-current assets	20		77
FX contracts	2	Other non-current assets	9		15
Commodity contracts	2	Other non-current assets	6		3

Liabilities:
Interest rate contracts	2	Other current liabilities	$	—	$	7
FX contracts	2	Other current liabilities	2		—
Commodity contracts	2	Other current liabilities	27		27
Interest rate contracts	2	Other non-current liabilities	—		6
Commodity contracts	2	Other non-current liabilities	5		10

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

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

IMPACT OF ECONOMIC HEDGES

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



		Second Quarter						First Six Months
(in millions)	Income Statement Location	2019			2018			2019			2018
Interest rate contracts	Interest expense	$	2		$	(6	)	$	4		$	(30	)
FX contracts	Cost of sales	1			—			3			—
FX contracts	Other expense (income), net	—			(7		)	6			(13		)
Commodity contracts	Cost of sales	(3		)	3			12			5
Commodity contracts	SG&A expenses	2			—			(12		)	—
Total		$	2		$	(10	)	$	13		$	(38	)

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

9. Earnings Per Share

Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities.

As a result of the DPS Merger, all historical per share data and number of shares and numbers of equity awards were retroactively adjusted. The following table presents the Company's basic and diluted EPS and shares outstanding:



	Second Quarter				First Six Months
(in millions, except per share data)	2019		2018		2019		2018
Basic EPS:
Net income attributable to KDP	$	314	$	83	$	544	$	171
Weighted average common shares outstanding	1,406.7		790.5		1,406.5		790.5
Earnings per common share — basic	$	0.22	$	0.10	$	0.39	$	0.21
Diluted EPS:
Net income attributable to KDP	$	314	$	83	$	544	$	171
Impact of dilutive securities in Maple Parent Corporation	—		2		—		3
Total	$	314	$	81	$	544	$	168
Weighted average common shares outstanding	1,406.7		790.5		1,406.5		790.5
Effect of dilutive securities:
Stock options	0.5		—		0.7		—
RSUs	12.0		—		11.3		—
Weighted average common shares outstanding and common stock equivalents	1,419.2		790.5		1,418.5		790.5
Earnings per common share — diluted	$	0.22	$	0.10	$	0.38	$	0.21

Anti-dilutive shares excluded from the diluted weighted average shares outstanding calculation	0.1		—		0.1		—

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

10. Stock-Based Compensation

Stock-based compensation expense is primarily recorded in SG&A expenses in the unaudited Condensed Consolidated Statements of Income. The components of stock-based compensation expense are presented below:



	Second Quarter						First Six Months
(in millions)	2019			2018			2019			2018
Total stock-based compensation expense	$	20		$	9		$	34		$	20
Income tax benefit recognized in the Statements of Income	(4		)	(2		)	(7		)	(5		)
Stock-based compensation expense, net of tax	$	16		$	7		$	27		$	15

RESTRICTED STOCK UNITS

The table below summarizes RSU activity:



	RSUs		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2018	18,625,898		$	15.68	3.5	$	478
Granted	5,200,620		26.25
Vested and released	(4,368	)	24.20			—
Forfeited	(1,136,796	)	19.07
Outstanding as of June 30, 2019	22,685,354		$	17.93	3.0	$	656

As of June 30, 2019, there was $297 million of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted average period of 3.9 years.

11. Accumulated Other Comprehensive Income (Loss)

The following table provides a summary of changes in Accumulated Other Comprehensive Income (Loss), net of taxes:



(in millions)	Foreign Currency Translation Adjustments			Pension and PRMB Liabilities			Accumulated Other Comprehensive Income (Loss)
Balance as of April 1, 2019	$	(33	)	$	(4	)	$	(37	)
Other comprehensive income	88			—			88
Balance as of June 30, 2019	$	55		$	(4	)	$	51

Balance as of January 1, 2019	$	(126	)	$	(4	)	$	(130	)
Other comprehensive income	181			—			181
Balance as of June 30, 2019	$	55		$	(4	)	$	51

Balance as of April 1, 2018	$	75		$	—		$	75
Other comprehensive loss	(16		)	—			(16		)
Balance as of June 30, 2018	$	59		$	—		$	59

Balance as of January 1, 2018	$	99		$	—		$	99
Other comprehensive loss	(40		)	—			(40		)
Balance as of June 30, 2018	$	59		$	—		$	59

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

12. Other Financial Information

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



	June 30,		December 31,
(in millions)	2019		2018
Inventories:
Raw materials	$	207	$	204
Work in process	8		7
Finished goods	471		415
Total inventories	$	686	$	626
Prepaid expenses and other current assets:
Other receivables	$	49	$	51
Customer incentive programs	80		12
Derivative instruments	10		9
Prepaid marketing	43		29
Spare parts	45		43
Assets held for sale	7		8
Income tax receivable	13		22
Other	70		80
Total prepaid expenses and other current assets	$	317	$	254
Other non-current assets:
Customer incentive programs	$	29	$	34
Marketable securities - trading⁽¹⁾	40		44
Operating lease right-of-use assets⁽²⁾	355		—
Derivative instruments	35		95
Equity securities without readily determinable fair values	1		1
Non-current restricted cash and restricted cash equivalents	10		10
Related party notes receivable⁽³⁾	32		17
Other	70		58
Total other non-current assets	$	572	$	259


(1)	Fair values of marketable securities are determined using quoted market prices from daily exchange traded markets, based on the closing price as of the balance sheet date, and are classified as Level 1. The fair value of marketable securities was $40 million and $44 million as of June 30, 2019 and December 31, 2018, respectively.


(2)	Refer to Note 3 for additional information.


(3)	Refer to Note 15 for additional information.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)



	June 30,		December 31,
(in millions)	2019		2018
Accrued expenses:
Customer rebates & incentives	$	374	$	342
Accrued compensation	148		214
Insurance reserve	39		37
Accrued interest	53		77
Accrued professional fees	29		113
Other accrued expenses	226		229
Total accrued expenses	$	869	$	1,012
Other current liabilities:
Dividends payable	$	212	$	209
Income taxes payable	110		60
Operating lease liability⁽¹⁾	61		—
Finance lease liability⁽²⁾	37		26
Derivative instruments	29		34
Holdback liabilities	42		44
Other	25		33
Total other current liabilities	$	516	$	406
Other non-current liabilities:
Pension and post-retirement liability	$	29	$	30
Insurance reserves	61		57
Operating lease liability⁽¹⁾	290		—
Finance lease liability⁽²⁾	253		305
Derivative instruments	5		16
Deferred compensation liability	40		44
Other	93		107
Total other non-current liabilities	$	771	$	559


(1)	Refer to Note 3 for additional information.


(2)	Amounts as of December 31, 2018 include capital leases and financing obligations reported under ASC 840. Refer to Notes 1 and 3 for additional information.

ACCOUNTS PAYABLE

KDP entered into an agreement with a third party administrator to allow participating suppliers to track payment obligations from KDP, and if elected, sell payment obligations from KDP to financial institutions. Suppliers can sell one or more of KDP's payment obligations at their sole discretion and the rights and obligations of KDP to its suppliers are not impacted. KDP has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. KDP's obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted. As of June 30, 2019 and December 31, 2018, $2,096 million and $1,676 million, respectively, of KDP's outstanding payment obligations are payable to suppliers who utilize this third party service administrator.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

13. Supplemental Cash Flow Information

The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the unaudited Condensed Consolidated Balance Sheets to the total of the same amounts shown in the unaudited Condensed Consolidated Statements of Cash Flows:



	Fair Value Hierarchy Level	June 30, 2019				December 31, 2018
(in millions)	Fair Value Hierarchy Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and cash equivalents	1	$	106	$	106	$	83	$	83
Restricted cash and restricted cash equivalents⁽¹⁾	1	44		44		46		46
Non-current restricted cash and restricted cash equivalents included in Other non-current assets	1	10		10		10		10
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows		$	160	$	160	$	139	$	139


(1)	Restricted cash and cash equivalents primarily represent amounts held in escrow in connection with the Big Red Acquisition and the Core Acquisition.

The following table provides supplemental cash flow disclosures:



	First Six Months
(in millions)	2019			2018
Supplemental cash flow disclosures of non-cash investing activities:
Measurement period adjustment of Core purchase price	$	(11	)	$	—
Capital expenditures included in accounts payable and accrued expenses	205			39
Purchases of intangibles	2			—
Supplemental cash flow disclosures of non-cash financing activities:
Dividends declared but not yet paid	212			—
Finance lease additions	30			—
Supplemental cash flow disclosures:
Cash paid for interest	272			47
Cash paid for related party interest	—			51
Cash paid for income taxes	142			71

14. Commitments and Contingencies

LEGAL MATTERS

The Company is involved from time to time in various claims, proceedings, and litigation, including those described below. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made.

Proposition 65 Litigation

On May 9, 2011, an organization named Council for Education and Research on Toxics ("CERT") filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against Keurig. The lawsuit is Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182. CERT alleges that Keurig, in addition to nearly one hundred other defendants who manufacture, package, distribute, or sell coffee, failed to warn persons in California that Keurig's coffee products (the "Products") expose persons to the chemical acrylamide in violation of California's Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code section 25249.5, et seq. ("Proposition 65"). CERT seeks equitable relief, including providing warnings to consumers, as well as civil penalties in the amount of the statutory maximum of $2,500 per day per violation of Proposition 65. CERT asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Keurig, as part of a joint defense group organized to defend against the lawsuit, disputes the claims of the Plaintiff. Acrylamide is not added to coffee, but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. Keurig has asserted multiple affirmative defenses. The case was scheduled to proceed to a third phase for trial on damages, remedies and attorneys' fees beginning on October 15, 2018, however on October 12, 2018, the California Court of Appeal granted the defendants' request for a stay of the third phase trial.

The Court of Appeal’s stay order was prompted by a notice published on June 15, 2018 by California’s Office of Environmental Health Hazard Assessment (“OEHHA”) proposing a new Proposition 65 regulation clarifying that cancer warnings are not required for Proposition 65 chemicals, such as acrylamide, that are present in coffee as a result of roasting coffee beans. After two rounds of public comments, the regulation was finalized, adopted and approved by the Office of Administrative Law on June 3, 2019. It will take effect on October 1, 2019. The Court of Appeal has lifted its 2018 stay order. Further litigation is anticipated based on CERT’s contentions that the regulation is legally invalid and, alternatively, cannot be applied to its pending claims.

At this stage of the proceedings, prior to a trial on remedies issues, Keurig is unable to reasonably estimate the potential loss or effect on Keurig or its operations that could be associated with the lawsuit. The trial court has discretion to impose zero penalties against Keurig or to impose significant statutory penalties. Significant labeling or warning requirements that could potentially be imposed by the trial court may increase Keurig's costs and adversely affect sales of coffee products. We can provide no assurances as to the outcome of any litigation.

15. Related Parties

IDENTIFICATION OF RELATED PARTIES

The Company is indirectly controlled by a single stockholder, JAB Holding Company S.a.r.l ("JAB"), a privately held investor group. JAB has ownership control over certain investments that create the following related party transaction types:

•

Coffee Transactions include transactions with Peet's Coffee ("Peet's"), Caribou Coffee ("Caribou"), Panera Bread ("Panera"), Einstein Bros Bagels ("Einstein Bros") and Krispy Kreme Doughnuts ("Krispy Kreme"). The Company manufactures portion packs containing a selection of coffee and tea varieties under Peet’s brands for sale in the U.S. and Canada. As part of this agreement, Peet’s issues purchase orders to the Company for portion packs to be supplied to Peet’s and sold in select channels. In turn, the Company places purchase orders for Peet’s raw materials to manufacture portion packs for sale by the Company in select channels. The Company licenses the Caribou and Krispy Kreme trademarks for use in the Keurig system in the Company owned channels.


•	Restaurant Transactions include transactions with Panera, Peet's, Caribou, Einstein Bros and Krispy Kreme. The Company sells various beverage concentrates and packaged beverages to these companies.

The Company also has rights in certain territories to bottle and/or distribute various brands that the Company does not own. The Company holds investments in certain brand ownership companies. Refer to Note 2 for additional information about the Company's investments in unconsolidated affiliates. The Company purchases inventory from these brand ownership companies and sells finished product to third-party customers primarily in the U.S. Additionally, any transactions with significant partners in these investments, such as Anheuser-Busch InBev ("ABI"), are also included in this line. ABI purchases Clamato from the Company and pays the Company a royalty for use of the brand name.

LINE OF CREDIT WITH BEDFORD

The Company and ABI executed a line of credit agreement with Bedford on March 3, 2017, in conjunction with the creation of the joint venture ("Bedford Credit Agreement"), which was amended on December 7, 2018 to increase the line of credit (the credit agreement, as amended, the "Bedford Credit Agreement"). Under the Bedford Credit Agreement, the Company has committed to provide up to $51 million capacity with a fixed interest rate of 8.1% per annum. The Bedford Credit Agreement matures on March 3, 2024. The Company has outstanding receivable balances on the Bedford Credit Agreement of $32 million and $17 million as of June 30, 2019 and December 31, 2018, respectively.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

16. Segments

Following the DPS Merger as described in Note 2, the Company revised its segment structure to consist of the following four reportable segments as of June 30, 2019 and December 31, 2018, and for the second quarter and first six months of 2019, and recasted for the second quarter and the first six months of 2018:


•	The Coffee Systems segment reflects sales in the U.S. and Canada of the manufacture and distribution of finished goods relating to the Company's coffee system, pods and brewers.


•	The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third-party brands, through both the Direct Store Delivery system and the Warehouse Direct system.


•	The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third-party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands.


•	The Latin America Beverages segment reflects sales in Mexico, the Caribbean, and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.

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

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



	Second Quarter				First Six Months
(in millions)	2019		2018		2019		2018
Segment Results – Net sales
Coffee Systems	$	990	$	949	$	1,958	$	1,897
Packaged Beverages	1,311		—		2,427		—
Beverage Concentrates	370		—		674		—
Latin America Beverages	141		—		257		—
Net sales	$	2,812	$	949	$	5,316	$	1,897



	Second Quarter				First Six Months
(in millions)	2019		2018		2019		2018
Segment Results – Income from operations
Coffee Systems	$	287	$	274	$	580	$	531
Packaged Beverages	186		—		335		—
Beverage Concentrates	244		—		445		—
Latin America Beverages	26		—		37		—
Total income from operations - segments	743		274		1,397		531
Unallocated corporate costs	156		107		312		186
Income from operations	$	587	$	167	$	1,085	$	345

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

17. Revenue Recognition

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

The following table disaggregates the Company's revenue by portfolio for the second quarter and first six months of 2019 and 2018:



(in millions)	Coffee Systems		Packaged Beverages		Beverage Concentrates		Latin America Beverages		Total
For the second quarter of 2019:
CSD⁽¹⁾	$	—	$	541	$	362	$	102	$	1,005
NCB⁽¹⁾	—		662		3		38		703
Pods⁽²⁾	783		—		—		—		783
Appliances	154		—		—		—		154
Other	53		108		5		1		167
Net sales	$	990	$	1,311	$	370	$	141	$	2,812

For the first six months of 2019:
CSD⁽¹⁾	$	—	$	1,063	$	660	$	182	$	1,905
NCB⁽¹⁾	—		1,163		5		74		1,242
Pods⁽²⁾	1,576		—		—		—		1,576
Appliances	277		—		—		—		277
Other	105		201		9		1		316
Net sales	$	1,958	$	2,427	$	674	$	257	$	5,316

For the second quarter of 2018:
CSD⁽¹⁾	$	—	$	—	$	—	$	—	$	—
NCB⁽¹⁾	—		—		—		—		—
Pods⁽²⁾	763		—		—		—		763
Appliances	131		—		—		—		131
Other	55		—		—		—		55
Net sales	$	949	$	—	$	—	$	—	$	949

For the first six months of 2018:
CSD⁽¹⁾	$	—	$	—	$	—	$	—	$	—
NCB⁽¹⁾	—		—		—		—		—
Pods⁽²⁾	1,557		—		—		—		1,557
Appliances	232		—		—		—		232
Other	108		—		—		—		108
Net sales	$	1,897	$	—	$	—	$	—	$	1,897

(1) Represents net sales of owned and Allied Brands within our portfolio.


(2)	Represents net sales from owned brands, partner brands and private label owners. Net sales for partner brands and private label owners are contractual and long term in nature.

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

18. Guarantor and Non-Guarantor Financial Information

The Notes are fully and unconditionally guaranteed by certain direct and indirect subsidiaries of the Company (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by the Company and jointly and severally guarantee, subject to the release provisions described below, the Company's obligations under the Notes. None of the Company's subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries held by Maple 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 other indebtedness of the Company, the Company's exercise of its legal defeasance option with respect to the Notes and the discharge of the Company's obligations under the applicable indenture. The DPS Merger was accounted for under the acquisition method of accounting, using pushdown accounting for the purposes of presenting the following guarantor and non-guarantor financial information.

The second quarter and first six months of 2018 are not presented herein, as amounts reported prior to the DPS Merger are that of Maple, and would therefore be entirely reported within the Non-Guarantors column. Refer to the Condensed Consolidated Statements of Income, Statements of Comprehensive Income, and Statements of Cash Flows for the amounts which would be presented as Non-Guarantors for these historical periods.

The following schedules present the financial information for Keurig Dr Pepper Inc. (the "Parent"), Guarantors and Non-Guarantors. The consolidating schedules are provided in accordance with the reporting requirements of Rule 3-10 under SEC Regulation S-X for guarantor subsidiaries.



	Condensed Consolidating Statements of Income
	For the Second Quarter of 2019
(in millions)	Parent			Guarantors		Non-Guarantors			Eliminations			Total
Net sales	$	—		$	1,660	$	1,207		$	(55	)	$	2,812
Cost of sales	—			661		580			(55		)	1,186
Gross profit	—			999		627			—			1,626
Selling, general and administrative expenses	1			668		359			—			1,028
Other operating expense, net	—			—		11			—			11
Income from operations	(1		)	331		257			—			587
Interest expense	198			3		28			(59		)	170
Interest expense - related party	—			—		—			—			—
Loss on early extinguishment of debt	—			—		—			—			—
Other expense (income), net	(239		)	192		(11		)	59			1
Income before provision for income taxes	40			136		240			—			416
Provision for income taxes	(5		)	42		65			—			102
Income before equity in earnings of consolidated subsidiaries	45			94		175			—			314
Equity in earnings of consolidated subsidiaries	269			14		—			(283		)	—
Net income	$	314		$	108	$	175		$	(283	)	$	314

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)



	Condensed Consolidating Statements of Income
	For the First Six Months of 2019
(in millions)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	—		$	3,070		$	2,345		$	(99	)	$	5,316
Cost of sales	—			1,232			1,159			(99		)	2,292
Gross profit	—			1,838			1,186			—			3,024
Selling, general and administrative expenses	5			1,230			704			—			1,939
Other operating expense, net	—			(10		)	10			—			—
Income from operations	(5		)	618			472			—			1,085
Interest expense	398			7			57			(123		)	339
Interest expense - related party	—			—			—			—			—
Loss on early extinguishment of debt	9			—			—			—			9
Other (income) expense, net	(251		)	147			(13		)	123			6
Income before provision for income taxes	(161		)	464			428			—			731
Provision for income taxes	(54		)	126			115			—			187
Income before equity in earnings of consolidated subsidiaries	(107		)	338			313			—			544
Equity in earnings of consolidated subsidiaries	651			14			—			(665		)	—
Net income	$	544		$	352		$	313		$	(665	)	$	544



	Condensed Consolidating Statements of Comprehensive Income
	For the Second Quarter of 2019
(in millions)	Parent		Guarantors		Non-Guarantors		Eliminations			Total
Comprehensive income	$	402	$	178	$	264	$	(442	)	$	402



	Condensed Consolidating Statements of Comprehensive Income
	For the First Six Months of 2019
(in millions)	Parent		Guarantors		Non-Guarantors		Eliminations			Total
Comprehensive income	$	725	$	497	$	495	$	(992	)	$	725

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)



	Condensed Consolidating Balance Sheets
	As of June 30, 2019
(in millions)	Parent		Guarantors		Non-Guarantors		Eliminations			Total
Current assets:
Cash and cash equivalents	$	—	$	11	$	95	$	—		$	106
Restricted cash and restricted cash equivalents	40		2		2		—			44
Trade accounts receivable, net	—		642		426		—			1,068
Related party receivable	135		74		64		(273		)	—
Inventories	—		250		436		—			686
Prepaid expenses and other current assets	613		199		115		(610		)	317
Total current assets	788		1,178		1,138		(883		)	2,221
Property, plant and equipment, net	—		1,297		993		—			2,290
Investments in consolidated subsidiaries	41,003		4,971		—		(45,974		)	—
Investments in unconsolidated affiliates	—		63		107		—			170
Goodwill	—		8,239		11,800		—			20,039
Other intangible assets, net	—		16,857		7,371		—			24,228
Long-term receivable, related parties	5,066		8,623		—		(13,689		)	—
Other non-current assets	61		248		263		—			572
Deferred tax assets	—		—		27		—			27
Total assets	$	46,918	$	41,476	$	21,699	$	(60,546	)	$	49,547

Current liabilities:
Accounts payable	$	—	$	990	$	1,919	$	—		$	2,909
Accrued expenses	53		596		220		—			869
Structured payables	—		47		548		—			595
Related party payable	74		95		104		(273		)	—
Short-term borrowings and current portion of long-term obligations	1,806		—		—		—			1,806
Other current liabilities	269		679		178		(610		)	516
Total current liabilities	2,202		2,407		2,969		(883		)	6,695
Long-term obligations to third parties	13,164		—		—		—			13,164
Long-term obligations to related parties	8,589		3,440		1,660		(13,689		)	—
Deferred tax liabilities	40		4,107		1,887		—			6,034
Other non-current liabilities	40		495		236		—			771
Total liabilities	24,035		10,449		6,752		(14,572		)	26,664
Total stockholders' equity	22,883		31,027		14,947		(45,974		)	22,883
Total liabilities and stockholders' equity	$	46,918	$	41,476	$	21,699	$	(60,546	)	$	49,547

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)



	Condensed Consolidating Balance Sheets
	As of December 31, 2018
(in millions)	Parent		Guarantors		Non-Guarantors		Eliminations			Total
Current assets:
Cash and cash equivalents	$	—	$	18	$	65	$	—		$	83
Restricted cash and restricted cash equivalents	42		3		1		—			46
Trade accounts receivable, net	—		596		554		—			1,150
Related party receivable	189		71		76		(336		)	—
Inventories	—		226		400		—			626
Prepaid expenses and other current assets	569		110		132		(557		)	254
Total current assets	800		1,024		1,228		(893		)	2,159
Property, plant and equipment, net	—		1,351		959		—			2,310
Investments in consolidated subsidiaries	40,119		4,882		—		(45,001		)	—
Investments in unconsolidated affiliates	—		63		123		—			186
Goodwill	50		8,371		11,590		—			20,011
Other intangible assets, net	—		16,583		7,384		—			23,967
Long-term receivable, related parties	5,503		7,827		—		(13,330		)	—
Other non-current assets	64		41		154		—			259
Deferred tax assets	—		—		26		—			26
Total assets	$	46,536	$	40,142	$	21,464	$	(59,224	)	$	48,918

Current liabilities:
Accounts payable	$	—	$	497	$	1,803	$	—		$	2,300
Accrued expenses	78		610		324		—			1,012
Structured payables	—		47		479		—			526
Related party payable	65		106		165		(336		)	—
Short-term borrowings and current portion of long-term obligations	1,458		—		—		—			1,458
Other current liabilities	278		626		59		(557		)	406
Total current liabilities	1,879		1,886		2,830		(893		)	5,702
Long-term obligations to third parties	14,201		—		—		—			14,201
Long-term obligations to related parties	7,827		3,369		2,134		(13,330		)	—
Deferred tax liabilities	46		4,075		1,802		—			5,923
Other non-current liabilities	50		337		172		—			559
Total liabilities	24,003		9,667		6,938		(14,223		)	26,385
Total stockholders' equity	22,533		30,475		14,526		(45,001		)	22,533
Total liabilities and stockholders' equity	$	46,536	$	40,142	$	21,464	$	(59,224	)	$	48,918

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KEURIG DR PEPPER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)



	Condensed Consolidating Statements of Cash Flows
	For the First Six Months of 2019
(in millions)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Operating activities:
Net cash (used in) provided by operating activities	$	(178	)	$	812		$	581		$	(12	)	$	1,203
Investing activities:
Acquisitions of businesses	—			(3		)	(5		)	—			(8		)
Collections on (issuances of) related party notes receivable	535			(789		)	(14		)	254			(14		)
Investments in unconsolidated affiliates	—			(11		)	—			—			(11		)
Purchases of property, plant and equipment	—			(44		)	(74		)	—			(118		)
Proceeds from sales of property, plant and equipment	—			10			9			—			19
Purchases of intangibles	—			(4		)	—			—			(4		)
Return of capital from investments in consolidated subsidiaries	—			32			—			(32		)	—
Other, net	10			—			12			—			22
Net cash provided by (used in) investing activities	545			(809		)	(72		)	222			(114		)
Financing activities:
Proceeds from (payments of) related party notes	763			—			(509		)	(254		)	—
Proceeds from term loan	2,000			—			—			—			2,000
Net issuance of commercial paper	381			—			—			—			381
Proceeds from structured payables	—			—			78			—			78
Payments on structured payables	—			—			(9		)	—			(9		)
Payments on senior unsecured notes	(250		)	—			—			—			(250		)
Repayment of term loan	(2,848		)	—			—			—			(2,848		)
Payments on finance leases	—			(11		)	(8		)	—			(19		)
Cash dividends paid	(423		)	—			(44		)	44			(423		)
Other, net	8			—			2			—			10
Net cash used in financing activities	(369		)	(11		)	(490		)	(210		)	(1,080		)
Cash and cash equivalents — net change from:
Operating, investing and financing activities	(2		)	(8		)	19			—			9
Effect of exchange rate changes on cash and cash equivalents	—			—			12			—			12
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	42			31			66			—			139
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	40		$	23		$	97		$	—		$	160

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

The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto in our Form 10-K, as filed on February 28, 2019.

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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend" or the negative of these terms or similar expressions 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 on Form 10-K for the year ended December 31, 2018 (the "Annual Report"). 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.

DR PEPPER SNAPPLE GROUP, INC. MERGER

Maple owns Keurig, a leader in specialty coffee and innovative single serve brewing systems. The combined businesses created Keurig Dr Pepper Inc. ("KDP"), a new beverage company of scale with a portfolio of iconic consumer brands and expanded distribution capability to reach virtually every point-of-sale in North America.

See Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information related to the DPS Merger.

OVERVIEW

KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including ready-to-drink teas and coffee, juices, juice drinks, water and mixers, and specialty coffee, and is a leading producer of innovative single-serve brewing systems. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig, Dr Pepper, Canada Dry, Snapple, Bai, Mott's, Core, Green Mountain and The Original Donut Shop. KDP has some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. KDP offers more than 125 owned, licensed and partner brands, including the top ten best-selling coffee brands and Dr Pepper as a leading flavored CSD in the U.S. according to IRi, 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.

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COFFEE SYSTEMS

Our Coffee Systems segment is primarily a producer of innovative single-serve brewing systems and specialty coffee in the U.S. and Canada. The multi-brand brewing system is aimed at changing the way consumers prepare and enjoy coffee and other beverages both at home and away from home in places such as offices, restaurants, cafeterias, convenience stores and hotels. We develop and sell a variety of Keurig brewers and, in addition to coffee, produce and sell a variety of other specialty beverages in K-Cup pods (including hot and iced teas, hot cocoa and other beverages) for use with Keurig brewing systems. We also develop and sell brewer accessories, including pod storage racks, baskets, brewer carrying cases and other coffee-related equipment and accessories. We also offer traditional whole bean and ground coffee in other package types, including bags, fractional packages and cans.

Our Coffee Systems segment offers pods primarily in the single-serve K-Cup pod format. We manufacture and sell 100% of the K-Cup pods of our own brands, such as Green Mountain Coffee Roasters, The Original Donut Shop, Van Houtte, Laughing Man and REVV. We have licensing and manufacturing agreements with our partner brands to manufacture approximately 80% of the K-Cup pods in the U.S. and Canada, including brands such as Starbucks, Peet's, Dunkin' Donuts, Caribou Coffee, Eight O’Clock, Folgers, Maxwell House, Newman’s Own Organics and Tim Hortons, and private label arrangements. Our Coffee Systems segment also has agreements for manufacturing, distributing, and selling K-Cup pods for tea under brands such as Celestial Seasonings, Lipton and Tazo in addition to K-Cup pods of our own brand, Snapple. We also produce and sell K-Cup pods for cocoa, including through a licensing agreement for the Swiss Miss brand, and hot apple cider.

Our Coffee Systems segment manufactures its K-Cup pods in facilities in North America that include specialty designed proprietary high-speed packaging lines using freshly roasted and ground coffee as well as tea, cocoa and other products. We offer high-quality coffee including 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 all of our single-serve brewing systems, where we then utilize third-party contract manufacturers located in various countries in Asia for brewer appliance manufacturing. We distribute our Coffee Systems products using third-party distributors and retail partners.

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 Allied Brands and manufacture packaged beverages for certain private label beverages in the U.S. and Canada.

Our larger NCB brands in this segment include Snapple, Hawaiian Punch, Mott's, Clamato, Bai, Yoo-Hoo, Deja Blue, Core, ReaLemon, Mistic, Vita Coco coconut water, and Mr and Mrs T mixers. Our larger CSD brands in this segment include Dr Pepper, 7UP, Canada Dry, A&W, Sunkist soda, Squirt, RC Cola, Big Red, and Vernors.

Approximately 90% of our 2019 Packaged Beverages net sales come from the manufacturing and distribution of our own brands and the manufacturing of certain private label beverages. The remaining portion of our 2019 Packaged Beverages net sales came from the distribution of our partner brands such as Vita Coco coconut water, AriZona tea, Neuro drinks, High Brew, evian, Peet's Coffee and Forto Coffee shots. Although the majority of our Packaged Beverages net sales relate to our brands, we also provide a route-to-market for these third party brand owners seeking effective distribution for their new and emerging brands. These brands give us exposure in certain markets to fast growing segments of the beverage industry with minimal capital investment.

Our Packaged Beverages products are manufactured in multiple facilities across the U.S. and are sold or distributed to retailers and their warehouses by our own distribution network or by third party distributors.

BEVERAGE CONCENTRATES

Our Beverage Concentrates segment is principally a brand ownership business where we manufacture and sell beverage concentrates in the U.S. and Canada. Most of the brands in this segment are CSD brands. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, Sunkist soda, 7UP, A&W, Sun Drop, Squirt, RC Cola and the concentrate form of Hawaiian Punch. Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri.

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 PET containers, glass bottles and aluminum cans, and sell them as a finished beverage to retailers. 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. Dr Pepper represents most of our fountain channel volume.

Our Beverage Concentrates brands are sold by our bottlers through all major retail channels including supermarkets, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.

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LATIN AMERICA BEVERAGES

Our Latin America Beverages segment is a brand ownership, manufacturing and distribution business, with operations in Mexico representing approximately 90% of segment net sales. This segment participates mainly in the carbonated mineral water, flavored CSD, bottled water and vegetable juice categories, with particular strength in carbonated mineral water, vegetable juice categories and grapefruit flavored CSDs. The largest brands include Peñafiel, Squirt, Aguafiel, Clamato and Crush.

In Mexico, we manufacture and distribute our products through our bottling operations and third party bottlers and distributors. We sell our finished beverages through all major Mexican retail channels, including small outlets, supermarkets, hypermarkets, convenience stores and on-premise channels. In the Caribbean, we distribute our products through third party bottlers and distributors. We have also begun to distribute certain products in other international jurisdictions through various third party bottlers and distributors.

VOLUME

In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates, finished beverages, pods or brewers.

Beverage Concentrates Sales Volume

In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales. The unit of measurement for concentrate case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.

Concentrate case sales represent units of measurement 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. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases.

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.

Appliance and Pod Sales Volume

In our Coffee Systems segments, we measure our sales volume as the number of appliances and the number of individual pods sold to our customers.

COMPARABLE RESULTS OF OPERATIONS

As a result of the DPS Merger, in order for management to discuss our results on a comparable basis, we prepared unaudited pro forma condensed combined financial information for the second quarter and first six months of 2018 to illustrate the estimated effects of the DPS Merger, which was consummated on July 9, 2018, based on the historical results of operations of DPS and Maple. See Supplemental Unaudited Pro Forma Condensed Combined Financial Information section at the end of Management's Discussion and Analysis for further information on the assumptions used in the preparation of the financial information.

Furthermore, management believes that there are certain non-GAAP financial measures that allow management to evaluate our results, trends and ongoing performance on a comparable basis. In order to derive the adjusted financial information, we adjust certain financial statement captions and metrics prepared under U.S. GAAP for 2019 and on a pro forma basis for 2018 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 the Adjusted Results of Operations section, within Management's Discussion and Analysis discussion, as Adjusted net sales, Adjusted pro forma net sales, Adjusted income from operations, Adjusted pro forma income from operations, Adjusted interest expense, Adjusted pro forma interest expense, Adjusted provision for income taxes, Adjusted pro forma provision for income taxes, Adjusted net income, Adjusted pro forma net income, Adjusted diluted EPS and Adjusted pro forma diluted EPS.

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EXECUTIVE SUMMARY

Financial Overview

•The following table details our net income, diluted EPS, Adjusted net income and Adjusted diluted EPS for second quarter of 2019 and 2018:



	Second Quarter				Dollar		Percent
(in millions, except per share data)	2019		2018		Change		Change
Net income attributable to KDP	$	314	$	83	$	231	278.3	%
Diluted EPS	0.22		0.10		0.12		120.0
Adjusted net income⁽¹⁾	423		356		67		18.8
Adjusted diluted EPS⁽¹⁾	0.30		0.26		0.04		15.4


(1)	Adjusted net income and Adjusted diluted EPS are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

Net income attributable to KDP increased $231 million to $314 million for the second quarter of 2019 compared to the prior year driven primarily by the impact of the DPS Merger. Diluted EPS increased 120.0% to $0.22 per diluted share as compared to $0.10 in the prior year.

Adjusted net income advanced 18.8% to $423 million for the second quarter of 2019 as compared to Adjusted pro forma net income of $356 million in the prior period. This performance was driven by growth in Adjusted income from operations, primarily attributable to net productivity and merger synergies partially offset by inflation on input costs and logistics, and lower Adjusted interest expense primarily due to realized gains associated with the termination of certain interest rate swaps and lower indebtedness. Adjusted diluted EPS increased 15.4% to $0.30 per diluted share as compared to Adjusted pro forma diluted EPS of $0.26 per diluted share in the prior year.


•	During the first six months of 2019, we made net repayments of approximately $717 million related to our 2019 Notes, our term loans and Commercial Paper.


•	On May 29, 2019, we entered into a new 364-day credit agreement which provides a commitment for unsecured financing of up to $750 million.

Recent Developments


•	Our Board of Directors declared a quarterly dividend of $0.15 per share on May 3, 2019, which was paid on July 19, 2019 to shareholders of record on July 5, 2019.

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."

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Second Quarter of 2019 Compared to the Second Quarter of 2018

Consolidated Operations

The following table sets forth our unaudited condensed consolidated results of operations for the second quarter of 2019 and 2018:



	Second Quarter
	2019					2018					Dollar			Percentage
($ in millions,except per share amounts)	Dollars			Percent		Dollars			Percent		Change			Change
Net sales	$	2,812		100.0	%	$	949		100.0	%	$	1,863		196	%
Cost of sales	1,186			42.2		458			48.3		728			159
Gross profit	1,626			57.8		491			51.7		1,135			231
Selling, general and administrative expenses	1,028			36.6		321			33.8		707			220
Other operating expense, net	11			0.4		3			0.3		8			267
Income from operations	587			20.9		167			17.6		420			251
Interest expense	170			6.0		51			5.4		119			233
Interest expense - related party	—			—		26			2.7		(26		)	NM
Other expense (income), net	1			—		(8		)	(0.8	)	9			NM
Income before provision for income taxes	416			14.8		98			10.3		318			324
Provision for income taxes	102			3.6		13			1.4		89			685
Net income	314			11.2		85			9.0		229			269
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—			—		2			0.2		(2		)	NM
Net income attributable to KDP	$	314		11.2	%	$	83		8.7	%	$	231		278

Earnings per common share:
Basic	$	0.22				$	0.10				0.12			120.0	%
Diluted	0.22					0.10					0.12			120.0	%
Weighted average common shares outstanding:
Basic	1,406.7					790.5
Diluted	1,419.2					790.5

Effective tax rate	24.5		%	NM		13.3		%	NM		NM			NM

Net Sales. Net sales increased $1,863 million for the second quarter of 2019 compared with the second quarter of 2018. The primary driver of the increase in net sales was the $1,822 million of sales acquired as a result of the DPS Merger.

Gross Profit. Gross profit increased $1,135 million for the second quarter of 2019 compared with the second quarter of 2018. Gross margin of 57.8% for the second quarter of 2019 was significantly improved compared to the 51.7% gross margin for the second quarter of 2018. The primary driver of the change in gross profit was incremental gross profit we acquired as a result of the consummation of the DPS Merger.

Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased $707 million for the second quarter of 2019 compared with the second quarter of 2018. The primary driver of the increase in SG&A expenses was the impact of the DPS Merger, which includes acquired operating costs associated with the integration of DPS and Keurig.

Income from Operations. Income from operations increased $420 million to $587 million for the second quarter of 2019 due to the increase in gross profit partially offset by an increase in SG&A expenses, driven by the DPS Merger.

Interest Expense. Interest expense increased $119 million for the second quarter of 2019 compared with the second quarter of 2018 due primarily to the assumption of the existing senior unsecured notes and increased borrowings as a result of the DPS Merger, which was partially offset by the impact of the net repayments related to our 2019 Notes, our term loans and Commercial Paper.

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Interest Expense - Related Party. Interest expense - related party decreased $26 million for the second quarter of 2019 compared with the second quarter of 2018 as a result of the capitalization of the related party term loans into additional paid in capital during the third quarter of 2018.

Effective Tax Rate. The effective tax rates for the second quarter of 2019 and 2018 were 24.5% and 13.3%, respectively. For the second quarter of 2019, the provision for income taxes was higher than the second quarter of 2018 primarily due to the benefit received from the one time transition tax related to the TCJA in the second quarter of 2018. See Note 6 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.

Adjusted Results of Operations

The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the second quarter of 2019 and 2018:



	Second Quarter						Dollar			Percent
(in millions, except per share amounts)	2019			2018			Change			Change
Adjusted net sales⁽¹⁾	$	2,812		$	2,822		$	(10	)	(0.4	)%
Adjusted income from operations⁽¹⁾	702			640			62			9.7
Adjusted interest expense⁽¹⁾	138			175			(37		)	(21.1	)
Adjusted provision for income taxes⁽¹⁾	142			115			27			23.5
Adjusted net income⁽¹⁾	423			356			67			18.8
Adjusted diluted EPS⁽¹⁾	0.30			0.26			0.04			15.4

Adjusted diluted weighted average shares⁽¹⁾	1,419.2			1,386.5
Adjusted operating margin⁽¹⁾	25.0		%	22.7		%				230 bps
Adjusted effective tax rate⁽¹⁾	25.1		%	24.4		%


(1)	These adjusted measures are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of this term and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

Adjusted Net Sales. Adjusted net sales decreased $10 million, or 0.4%, to $2,812 million for the second quarter of 2019 as compared to Adjusted pro forma net sales of $2,822 million for the second quarter of 2018. This performance reflected strong underlying net sales growth of 2.6%, driven by higher volume/mix of 2.1% and net price realization of 0.5%, as well as a 0.2% benefit from the shift of Easter into the second quarter of 2019. More than offsetting these positive drivers was the expected unfavorable impacts of 3.0% related to changes in our Allied Brands portfolio, as well as unfavorable foreign currency translation of 0.2%.

Adjusted Income from Operations. Adjusted income from operations increased $62 million, or 9.7%, to $702 million compared to Adjusted pro forma income from operations of $640 million in the second quarter of 2018. This strong growth was despite comparison to the prior year quarter that included a $16 million gain on the acquisition of Big Red and a $5 million one-time reimbursement from a resin supplier, which reduced the year-over-year growth rate by more than three percentage points. Driving the performance in the quarter were strong productivity and merger synergies, both of which benefitted SG&A and cost of sales, and growth in underlying net sales, partially offset by inflation in input costs, led by packaging and logistics. Adjusted operating margin grew 230 bps to 25.0% in the second quarter of 2019.

Adjusted Interest Expense. Adjusted interest expense decreased $37 million, or 21.1%, to $138 million for the second quarter of 2019 compared to Adjusted pro forma interest expense of $175 million in the prior year. This change was primarily the result of the benefit of lower indebtedness due to continued deleveraging, realized gains associated with the termination of certain interest rate swaps and realized gains on existing interest rate swaps.

Adjusted Effective Tax Rate. The Adjusted effective tax rate increased 0.7 points to 25.1% for the second quarter of 2019 compared to Adjusted pro forma effective tax rate of 24.4% in the prior year. This increase in our Adjusted effective tax rate was primarily due to the loss of tax benefits associated with the U.S. domestic manufacturing deduction in 2019.

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Results of Operations by Segment

The following tables set forth net sales and income from operations for our segments for the second quarter of 2019 and 2018, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:



	Second Quarter
(in millions)	2019		2018
Segment Results — Net sales
Coffee Systems	$	990	$	949
Packaged Beverages	1,311		—
Beverage Concentrates	370		—
Latin America Beverages	141		—
Net sales	$	2,812	$	949

	Second Quarter
(in millions)	2019		2018
Segment Results — Income from Operations
Coffee Systems	$	287	$	274
Packaged Beverages	186		—
Beverage Concentrates	244		—
Latin America Beverages	26		—
Total income from operations	743		274
Unallocated corporate costs	156		107
Income from operations	$	587	$	167

COFFEE SYSTEMS

The following table details our Coffee Systems segment's net sales, income from operations, operating margin, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the second quarter of 2019 and 2018:



	Second Quarter						Dollar		Percent
(in millions)	2019			2018			Change		Change
Net sales	$	990		$	949		$	41	4.3	%
Income from operations	287			274			13		4.7
Operating margin	29.0		%	28.9		%			10 bps
Adjusted income from operations⁽¹⁾	331			306			25		8.2
Adjusted operating margin⁽¹⁾	33.4		%	32.2		%			120 bps


(1)	Adjusted income from operations is a non-GAAP financial measure. For the second quarter of 2018, this financial measure was prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

Sales Volume. The volume/mix growth for the Coffee Systems segment was driven by a 12.8% increase in K-Cup pod volume and a 19.4% increase in brewer volume, partially offset by unfavorable pod sales mix, primarily reflecting the impact of volume growth of branded partners in the second quarter of 2019.

Net Sales. Net sales increased 4.3% to $990 million for the second quarter of 2019 compared to net sales of $949 million in the second quarter of 2018 due to volume/mix growth of 8.3%, partially offset by lower net price realization of 3.5% and unfavorable foreign currency translation of 0.5%.

Income from Operations. Income from operations increased $13 million, or 4.7%, to $287 million for the second quarter of 2019, compared with the second quarter of 2018, primarily reflecting the benefits of productivity, net sales growth and lower administrative expenses. Partially offsetting these growth drivers were expenses associated with our productivity projects and inflation in input costs, led by packaging and logistics. Operating margin grew 10 basis points ("bps") to 29.0% for the second quarter of 2019.

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Adjusted Income from Operations. Adjusted income from operations increased $25 million, or 8.2%, to $331 million for the second quarter of 2019, compared with Adjusted pro forma income from operations of $306 million for the second quarter of 2018, primarily reflecting the benefits of productivity and strong growth in pod sales, partially offset by inflation in packaging and logistics. Adjusted operating margin grew 120 bps to 33.4%.

PACKAGED BEVERAGES

The following table details our Packaged Beverages segment's net sales, income from operations, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the second quarter of 2019 and 2018:



	Second Quarter						Dollar			Percent
(in millions)	2019			2018			Change			Change
Net sales	$	1,311		$	—		$	1,311		NM
Income from operations	186			—			186			NM
Adjusted net sales⁽¹⁾	1,311			1,378			(67		)	(4.9	)%
Adjusted income from operations⁽¹⁾	190			161			29			18.0
Adjusted operating margin⁽¹⁾	14.5		%	11.7		%				280 bps


(1)	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

Sales Volume. Sales volume for the second quarter of 2019 were wholly incremental as a result of the DPS Merger.

Adjusted Sales Volume. Adjusted sales volume for the second quarter of 2019 declined 4.6% due to the net unfavorable impact of changes in our Allied Brands portfolio and lower CSD volume, partially offset by growth of Core Hydration and higher volume from contract manufacturing.

Net Sales. Net sales of $1,311 million for the second quarter of 2019 were wholly incremental as a result of the DPS Merger.

Adjusted Net Sales. Adjusted net sales decreased 4.9% to $1,311 million, compared with Adjusted pro forma net sales of $1,378 million in the second quarter of 2018, reflecting underlying net sales growth of 1.0%, driven by higher net price realization of 2.0% from pricing actions taken late in 2018 partially offset by lower volume/mix of 1.0%, as well as a 0.5% benefit from the shift of Easter into the second quarter of 2019. More than offsetting these growth drivers was the expected unfavorable impacts of 6.3% from changes in the Allied Brands portfolio, as well as unfavorable foreign currency translation of 0.1%.

Income from Operations. Income from operations was $186 million for the second quarter of 2019, which were wholly incremental as a result of the DPS Merger, as net sales were reduced by cost of sales and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of people costs, marketing investments and logistics expense.

Adjusted Income from Operations. Adjusted income from operations increased $29 million, or 18.0%, to $190 million for the second quarter of 2019, compared with Adjusted pro forma income from operations of $161 million for the second quarter of 2018, largely reflecting strong productivity and merger synergies, as well as timing of marketing investments. These drivers were partially offset by inflation particularly in packaging and manufacturing input costs. Adjusted operating margin grew 280 bps versus the year ago period to 14.5%.

BEVERAGE CONCENTRATES

The following table details our Beverage Concentrates segment's net sales, income from operations, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the second quarter of 2019 and 2018:



	Second Quarter						Dollar		Percent
(in millions)	2019			2018			Change		Change
Net sales	$	370		$	—		$	370	NM
Income from operations	244			—			244		NM
Adjusted net sales⁽¹⁾	370			359			11		3.1	%
Adjusted income from operations⁽¹⁾	246			236			10		4.2
Adjusted operating margin⁽¹⁾	66.5		%	65.7		%			80 bps


(1)	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

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Sales volume. Sales volume for the second quarter of 2019 were wholly incremental as a result of the DPS Merger.

Adjusted sales volume. Adjusted sales volume for the second quarter of 2019 declined 1.0% due to CSD category volume declines.

Net Sales. Net sales were $370 million for the second quarter of 2019, which were wholly incremental as a result of the DPS Merger.

Adjusted Net Sales. Adjusted net sales increased 3.1% to $370 million for the second quarter of 2019, compared with Adjusted pro forma net sales of $359 million for the second quarter of 2018, driven by net price realization of 4.4%, partially offset by lower volume/mix of 1.1% and unfavorable foreign currency translation of 0.2%.

Income from Operations. Income from operations was $244 million for the second quarter of 2019, which was wholly incremental as a result of the DPS Merger, as net sales were reduced by SG&A expenses and cost of sales. SG&A expenses were primarily comprised of marketing investments and people costs. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs.

Adjusted Income from Operations. Adjusted income from operations increased $10 million, or 4.2%, to $246 million for the second quarter of 2019 compared with Adjusted pro forma income from operations of $236 million for the second quarter of 2018. This performance reflected the growth in Adjusted net sales. Adjusted operating margin grew 80 bps versus the year ago period to 66.5%.

LATIN AMERICA BEVERAGES

The following table details our Latin America Beverages segment's net sales, income from operations, Adjusted net sales, Adjusted income from operations and Adjusted operating margin for the second quarter of 2019 and 2018:



	Second Quarter						Dollar			Percent
(in millions)	2019			2018			Change			Change
Net sales	$	141		$	—		$	141		NM
Income from operations	26			—			26			NM
Adjusted net sales⁽¹⁾	141			136			5			3.7	%
Adjusted income from operations⁽¹⁾	20			26			(6		)	(23.1	)%
Adjusted operating margin⁽¹⁾	14.2		%	19.1		%				(490) bps


(1)	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the second quarter of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

Sales Volume. Sales volume for the second quarter of 2019 were wholly incremental as a result of the DPS Merger.

Adjusted Sales Volume. Adjusted sales volume for the second quarter of 2019 declined 3.7% due to the exit of our Aguafiel bulk water business of 4.7% and an increase of 1.0% in the balance of the portfolio.

Net Sales. Net sales were $141 million for the second quarter of 2019, which were wholly incremental as a result of the DPS Merger.

Adjusted Net Sales. Adjusted net sales increased 3.7% to $141 million for the second quarter of 2019, compared with Adjusted pro forma net sales of $136 million for the second quarter of 2018, driven by higher net price realization of 3.8% from pricing actions taken in 2018 and favorable foreign currency translation of 1.3%, partially offset by unfavorable volume/mix of 1.4%.

Income from Operations. Income from operations was $26 million for the second quarter of 2019, which was wholly incremental as a result of the DPS Merger, as net sales were reduced by cost of sales and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of logistics expense, people costs and marketing investments.

Adjusted Income from Operations. Adjusted income from operations decreased $6 million, or 23.1%, to $20 million for the second quarter of 2019, compared with Adjusted pro forma income from operations of $26 million for the second quarter of 2018. This performance reflected the benefit of net sales growth and productivity, which were more than offset by inflation in logistics and input costs, as well as the comparison to a $5 million benefit in the second quarter of 2018 related to a previous reimbursement by a resin supplier. Adjusted operating margin declined 490 bps versus the year ago period to 14.2%.

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First Six Months of 2019 Compared to First Six Months of 2018

Consolidated Operations

The following table sets forth our unaudited condensed consolidated results of operations for the first six months of 2019 and 2018:



	First Six Months
	2019				2018				Dollar			Percentage
($ in millions, except per share amounts)	Dollars		Percent		Dollars		Percent		Change			Change
Net sales	$	5,316	100.0	%	$	1,897	100.0	%	$	3,419		180.2	%
Cost of sales	2,292		43.1		925		48.8		1,367			147.8
Gross profit	3,024		56.9		972		51.2		2,052			211.0
Selling, general and administrative expenses	1,939		36.5		621		32.7		1,318			212.0
Other operating expense, net	—		—		6		0.3		(6		)	NM
Income from operations	1,085		20.4		345		18.2		740			214.0
Interest expense	339		6.4		49		2.6		290			NM
Interest expense - related party	—		—		51		5.5		(51		)	NM
Loss on early extinguishment of debt	9		0.2		2		0.1		7			NM
Other expense (income), net	6		0.1		5		0.3		1			NM
Income before provision for income taxes	731		13.8		238		12.5		493			207.0
Provision for income taxes	187		3.5		64		3.4		123			192.0
Net income	544		10.2		174		9.2		370			213.0
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	—		—		3		0.2		(3		)	NM
Net income attributable to KDP	$	544	10.2	%	$	171	9.0	%	373			218.0

Earnings per common share:
Basic	$	0.39			$	0.21			$	0.18		86.0	%
Diluted	0.38				0.21				0.17			81.0
Weighted average common shares outstanding:
Basic	1,406.5				790.5
Diluted	1,418.5				790.5

Effective tax rate	25.6				26.9

Net Sales. Net sales increased $3,419 million, or approximately 180%, for the first six months of 2019 compared with the first six months of 2018. The primary factor of the increase in net sales was the $3,358 million of sales acquired as a result of the DPS Merger.

Gross Profit. Gross profit increased $2,052 million for the first six months of 2019 compared with the first six months of 2018. Gross margin of 56.9% for the first six months of 2019 significantly improved from the 51.2% gross margin for the first six months of 2018. The primary driver of the change was the incremental gross profit we acquired as a result of the consummation of the DPS Merger.

Selling, General and Administrative Expenses. SG&A expenses increased $1,318 million for the first six months of 2019 compared with the first six months of 2018. The primary driver of the increase in SG&A expenses was the impact of the DPS Merger, which includes acquired operating costs and restructuring expenses associated with the integration of DPS and Keurig.

Income from Operations. Income from operations increased $740 million to $1,085 million for the first six months of 2019 due to the increase in gross profit partially offset by an increase in SG&A expenses, driven by the DPS Merger.

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Interest Expense. Interest expense increased $290 million for the first six months of 2019 compared with the first six months of 2018 due primarily to the increased borrowings and assumption of the existing senior unsecured notes as a result of the DPS Merger and the impact of our interest rate derivative instruments, which was partially offset by the impact of the net repayments related to our 2019 Notes, our term loans and Commercial Paper.

Interest Expense - Related Party. Interest expense - related party decreased $51 million for the first six months of 2019 compared with the first six months of 2018 as a result of the capitalization of the related party term loans into additional paid in capital during the DPS Merger.

Effective Tax Rate. The effective tax rates for the first six months of 2019 and 2018 were 25.6% and 26.9%, respectively. The decrease in our effective tax rate was primarily due to a reduction in the U.S. federal tax rate from 24.5% to 21.0% and exclusion of DPS Merger related non-deductible transaction costs offset by the elimination of the domestic manufacturing deduction. Refer to Note 6 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

Adjusted Results of Operations

The following table sets forth certain unaudited condensed consolidated adjusted results of operations for the first six months of 2019 and 2018:



	For the First Six Months						Dollar			Percent
(in millions, except per share amounts)	2019			2018			Change			Change
Adjusted net sales⁽¹⁾	$	5,316		$	5,355		$	(39	)	(0.7	)%
Adjusted income from operations⁽¹⁾	1,323			1,202			121			10.1
Adjusted interest expense⁽¹⁾	262			341			(79		)	(23.2	)
Adjusted provision for income taxes⁽¹⁾	270			218			52			23.9
Adjusted net income⁽¹⁾	785			612			173			28.3
Adjusted diluted EPS⁽¹⁾	0.55			0.44			0.11			25.0

Adjusted diluted weighted average shares⁽¹⁾	1,418.5			1,386.5
Adjusted operating margin⁽¹⁾	24.9		%	22.4		%				250 bps
Adjusted effective tax rate⁽¹⁾	25.6		%	26.3		%


(1)	These adjusted measures are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of this term and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

Adjusted Net Sales. Adjusted net sales decreased $39 million, or 0.7%, to $5,316 million for the first six months of 2019 as compared to Adjusted pro forma net sales of $5,355 million for the first six months of 2018. This performance reflected strong underlying net sales growth of 2.4%, driven by higher volume/mix of 1.6% and net price realization of 0.8%, more than offset by the expected unfavorable impacts related to changes in our Allied Brands portfolio of 2.8%. Unfavorable foreign currency translation also impacted the period by 0.3%.

Adjusted Income from Operations. Adjusted income from operations increased $121 million, or 10.1%, to $1,323 million compared to Adjusted pro forma income from operations of $1,202 million in the prior year. This performance primarily reflected strong productivity and merger synergies, both of which benefitted SG&A and cost of sales, as well as favorable timing in marketing spending. Partially offsetting these growth drivers were inflation in input costs, led by packaging, and logistics, and the comparison to a $16 million gain in the prior year from the remeasurement of our equity investment in Big Red and a $5 million one-time reimbursement from a resin supplier. Adjusted operating margin grew 250 bps to 24.9% in the first six months of 2019.

Adjusted Interest Expense. Adjusted interest expense decreased $79 million, or 23.2%, to $262 million for the first six months of 2019 compared to Adjusted pro forma interest expense of $341 million in the prior year. This change was primarily the result of the benefit of lower indebtedness due to continued deleveraging, realized gains associated with the termination of certain interest rate swaps and the benefit of lower interest rates as a result of our existing interest rate swaps.

Adjusted Effective Tax Rate. The Adjusted effective tax rate decreased 0.7 points to 25.6% for the first six months of 2019 compared to Adjusted pro forma effective tax rate of 26.3% in the prior year. This improvement in our Adjusted effective tax rate was primarily due to a reduction in the U.S. federal tax rate from 24.5% to 21.0%, partially offset by the loss of tax benefits associated with the U.S. domestic manufacturing deduction in 2019.

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Results of Operations by Segment

The following tables set forth net sales and income from operations for our segments for the first six months of 2019 and 2018, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:



(in millions)	First Six Months
Segment Results — Net sales	2019		2018
Coffee Systems	$	1,958	$	1,897
Packaged Beverages	2,427		—
Beverage Concentrates	674		—
Latin America Beverages	257		—
Net sales	$	5,316	$	1,897

	First Six Months
(in millions)	2019		2018
Segment Results — Income from Operations
Coffee Systems	$	580	$	531
Packaged Beverages	335		—
Beverage Concentrates	445		—
Latin America Beverages	37		—
Total income from operations	1,397		531
Unallocated corporate costs	312		186
Income from operations	$	1,085	$	345

COFFEE SYSTEMS



	For the First Six Months						Dollar		Percent
(in millions)	2019			2018			Change		Change
Net sales	$	1,958		$	1,897		$	61	3.2	%
Income from operations	580			531			49		9.2
Operating margin	29.6		%	28.0		%			160 bps
Adjusted net sales⁽¹⁾	1,958			1,901			57		3.0
Adjusted income from operations⁽¹⁾	666			618			48		7.8
Adjusted operating margin⁽¹⁾	34.0		%	32.5		%			150 bps


(1)	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

Sales Volume. The volume/mix growth for the Coffee Systems segment reflected a 9.8% increase in K-Cup pod volume and a 16.4% increase in brewer volume, partially offset by unfavorable pod sales mix, primarily reflecting the impact of volume growth of branded partners and private label in the first six months of 2019.

Net Sales. Net sales increased 3.2% to $1,958 million for the first six months of 2019 compared to the first six months of 2018 due to volume/mix growth of 6.7%, partially offset by lower net price realization of 2.9%, reflecting the continued moderation in strategic pod pricing investments and unfavorable foreign currency translation of 0.6%.

Adjusted Net Sales. Adjusted net sales increased 3.0% to $1,958 million for the first six months of 2019 compared to the first six months of 2018 due to volume/mix growth of 6.7%, partially offset by lower net price realization of 3.1%, reflecting the continued moderation in strategic pod pricing investments and unfavorable foreign currency translation of 0.6%.

Income from Operations. Income from operations increased $49 million for the first six months of 2019, compared with the first six months of 2018, primarily reflecting the benefits of productivity, partially offset by inflation in input costs, led by packaging and logistics. Operating margin grew 160 bps to 29.6%.

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Adjusted Income from Operations. Adjusted income from operations increased $48 million, or 7.8%, to $666 million for the first six months of 2019, compared with Adjusted pro forma income from operations of $618 million for the first six months of 2018, primarily reflecting the benefits of productivity, partially offset by inflation in input costs, led by packaging, and logistics. Adjusted operating margin grew 150 bps versus the year ago period to 34.0%.

PACKAGED BEVERAGES



	For the First Six Months						Dollar			Percent
(in millions)	2019			2018			Change			Change
Net sales	$	2,427		$	—		$	2,427		NM
Income from operations	335			—			335			NM
Adjusted net sales⁽¹⁾	2,427			2,556			(129		)	(5.0	)%
Adjusted income from operations⁽¹⁾	350			321			29			9.0
Adjusted operating margin⁽¹⁾	14.4		%	12.6		%				180 bps


(1)	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

Sales Volume. Sales volume for the first six months of 2019 were wholly incremental as a result of the DPS Merger.

Adjusted Sales Volume. Adjusted sales volume for the first six months of 2019 declined 4.7% due to the net unfavorable impact of 3.6% related to changes in our Allied Brands portfolio and lower CSD volume, partially offset by growth of Core Hydration and higher volume from contract manufacturing.

Net Sales. Net sales were $2,427 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger.

Adjusted Net Sales. Adjusted net sales decreased 5.0% to $2,427 million for the first six months of 2019 compared with Adjusted pro forma net sales of $2,556 million for the first six months of 2018, reflecting underlying net sales growth of 1.3%, driven by higher net price realization of 2.1% from pricing actions taken late in 2018 partially offset by lower volume/mix of 0.8%. More than offsetting the underlying net sales growth were the expected unfavorable impacts of 5.9% from changes in the Allied Brands portfolio, 0.3% from one less shipping day in the first quarter of 2019 and unfavorable foreign currency translation of 0.1%.

Income from Operations. Income from operations was $335 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger, as net sales were reduced by cost of sales and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of employee salaries, marketing investments and logistics expense.

Adjusted Income from Operations. Adjusted income from operations increased $29 million, or 9.0%, to $350 million for the first six months of 2019 compared with Adjusted pro forma income from operations of $321 million for the first six months of 2018, largely reflecting strong productivity and merger synergies and timing of marketing investments. These drivers were partially offset by inflation on input costs, led by packaging, and logistics. Adjusted operating margin grew 180 bps versus the year ago period to 14.4%.

BEVERAGE CONCENTRATES



	For the First Six Months						Dollar		Percent
(in millions)	2019			2018			Change		Change
Net sales	$	674		$	—		$	674	NM
Income from operations	445			—			445		NM
Adjusted net sales⁽¹⁾	674			649			25		3.9	%
Adjusted income from operations⁽¹⁾	447			415			32		7.7
Adjusted operating margin⁽¹⁾	66.3		%	63.9		%			240 bps


(1)	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

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Sales Volume. Sales volume for the first six months of 2019 were wholly incremental as a result of the DPS Merger.

Adjusted Sales Volume. Adjusted sales volume for the first six months of 2019 declined 1.7% due to CSD category volume declines.

Net Sales. Net sales were $674 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger.

Adjusted Net Sales. Adjusted net sales increased 3.9% to $674 million for the first six months of 2019 compared with Adjusted pro forma net sales of $649 million for the first six months of 2018, driven by net price realization of 5.6%, partially offset by lower volume/mix of 1.5% and unfavorable foreign currency translation of 0.2%.

Income from Operations. Income from operations was $445 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger, as net sales were reduced by SG&A expenses and cost of sales. SG&A expenses were primarily comprised of marketing investments and employee salaries. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs.

Adjusted Income from Operations. Adjusted income from operations increased $32 million, or 7.7%, to $447 million for the first six months of 2019 compared with Adjusted pro forma income from operations of $415 million for the first six months of 2018. This performance reflected the growth in Adjusted net sales as well as timing of marketing investments. Adjusted operating margin grew 240 bps versus the year ago period to 66.3%.

LATIN AMERICA BEVERAGES



	For the First Six Months						Dollar			Percent
(in millions)	2019			2018			Change			Change
Net sales	$	257		$	—		$	257		NM
Income from operations	37			—			37			NM
Adjusted net sales⁽¹⁾	257			249			8			3.2	%
Adjusted income from operations⁽¹⁾	32			38			(6		)	(15.8	)
Adjusted operating margin⁽¹⁾	12.5		%	15.3		%				(280 bps)


(1)	Adjusted net sales and Adjusted income from operations are non-GAAP financial measures. For the first six months of 2018, these financial measures were prepared on an adjusted pro forma basis. For a definition of these terms and a reconciliation to the most directly comparable GAAP measures, please see Non-GAAP Financial Measures below.

Sales Volume. Sales volume for the first six months of 2019 were wholly incremental as a result of the DPS Merger.

Adjusted Sales Volume. Adjusted sales volume for the first six months of 2019 declined 5.0% due to the exit of our Aguafiel bulk water business of 4.6% and a decline of 0.4% in the balance of the portfolio.

Net Sales. Net sales were $257 million for the first six months of 2019, which were wholly incremental as a result of the DPS Merger.

Adjusted Net Sales. Adjusted net sales increased 3.2% to $257 million for the first six months of 2019 compared with Adjusted pro forma net sales of $249 million for the first six months of 2018, driven by higher net price realization of 4.0% from pricing actions taken in 2018, partially offset by unfavorable volume/mix of 0.4% and unfavorable foreign currency translation of 0.4%.

Income from Operations. Income from operations was $37 million for the first six months of 2019, which was wholly incremental as a result of the DPS Merger, as net sales were reduced by cost of sales and SG&A expenses. Cost of sales were primarily comprised of ingredients and packaging costs and other manufacturing costs. SG&A expenses were primarily comprised of logistics expense, employee salaries and marketing investments.

Adjusted Income from Operations. Adjusted income from operations decreased $6 million, or 15.8%, to $32 million in the first six months of 2019 compared with Adjusted pro forma income from operations of $38 million in the first six months of 2018. This performance reflected the benefit of net sales growth, which were more than offset by inflation on input costs, logistics and energy, a comparison to a $5 million benefit in the second quarter of 2018 related to a previous reimbursement by a resin supplier and unfavorable foreign currency impacts. Adjusted operating margin declined 280 bps versus the year ago period to 12.5%.

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CRITICAL ACCOUNTING ESTIMATES

The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. These critical accounting estimates are discussed in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2018.

LIQUIDITY AND CAPITAL RESOURCES

Trends and Uncertainties Affecting Liquidity

Customer and consumer demand for our products may be impacted by all risk factors discussed under "Risk Factors" in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, that could have a material effect on production, delivery and consumption of our products in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume. 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 ("Commercial Paper") 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 364-Day Credit Agreement, which have availability of $3,150 million as of June 30, 2019;


•	our continued integration of DPS;


•	our continued capital expenditures;


•	our continued payment of dividends;


•	seasonality of our operating cash flows, which could impact short-term liquidity;


•	fluctuations in our tax obligations;


•	future equity investments; and


•	future mergers or acquisitions of brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.

Financing Arrangements

Refer to Note 7 of the Notes to our Unaudited Condensed Consolidated Financial Statements for management's discussion of financing arrangements.

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 for the first six months of 2019 and 2018:



	First Six Months
(in millions)	2019			2018
Net cash provided by operating activities	$	1,203		$	578
Net cash used in investing activities	(114		)	(80		)
Net cash (used in) provided by financing activities	(1,080		)	7,690

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NET CASH PROVIDED BY OPERATING ACTIVITIES

Net cash provided by operating activities increased $625 million for the first six months of 2019, as compared to the first six months of 2018, primarily due to additional cash flows from operations generated as a result of the DPS Merger. The increase in net cash provided by operating activities was driven by the increase in net income adjusted for non-cash items, the deferral of estimated tax payments and the improvement in working capital primarily driven by extended payment terms with our suppliers, partially offset by the payment and deferral of customer incentives.

During the first six months of 2019, the Company deferred estimated tax payments of $150 million, which were paid in July and August 2019, as compared to the deferral of estimated tax payments of $36 million during the first six months of 2018.

Cash Conversion Cycle

Our cash conversion cycle is defined as days inventory outstanding ("DIO") and days sales outstanding ("DSO") less days of payables outstanding ("DPO"). The calculation of each component of the cash conversion cycle is provided below:



Component		Calculation (on a trailing twelve month basis)
DIO		(Average inventory divided by cost of sales) * Number of days in the period
DSO		(Accounts receivable divided by net sales) * Number of days in the period
DPO		(Accounts payable * Number of days in the period) divided by cost of sales and SG&A expenses

Our cash conversion cycle declined 42 days to approximately (36) days as of June 30, 2019 as compared to (78) days in the prior year period. The change was primarily driven by a reduction of 64 days in our DPO as the DPS operations had significantly shorter terms than the legacy KGM business. DIO improved 25 days as a result of the DPS Merger. DSO was relatively consistent as compared to the prior year period. In future periods, DPO will continue to have a positive impact on our cash conversion cycle as a result of our supplier terms initiative, which has set our customary terms as we integrate our legacy businesses.

Accounts payable program

We entered into an agreement with a third party administrator to allow participating suppliers to track payment obligations from us, and if elected, 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. As of June 30, 2019 and December 31, 2018, $2,096 million and $1,676 million, respectively, of our outstanding payment obligations are payable to suppliers who utilize this third party service administrator.

A significant downgrade in our credit ratings could limit a financial institution's willingness to participate in the accounts payable program. In addition, a significant downgrade in our credit ratings could also reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions.

NET CASH USED IN INVESTING ACTIVITIES

Cash used in investing activities for the first six months of 2019 and 2018 consisted primarily of purchases of property, plant and equipment of $118 million and $44 million, respectively.

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

Cash used in financing activities for the first six months of 2019 consisted primarily of the voluntary and mandatory repayments on the term loan facility of $848 million, repayment of the 2019 Notes of $250 million, and dividend payments of $423 million. These cash outflows from financing activities were partially offset by net issuance of commercial paper of $381 million and net proceeds from structured payables of $69 million.

Net cash provided by financing activities for the first six months of 2018 consisted primarily of proceeds from senior unsecured notes of $8,000 million obtained in anticipation of funding the DPS Merger, partially offset by repayments on the term loan facility of $254 million, payments on deferred financing fees of $35 million and dividend payments of $23 million.

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Debt Ratings

As of June 30, 2019, our credit ratings were as follows:



Rating Agency	Long-Term Debt Rating	Commercial Paper Rating	Outlook	Date of Last Change
Moody's	Baa2	P-2	Negative	May 11, 2018
S&P	BBB	A-2	Stable	May 14, 2018

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

Capital Expenditures

Capital expenditures were $118 million and $44 million for the first six months of 2019 and 2018, respectively.

Capital expenditures for the first six months of 2019 primarily related to machinery and equipment, our continued investment in the build-out of our new Spartanburg facility, information technology infrastructure, logistics equipment and replacement of existing cold drink equipment. Capital expenditures included in accounts payable and accrued expenses was $205 million for the first six months of 2019, which primarily related to our continued investment in the build-out of our new Spartanburg facility.

Capital expenditures for the first six months of 2018 was primarily related to portion pack manufacturing, information technology infrastructure, and the land for our new Spartanburg facility.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $21 million from December 31, 2018 to June 30, 2019 due to the Company's focus on utilizing cash for debt repayment.

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 $59 million as of both June 30, 2019 and December 31, 2018. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.

Contractual Commitments and Obligations

We enter into various contractual obligations that impact, or could impact, our liquidity. Based on our current and anticipated level of operations, we believe that our proceeds from operating cash flows combined with cash on hand and amounts available under our financing arrangements will be sufficient to meet our anticipated obligations.

The following table summarizes our contractual obligations and contingencies, as of June 30, 2019, that have significantly changed from the amounts disclosed in our Annual Report:



	Payments Due in Year
(in millions)	Total		2019		2020		2021		2022		2023		After 2023
Long-term obligations⁽¹⁾	$	13,710	$	50	$	350	$	2,350	$	350	$	3,885	$	6,725
Interest payments	5,013		263		515		481		434		354		2,966
Finance leases⁽²⁾	312		25		48		41		36		32		130
Operating leases⁽³⁾	406		36		69		56		45		36		164
Purchase obligations⁽⁴⁾	2,695		943		709		261		249		373		160


(1)	Amounts represent payments for the senior unsecured notes issued by us and the term loan credit agreement. Refer to Note 7 for additional information.

(2)

Amounts represent our contractual payment obligations for our lease arrangements classified as finance leases. These amounts exclude renewal options, which were not yet executed but were included in the lease term to determine finance lease obligation as the lease imposes a penalty on us in such amount that the renewal appeared reasonably assured at lease inception. Amounts exclude leases not yet commenced in accordance with ASC 842. Refer to Note 3 for additional information.


(3)	Amounts represent minimum contractual rental commitments under our non-cancelable operating leases. Amounts exclude leases not yet commenced in accordance with ASC 842. Amounts previously recorded as financing obligations were reclassified within operating leases as a result of the adoption of ASC 842. Refer to Note 3 for additional information.


(4)	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.

Through June 30, 2019, there have been no other material changes to the amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

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OFF-BALANCE SHEET ARRANGEMENTS

There are no material changes in off-balance sheet arrangements from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 1 of the Notes to our Unaudited Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP.

SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the DPS Merger for the second quarter of 2018, which was consummated on July 9, 2018, based on the historical results of operations of DPS and Maple. See Notes 1 and 2 of the Notes to our unaudited condensed consolidated financial statements for additional information on the DPS Merger.

The following unaudited pro forma condensed combined statement of income for the the second quarter of 2018 is based on the historical financial statements of Maple and DPS after giving effect to the DPS Merger, related equity investments, and the assumptions and adjustments described in the accompanying notes to this unaudited pro forma condensed combined statement of income. The Maple statement of income information for the the second quarter of 2018 was derived from the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. The DPS statement of income information for the second quarter of 2018 was derived from its unaudited condensed consolidated financial statements included in our Form 10-Q dated August 8, 2018. The unaudited pro forma condensed combined statement of income is presented as if the DPS Merger had been consummated on December 31, 2016, and combine the historical results of Maple and DPS.

The unaudited pro forma condensed combined statements of income set forth below primarily give effect to the following assumptions and adjustments:

•Application of the acquisition method of accounting;

•The issuance of Maple common stock to JAB in connection with the equity investments;

•The conversion of Maple Parent Corporation into KDP shares in accordance with the Merger Agreement;

•The pre-closing Maple share conversion;

•The exchange of one share of KDP common stock for each share of DPS common stock;

•The change in year-end for Maple; and

•The alignment of accounting policies.

The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized fair values at the Merger Date for the allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed.

The unaudited pro forma condensed combined financial information has been prepared in accordance with SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results. In addition, the accompanying unaudited pro forma condensed combined statements of income do not reflect any anticipated synergies, operating efficiencies, cost savings or any integration costs that may result from the DPS Merger.

The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma condensed combined statements of income to give effect to unaudited pro forma events that are (1) directly attributable to the DPS Merger, (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of KDP. As a result, under SEC Regulation S-X Article 11, certain expenses such as transaction costs and costs associated with the impact of the step-up of inventory are eliminated from pro forma results in all periods presented. In contrast, under the U.S. GAAP presentation in Note 2, Acquisitions and Investments in Unconsolidated Affiliates, these expenses are required to be included in the pro forma results for the year ended December 31, 2017. See Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.

As a result of the measurement period adjustments for the DPS Merger, we have finalized the accompanying unaudited pro forma condensed combined statements of income during the second quarter of 2019. Changes to the presentation for the year ended December 31, 2018 were not significant.

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The unaudited pro forma condensed combined financial information, including the related notes, should be read in conjunction with the historical consolidated financial statements and related notes of DPS, and with our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

KEURIG DR PEPPER INC.

PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

For the Second Quarter of 2018

(Unaudited)



(in millions, except per share data)	Reported KDP⁽¹⁾			DPS Second Quarter of 2018⁽²⁾			Reclassifications			Pro Forma Adjustments⁽³⁾			Pro Forma Combined
Net sales	$	949		$	1,886		$	—		$	(13	)	$	2,822
Cost of sales	458			790			—			(15		)	1,233
Gross profit	491			1,096			—			2			1,589
Selling, general and administrative expenses	321			721			28			(50		)	1,020
Depreciation and amortization	—			28			(28		)	—			—
Other operating income (loss), net	3			(15		)	—			1			(11		)
Income from operations	167			362			—			51			580
Interest expense	51			43			—			76			170
Interest expense - related party	26			—			—			(26		)	—
Other income, net	(8		)	(2		)	3			(1		)	(8		)
Income before provision for income taxes	98			321			(3		)	2			418
Provision for income taxes	13			83			—			(1		)	95
Income before equity in loss of unconsolidated affiliates	85			238			(3		)	3			323
Equity in loss of unconsolidated affiliates, net of tax	—			(3		)	3			—			—
Net income	85			235			—			3			323
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	2			—			—			(2		)	—
Net income attributable to KDP	$	83		$	235		$	—		$	5		$	323
Earnings per common share:
Basic	$	0.10		$	1.30								$	0.23
Diluted	0.10			1.30									$	0.23
Weighted average common shares outstanding:
Basic	790.5			180.2						415.8			1,386.5
Diluted	790.5			181.1						414.9			1,386.5


(1)	Refer to the Statements of Income.


(2)	Refers to DPS's activity during the the second quarter of 2018. Refer to our Quarterly Report on Form 10-Q as filed on August 8, 2018.


(3)	Refer to Summary of Pro Forma Adjustments.

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KEURIG DR PEPPER INC.

PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

For the First Six Months of 2018

(Unaudited)



(in millions, except per share data)	Reported KDP⁽¹⁾		DPS First Six Months of 2018⁽²⁾			Reclassifications⁽³⁾			Pro Forma Adjustments⁽³⁾			Pro Forma Combined
Net sales	$	1,897	$	3,480		$	—		$	(26	)	$	5,351
Cost of sales	925		1,471			—			(28		)	2,368
Gross profit	972		2,009			—			2			2,983
Selling, general and administrative expenses	621		1,347			55			(99		)	1,924
Depreciation and amortization	—		55			(55		)	—			—
Other operating income (expense), net	6		(14		)	—			3			(5		)
Income from operations	345		621			—			98			1,064
Interest expense	49		84			—			182			315
Interest expense - related party	51		—			—			(51		)	—
Interest income	—		(1		)	1			—			—
Loss on early extinguishment of debt	2		—			—			—			2
Other expense (income), net	5		(2		)	8			14			25
Income before provision for income taxes	238		540			(9		)	(47		)	722
Provision for income taxes	64		137			—			(13		)	188
Income before equity in loss of unconsolidated affiliates	174		403			(9		)	(34		)	534
Equity in loss of unconsolidated affiliates, net of tax	—		(9		)	9			—			—
Net income	174		394			—			(34		)	534
Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards	3		—			—			(3		)	—
Net income attributable to KDP	$	171	$	394		$	—		$	(31	)	$	534
Earnings per common share:
Basic	$	0.21	$	2.19								$	0.39
Diluted	0.21		2.17									0.39
Weighted average common shares outstanding:
Basic	790.5		180.1						415.9			1,386.5
Diluted	790.5		181.0						415.0			1,386.5


(1)	Refer to the Statements of Income.


(2)	Refers to DPS's activity during the the second quarter of 2018. Refer to our Quarterly Report on Form 10-Q as filed on August 8, 2018.


(3)	Refer to Summary of Pro Forma Adjustments.

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KEURIG DR PEPPER INC.

RECONCILIATION OF PRO FORMA SEGMENT INFORMATION

(Unaudited)



(in millions)	Reported KDP⁽¹⁾			DPS Second Quarter of 2018⁽²⁾			Pro Forma Adjustments⁽³⁾			Pro Forma Combined
For the Second Quarter of 2018
Net Sales
Coffee Systems	$	949		$	—		$	—		$	949
Packaged Beverages	—			1,378			—			1,378
Beverage Concentrates	—			372			(13		)	359
Latin America Beverages	—			136			—			136
Total net sales	$	949		$	1,886		$	(13	)	$	2,822

Income from Operations
Coffee Systems	$	274		$	—		$	—		$	274
Packaged Beverages	—			148			11			159
Beverage Concentrates	—			248			(13		)	235
Latin America Beverages	—			26			—			26
Unallocated corporate costs	(107		)	(60		)	53			(114		)
Total income from operations	$	167		$	362		$	51		$	580



(in millions)	Reported KDP⁽¹⁾			DPS First Six Months of 2018⁽²⁾			Pro Forma Adjustments⁽³⁾			Pro Forma Combined
For the First Six Months of 2018
Net Sales
Coffee Systems	$	1,897		$	—		$	—		$	1,897
Packaged Beverages	—			2,556			—			2,556
Beverage Concentrates	—			675			(26		)	649
Latin America Beverages	—			249			—			249
Total net sales	$	1,897		$	3,480		$	(26	)	$	5,351

Income from Operations
Coffee Systems	$	531		$	—		$	(3	)	$	528
Packaged Beverages	—			297			20			317
Beverage Concentrates	—			441			(27		)	414
Latin America Beverages	—			40			(2		)	38
Unallocated corporate costs	(186		)	(157		)	110			(233		)
Total income from operations	$	345		$	621		$	98		$	1,064


(1)	Refer to the Statements of Income.


(2)	Refers to DPS's activity during the second quarter and first six months of 2018.


(3)	Refer to Summary of Pro Forma Adjustments.

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Summary of Pro Forma Adjustments

Pro forma adjustments included in the Pro Forma Condensed Combined Statements of Income for the second quarter and first six months of 2018 are as follows:


a.	A decrease in Net sales to remove the historical deferred revenue associated with DPS' arrangements with PepsiCo, Inc. and The Coca-Cola Company, which were eliminated in the fair value adjustments for DPS as part of purchase price accounting in connection with the DPS Merger.


b.	An increase in Net sales to remove the historical amortization of certain capitalized upfront customer incentive program payments. These were eliminated in the fair value adjustments for DPS as these upfront payments were revalued within the customer relationship intangible assets recorded in purchase price accounting.


c.	Adjustment to remove the impact of the step-up of inventory recorded in purchase price accounting.


d.	Adjustments to SG&A expenses due to changes in amortization as a result of the fair value adjustments for DPS' intangible assets with definite lives as part of purchase price accounting.


e.	Adjustments to SG&A expenses due to changes in depreciation as a result of the fair value adjustments for DPS' property, plant and equipment as part of purchase price accounting.


f.	A decrease to SG&A expenses for both DPS and Maple to remove non-recurring transaction costs as a result of the DPS Merger.


g.	Removal of the Interest expense - related party caption for Maple, as the related party debt was capitalized into Additional paid-in capital immediately prior to the DPS Merger.


h.	Adjustments to Interest expense to remove the historical amortization of deferred debt issuance costs, discounts and premiums and to record incremental amortization as a result of the fair value adjustments for DPS' senior unsecured notes as part of purchase price accounting.


i.	Adjustments to Interest expense to record incremental interest expense and amortization of deferred debt issuance costs for borrowings related to the DPS Merger.


j.	Removal of the Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards caption as the Maple non-controlling interest was eliminated to reflect the capital structure of KDP.

Summary of Reclassifications

Reclassifications included in the Pro Forma Condensed Combined Statements of Income for the second quarter and first six months of 2018 are as follows:


a.	Foreign currency transaction gains and losses were reclassified from Cost of sales and SG&A expenses in the historical DPS Statements of Income to Other (income) expense, net.


b.	Depreciation and amortization expenses were reclassified from Depreciation and amortization in the historical DPS Statements of Income to SG&A expenses.


c.	Interest income was reclassified from Interest income in the historical DPS Statements of Income to Other (income) expense, net.

NON-GAAP FINANCIAL MEASURES

To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented in this report selected unaudited pro forma combined financial information. We also present for the second quarter and first six months of 2019 (i) Adjusted net sales, (ii) Adjusted income from operations, (iii) Adjusted net income and (iv) Adjusted diluted EPS and for the first quarter of 2018 (i) Adjusted pro forma net sales, (ii) Adjusted pro forma income from operations, (iii) Adjusted pro forma net income and (iv) Adjusted pro forma diluted EPS, which are considered non-GAAP financial measures. This pro forma financial information and 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 net sales, 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 second quarter and first six months of 2019, we define our Adjusted non-GAAP financial measures as certain financial statement captions and metrics adjusted for certain items affecting comparability, while for the second quarter and first six months of 2018, we define our Adjusted non-GAAP financial measures as certain pro forma financial statement captions and metrics adjusted for certain items affecting comparability. The items affecting comparability are defined below.

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Items affecting comparability: Defined as certain items that are excluded for comparison to prior year periods, adjusted for the tax impact as applicable. Tax impact is determined based upon an approximate rate for each item. For each period, management adjusts for (i) the unrealized mark-to-market impact of derivative instruments not designated as hedges in accordance with U.S. GAAP and do not have an offsetting risk reflected within the financial results; (ii) the amortization associated with definite-lived intangible assets; (iii) the amortization of the deferred financing costs associated with the DPS Merger and Maple's acquisition of Keurig Green Mountain, Inc. in 2016 (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 Keurig Green Mountain, Inc. Executive Ownership Plan or the Keurig Dr Pepper Omnibus Incentive Plan of 2009; and (vi) other certain items that are excluded for comparison purposes to prior year periods.

Prior to the second quarter of 2019, we did not add back the amortization of the fair value adjustment of the senior unsecured debt recognized as a result of the purchase price allocation for the DPS Merger. As this item is similar to the amortization of intangibles, we changed our method of computing Adjusted Pro Forma (2018) and Adjusted GAAP (2019) results to exclude the amortization of the fair value adjustment of the senior unsecured notes in order to reflect how management views our business results on a consistent basis.

For the second quarter and first six months of 2019, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) transaction costs not associated with the DPS Merger; (iv) provision for legal settlements; (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, as discussed in our Annual Report on Form 10-K.

For the second quarter and first six months of 2018, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to the DPS Merger and the Keurig Acquisition; (ii) productivity expenses; (iii) provisions for legal settlements; (iv) the loss on early extinguishment of debt related to the redemption of debt; and (v) tax reform associated with the TCJA.

For the second quarter and first six months of 2019, the supplemental financial data set forth below includes reconciliations of Adjusted net sales, Adjusted income from operations, Adjusted net income and Adjusted diluted EPS to the applicable financial measure presented in the unaudited condensed consolidated financial statement for the same period. For the second quarter and first six months of 2018, the supplemental financial data set forth below includes reconciliations of Adjusted pro forma net sales, Adjusted pro forma income from operations, Adjusted pro forma net income and Adjusted pro forma diluted EPS to the applicable financial measure presented in the unaudited pro forma condensed combined financial statements for the same period. For a reconciliation of the applicable financial measure presented in the unaudited pro forma condensed combined financial statement for the second quarter and first six months of 2018 to the applicable historical financial measure presented in accordance with U.S. GAAP, please see "Supplemental Unaudited Pro Forma Condensed Combined Financial Information" above.

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KEURIG DR PEPPER INC.

RECONCILIATION OF CERTAIN REPORTED ITEMS TO CERTAIN NON-GAAP ADJUSTED ITEMS

For the Second Quarter of 2019

(Unaudited, in millions, except per share data)



	Cost of sales			Gross profit			Gross margin		Selling, general and administrative expenses			Other operating expense, net			Income from operations			Operating margin
Reported	$	1,186		$	1,626		57.8	%	$	1,028		$	11		$	587		20.9	%
Items Affecting Comparability:
Mark to market	11			(11		)			(3		)	—			(8		)
Amortization of intangibles	—			—					(32		)	—			32
Stock compensation	—			—					(8		)	—			8
Restructuring and integration costs	(1		)	1					(37		)	—			38
Productivity	(1		)	1					(23		)	(9		)	33
Transaction costs	—			—					(1		)	—			1
Provision for settlements	—			—					(8		)	—			8
Malware Incident	—			—					(3		)	—			3
Adjusted GAAP	$	1,195		$	1,617		57.5	%	$	913		$	2		$	702		25.0	%



	Interest expense			Other expense (income), net			Income before provision for income taxes		Provision for income taxes		Effective tax rate		Net income		Weighted Average Diluted shares	Diluted earnings per share
Reported	$	170		$	1		$	416	$	102	24.5	%	$	314	1,419	$	0.22
Items Affecting Comparability:
Mark to market	(16		)	(2		)	10		4				6			—
Amortization of intangibles	—			—			32		9				23			0.02
Amortization of deferred financing costs	(3		)	—			3		1				2			—
Amortization of fair value debt adjustment	(6		)	—			6		1				5			—
Stock compensation	—			—			8		2				6			—
Restructuring and integration costs	—			—			38		11				27			0.02
Productivity	—			—			33		7				26			0.02
Transaction costs	(7		)	—			8		2				6			—
Provision for settlements	—			—			8		2				6			—
Malware Incident	—			—			3		1				2			—
Adjusted GAAP	$	138		$	(1	)	$	565	$	142	25.1	%	$	423	1,419	$	0.30

Diluted earnings per common share 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 Second Quarter of 2018

(Unaudited, in millions, except per share data)



	Cost of sales			Gross profit		Gross margin		Selling, general and administrative expenses			Income from operations			Operating margin
Pro Forma	$	1,233		$	1,589	56.3	%	$	1,020		$	580		20.6	%
Items Affecting Comparability:
Mark to market	(2		)	2				9			(7		)
Amortization of intangibles	—			—				(31		)	31
Stock compensation	—			—				(6		)	6
Restructuring and integration costs	—			—				(33		)	33
Productivity	(2		)	2				7			(5		)
Provision for settlements	—			—				(2		)	2
Adjusted Pro Forma	$	1,229		$	1,593	56.4	%	$	964		$	640		22.7	%



	Interest expense			Other expense (income), net			Income before provision for income taxes			Provision for income taxes			Effective tax rate		Net income			Weighted Average Diluted shares	Diluted earnings per share
Pro Forma	$	170		$	(8	)	$	418		$	95		22.7	%	$	323		1,386.5	$	0.23
Items Affecting Comparability:
Mark to market	10			2			(19		)	(5		)			(14		)		(0.01		)
Amortization of intangibles	—			—			31			8					23				0.02
Amortization of fair value debt adjustment	(5		)	—			5			1					4				—
Stock compensation	—			—			6			—					6				—
Restructuring and integration costs	—			—			33			6					27				0.02
Productivity	—			—			(5		)	(1		)			(4		)		—
Provision for settlements	—			—			2			1					1				—
Tax reform	—			—			—			10					(10		)		(0.01		)
Adjusted Pro Forma	$	175		$	(6	)	$	471		$	115		24.4	%	$	356		1,386.5	$	0.26

Numbers 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 First Six Months of 2019

(Unaudited, in millions, except per share data)



	Cost of sales			Gross profit		Gross margin		Selling, general and administrative expenses			Other operating expense, net			Income from operations			Operating margin
Reported	$	2,292		$	3,024	56.9	%	$	1,939		$	—		$	1,085		20.4	%
Items Affecting Comparability:
Mark to market	(1		)	1				9			—			(8		)
Amortization of intangibles	—			—				(63		)	—			63
Stock compensation	—			—				(15		)	—			15
Restructuring and integration costs	(2		)	2				(97		)	—			99
Productivity	(4		)	4				(29		)	(9		)	42
Transaction costs	—			—				(1		)	—			1
Inventory Step-Up	(3		)	3				—			—			3
Provision for settlements	—			—				(15		)	—			15
Malware Incident	(2		)	2				(6		)	—			8
Adjusted GAAP	$	2,280		$	3,036	57.1	%	$	1,722		$	(9	)	$	1,323		24.9	%



	Interest expense			Loss on early extinguishment of debt			Income before provision for income taxes		Provision for income taxes		Effective tax rate		Net income		Weighted Average Diluted shares	Diluted earnings per share
Reported	$	339		$	9		$	731	$	187	25.6	%	$	544	1,418.5	$	0.38
Items Affecting Comparability:							—						—
Mark to market	(45		)	—			37		11				26			0.02
Amortization of intangibles	—			—			63		17				46			0.03
Amortization of deferred financing costs	(7		)	—			7		2				5			—
Amortization of fair value debt adjustment	(13		)	—			13		2				11			0.01
Stock compensation	—			—			15		4				11			0.01
Restructuring and integration costs	—			—			99		26				73			0.05
Productivity	—			—			42		9				33			0.02
Transaction costs	(12		)	—			13		3				10			0.01
Loss on early extinguishment of debt	—			(9		)	9		2				7			—
Inventory Step-Up	—			—			3		1				2			—
Provision for settlements	—			—			15		4				11			0.01
Malware Incident	—			—			8		2				6			—
Adjusted GAAP	$	262		$	—		$	1,055	$	270	25.6	%	$	785	1,418.5	$	0.55

Diluted earnings per common share 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 First Six Months of 2018

(Unaudited, in millions, except per share data)



	Net sales		Cost of sales			Gross profit		Gross margin		Selling, general and administrative expenses			Other operating expense, net			Income from operations		Operating margin
Pro Forma	$	5,351	$	2,368		$	2,983	55.7	%	$	1,924		$	(5	)	$	1,064	19.9	%
Items Affecting Comparability:
Mark to market	—		(16		)	16				9			—			7
Amortization of intangibles	—		—			—				(59		)	—			59
Stock compensation	—		—			—				(12		)	—			12
Restructuring and integration costs	—		—			—				(39		)	—			39
Productivity	—		(6		)	6				(7		)	(4		)	17
Provision for settlements	4		—			4				—			—			4
Adjusted Pro Forma	$	5,355	$	2,346		$	3,009	56.2	%	$	1,816		$	(9	)	$	1,202	22.4	%



	Interest expense			Loss on early extinguishment of debt			Other expense (income), net		Income before provision for income taxes			Provision for income taxes			Effective tax rate		Net income			Weighted Average Diluted shares	Diluted earnings per share
Pro Forma	$	315		$	2		$	25	$	722		$	188		26.0	%	$	534		1,386.5	$	0.39
Items Affecting Comparability:									—
Mark to market	37			—			6		(36		)	(9		)			(27		)		(0.02		)
Amortization of intangibles	—			—			—		59			15					44				0.03
Amortization of deferred financing costs	(1		)	—			—		1			1					—				—
Amortization of fair value debt adjustment	(10		)	—			—		10			2					8				0.01
Stock compensation	—			—			—		12			2					10				0.01
Restructuring and integration costs	—			—			—		39			6					33				0.02
Productivity	—			—			—		17			5					12				0.01
Loss on early extinguishment of debt	—			(2		)	—		2			—					2				—
Provision for settlements	—			—			—		4			1					3				—
Tax reform	—			—			—		—			7					(7		)		(0.01		)
Adjusted Pro Forma	$	341		$	—		$	31	$	830		$	218		26.3	%	$	612		1,386.5	$	0.44

Numbers may not foot due to rounding.

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Keurig Dr Pepper Inc.

Reconciliation of Pro Forma Segment Information to Certain Non-GAAP Adjusted Pro Forma Segment Information

(Unaudited)



(in millions)	Reported			Items Affecting Comparability			Adjusted GAAP
For the second quarter of 2019:
Net Sales
Coffee Systems	$	990		$	—		$	990
Packaged Beverages	1,311			—			1,311
Beverage Concentrates	370			—			370
Latin America Beverages	141			—			141
Total net sales	$	2,812		$	—		$	2,812

Income from Operations
Coffee Systems	$	287		$	44		$	331
Packaged Beverages	186			4			190
Beverage Concentrates	244			2			246
Latin America Beverages	26			(6		)	20
Unallocated corporate costs	(156		)	71			(85		)
Total income from operations	$	587		$	115		$	702



(in millions)	Pro Forma			Items Affecting Comparability		Adjusted Pro Forma
For the second quarter of 2018:
Net Sales
Coffee Systems	$	949		$	—	$	949
Packaged Beverages	1,378			—		1,378
Beverage Concentrates	359			—		359
Latin America Beverages	136			—		136
Total net sales	$	2,822		$	—	$	2,822

Income from Operations
Coffee Systems	$	274		$	32	$	306
Packaged Beverages	159			2		161
Beverage Concentrates	235			1		236
Latin America Beverages	26			—		26
Unallocated corporate costs	(114		)	25		(89		)
Total income from operations	$	580		$	60	$	640

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KEURIG DR PEPPER INC.

RECONCILIATION OF SEGMENT ITEMS TO CERTAIN NON-GAAP ADJUSTED SEGMENT ITEMS

(Unaudited)



(in millions)	Reported			Items Affecting Comparability			Adjusted GAAP
For the first six months of 2019:
Net Sales
Coffee Systems	$	1,958		$	—		$	1,958
Packaged Beverages	2,427			—			2,427
Beverage Concentrates	674			—			674
Latin America Beverages	257			—			257
Total net sales	$	5,316		$	—		$	5,316

Income from Operations
Coffee Systems	$	580		$	86		$	666
Packaged Beverages	335			15			350
Beverage Concentrates	445			2			447
Latin America Beverages	37			(5		)	32
Unallocated corporate costs	(312		)	140			(172		)
Total income from operations	$	1,085		$	238		$	1,323



(in millions)	Pro Forma			Items Affecting Comparability		Adjusted Pro Forma
For the first six months of 2018:
Net Sales
Coffee Systems	$	1,897		$	4	$	1,901
Packaged Beverages	2,556			—		2,556
Beverage Concentrates	649			—		649
Latin America Beverages	249			—		249
Total net sales	$	5,351		$	4	$	5,355

Income from Operations
Coffee Systems	$	528		$	90	$	618
Packaged Beverages	317			4		321
Beverage Concentrates	414			1		415
Latin America Beverages	38			—		38
Unallocated corporate costs	(233		)	43		(190		)
Total income from operations	$	1,064		$	138	$	1,202

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency exchange rates, interest rates and commodity prices. From time to time, we may enter into derivatives or other financial instruments to hedge or mitigate commercial risks. We do not enter into derivative instruments for speculation, investing or trading.

FOREIGN EXCHANGE RISK

The majority of our net sales, expenses and capital purchases are transacted in U.S. dollars. However, we have exposure with respect to foreign exchange rate fluctuations. Our primary exposure to foreign exchange rates is the Canadian dollar and Mexican peso against the U.S. dollar. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred. As of June 30, 2019, the impact to our income from operations of a 10% change (up or down) in exchange rates is estimated to be an increase or decrease of approximately $32 million on an annual basis.

We use derivative instruments such as foreign exchange forward contracts to manage a portion of our exposure to changes in foreign exchange rates. As of June 30, 2019, we had derivative contracts outstanding with a notional value of $475 million maturing at various dates through September 25, 2024.

INTEREST RATE RISK

We centrally manage our debt portfolio through the use of interest rate swaps and monitor our mix of fixed-rate and variable rate debt. As of June 30, 2019, the carrying value of our fixed-rate debt, excluding lease obligations, was $11,785 million and our variable-rate debt was $3,185 million, inclusive of commercial paper.

Additionally, as of June 30, 2019, the total notional value of receive-fixed, pay-variable interest rate swaps was $50 million and the total notional value of receive-variable, pay-fixed interest rate swaps was $575 million.

The following table is an estimate of the impact to our interest rate expense based upon our variable rate debt and derivative instruments and the fair value of the interest rate swaps that could result from hypothetical interest rate changes during the term of the financial instruments, based on debt levels as of June 30, 2019:




Hypothetical Change in Interest Rates⁽¹⁾		Annual Impact to Interest Expense
1-percent decrease		$27 million decrease
1-percent increase		$27 million increase


(1)	We pay an average floating rate, which fluctuates periodically, based on LIBOR and a credit spread, as a result of certain derivative instruments and variable rate debt instruments. See Notes 7 and 8 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

COMMODITY RISKS

We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. Our principal commodities risks relate to our purchases of coffee beans, PET, aluminum, diesel fuel, corn (for high fructose corn syrup), apple juice concentrate, apples, sucrose and natural gas (for use in processing and packaging).

We utilize commodities derivative instruments and supplier pricing agreements to hedge the risk of adverse movements in commodity prices for limited time periods for certain commodities. The fair market value of these contracts as of June 30, 2019 was a net liability of $18 million.

As of June 30, 2019, the impact of a 10% change (up or down) in market prices for these commodities where the risk of adverse movements has not been hedged is estimated to have a $5 million impact to our income from operations for the year ending December 31, 2019.

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ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, as of June 30, 2019, our disclosure controls and procedures are effective to (i) provide reasonable assurance that information required to be disclosed in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and (ii) ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

As described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, the DPS Merger was completed on July 9, 2018, and represented a change in internal control over financial reporting. Management continues to consolidate and integrate KDP’s system of controls. The processes and controls for significant areas including business combinations, intangibles and goodwill valuations, income taxes, treasury, consolidations and the preparation of financial statements and related disclosures, and entity level controls have been substantially impacted by the ongoing integration activities. The primary changes in these areas are related to the consolidation of process owner leadership and control owners, and where required, the modification of inputs, processes and associated systems. For all areas of change noted, management believes the control design and implementation thereof are being appropriately modified to address underlying risks. The above ongoing integration activities to KDP’s internal control over financial reporting are reasonably likely to materially affect KDP’s internal control over financial reporting in 2019.

In addition, the Company adopted ASC 842 as of January 1, 2019. The Company implemented a new IT system and internal controls related to the process of gathering, recording, accounting for and disclosing leases under the new standard.

There were no other changes during the quarter ended June 30, 2019 that have materially affected, or reasonably likely to materially affect, our internal controls over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

We are occasionally subject to litigation or other legal proceedings relating to our business.

See Note 14 of the Notes to our Unaudited Condensed Consolidated Financial Statements for more information related to commitments and contingencies, which is incorporated herein by reference.

BA Sports Nutrition Litigation

On March 6, 2019, The American Bottling Company ("ABC"), a subsidiary of KDP, filed suit against BA and Mike Repole in the Superior Court for the State of Delaware. The complaint asserts claims for breach of contract and promissory estoppel against BA and asserts a claim for tortious interference against Mr. Repole, in each case in connection with BA's attempted early termination of the distribution contract between BA and ABC. The complaint seeks monetary damages, attorneys' fees and costs. ABC intends to vigorously prosecute the action. The Company is unable to predict the outcome of the lawsuit, the potential recovery, if any, associated with the resolution of the lawsuit or any potential effect it may have on the Company or its operations.

ITEM 1A. Risk Factors

Deterioration of general macro-economic conditions could have a negative impact on our business, financial condition, results of operations and liquidity due to impacts on our suppliers, customers and operating costs.

Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers’ ability and willingness to sell quality products to us at favorable prices and terms. Many factors outside our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms. Such factors include a general decline in the economy and economic conditions and prolonged recessionary conditions. These events could negatively affect our suppliers’ operations and make it difficult for them to obtain the credit lines or loans necessary to finance their operations in the short-term or long-term and meet our product requirements.

Financial or operational difficulties that some of our suppliers may face, including their ability to access working capital, could also increase the cost of the products we purchase from them, the timing of settlement for our obligation to the supplier or our ability to source product from them. We might not be able to pass our increased costs onto our customers and, to the extent these difficulties impact the timing of settlement for our obligation to the supplier, we may have a decrease in our cash flow from operations and may have to use our various financing arrangements for short-term liquidity needs.

There have been no other material changes that we are aware of from the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.

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ITEM 6. Exhibits



2.1	Separation and Distribution Agreement between Cadbury Schweppes plc and Dr Pepper Snapple Group, Inc. and, solely for certain provisions set forth therein, Cadbury plc, dated as of May 1, 2008 (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (filed on May 5, 2008) and incorporated herein by reference).
2.2	Agreement and Plan of Merger, dated as of November 21, 2016, by and among Bai Brands LLC, Dr Pepper Snapple Group, Inc., Superfruit Merger Sub, LLC and Fortis Advisors LLC, (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K (filed on November 23, 2016) and incorporated herein by reference).
2.3	Amendment No. 1, dated as of January 31, 2017, to the Agreement and Plan of Merger, dated as of November 21, 2016, by and among Bai Brands LLC, Dr Pepper Snapple Group, Inc., Superfruit Merger Sub, LLC and Fortis Advisors LLC, (filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K (filed on January 31, 2017) and incorporated herein by reference).
2.4	Agreement and Plan of Merger, dated as of January 29, 2018, by and among Dr Pepper Snapple Group, Inc., Maple Parent Holdings Corp. and Salt Merger Sub, Inc. (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (filed on January 31, 2018) and incorporated herein by reference).
3.1	Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference).
3.2	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 17, 2012 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (filed July 26, 2012) and incorporated herein by reference).
3.3	Certificate of Second Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 19, 2016 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed May 20, 2016) and incorporated herein by reference).
3.4	Certificate of Third Amendment to the Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of July 9, 2018 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed July 9, 2018) and incorporate herein by reference).
3.5	Amended and Restated By-Laws of Dr Pepper Snapple Group, Inc. effective as of January 25, 2016 (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K (filed January 25, 2016) and incorporated herein by reference).
3.6	Amended and Restated By-Laws of Keurig Dr Pepper Inc. effective as of July 9, 2018 (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K (filed July 9, 2018) and incorporated herein by reference.
4.1	Indenture, dated April 30, 2008, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.2	Form of 7.45% Senior Notes due 2038 (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.3	Registration Rights Agreement, dated April 30, 2008, between Dr Pepper Snapple Group, Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, UBS Securities LLC, BNP Paribas Securities Corp., Mitsubishi UFJ Securities International plc, Scotia Capital (USA) Inc., SunTrust Robinson Humphrey, Inc., Wachovia Capital Markets, LLC and TD Securities (USA) LLC (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.4	Registration Rights Agreement Joinder, dated May 7, 2008, by the subsidiary guarantors named therein (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference).
4.5	Supplemental Indenture, dated May 7, 2008, among Dr Pepper Snapple Group, Inc., the subsidiary guarantors named therein and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference).
4.6	Second Supplemental Indenture dated March 17, 2009, to be effective as of December 31, 2008, among Splash Transport, Inc., as a subsidiary guarantor, Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company's Annual Report on Form 10-K (filed on March 26, 2009) and incorporated herein by reference).
4.7	Third Supplemental Indenture, dated October 19, 2009, among 234DP Aviation, LLC, as a subsidiary guarantor; Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q (filed November 5, 2009) and incorporated herein by reference).
4.8	Fourth Supplemental Indenture, dated as of January 31, 2017, among Bai Brands LLC, a New Jersey limited liability company, 184 Innovations Inc., a Delaware corporation (each as a new subsidiary guarantors under the Indenture dated April 30, 2008 (as referenced in Item 4.1 in this Exhibit Index), Dr Pepper Snapple Group, Inc., each other then-existing Guarantor under the Indenture and Wells Fargo, National Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed February 2, 2017) and incorporated herein by reference).
4.9	Indenture, dated as of December 15, 2009, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference).
4.10	Second Supplemental Indenture, dated as of January 11, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on January 11, 2011) and incorporated herein by reference).

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4.11	Third Supplemental Indenture, dated as of November 15, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).
4.12	2.60% Senior Note due 2019 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).
4.13	3.20% Senior Note due 2021 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).
4.14	Fourth Supplemental Indenture, dated as of November 20, 2012, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference).
4.15	2.00% Senior Note due 2020 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference).
4.16	2.70% Senior Note due 2022 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference).
4.17	Fifth Supplemental Indenture, dated as of November 9, 2015, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference).
4.18	3.40% Senior Note due 2025 (in global form), dated November 9, 2015, in the principal amount of $500,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference).
4.19	4.50% Senior Note due 2045 (in global form), dated November 9, 2015, in the principal amount of $250,000,000 (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 10, 2015) and incorporated herein by reference).
4.20	Sixth Supplemental Indenture, dated as of September 16, 2016, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on September 16, 2016) and incorporated herein by reference).
4.21	2.55% Senior Note due 2026 (in global form), dated September 16, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on September 16, 2016) and incorporated herein by reference).
4.22	Seventh Supplemental Indenture, dated as of December 14, 2016, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
4.23	2.53% Senior Note due 2021 (in global form), dated December 14, 2016, in the principal amount of $250,000,000 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
4.24	3.13% Senior Note due 2023 (in global form), dated December 14, 2016, in the principal amount of $500,000,000 (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
4.25	3.43% Senior Note due 2027 (in global form), dated December 14, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
4.26	4.42% Senior Note due 2046 (in global form), dated December 14, 2016, in the principal amount of $400,000,000 (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on December 14, 2016) and incorporated herein by reference).
4.27	Eighth Supplemental Indenture, dated as of January 31, 2017, among Bai Brands LLC, a New Jersey limited liability company, 184 Innovations Inc., a Delaware corporation (each as a new subsidiary guarantor under the Indenture dated April 30, 2008 (as referenced in Item 4.1 in this Exhibit Index), Dr Pepper Snapple Group, Inc., each other then-existing Guarantor under the Indenture) and Wells Fargo, National Bank, N.A., as trustee (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on February 2, 2017) and incorporated herein by reference).
4.28	Ninth Supplemental Indenture, dated as of June 15, 2017, among Dr Pepper Snapple Group, Inc., the guarantors party thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on June 15, 2017) and incorporated herein by reference).
4.29	Investor Rights Agreement by and among Keurig Dr Pepper Inc. and The Holders Listed on Schedule A thereto, dated as of July 9, 2018 (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.30	Base Indenture, dated as of May 25, 2018 between Maple Escrow Subsidiary and Wells Fargo Bank, N.A. as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.31	First Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2021 Notes (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).

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4.32	Second Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2023 Notes (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.33	Third Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2025 Notes (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.34	Fourth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2028 Notes (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.35	Fifth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2038 Notes (filed as Exhibit 4.6 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.36	Sixth Supplemental Indenture (including the form of note), dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and Maple Parent Holdings Corp. as parent guarantor, and Wells Fargo Bank, N.A., as trustee relating to the 2048 Notes (filed as Exhibit 4.7 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.37	Seventh Supplemental Indenture, dated as of July 9, 2018, among Keurig Dr Pepper Inc., the subsidiary guarantors thereto, and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.38	Registration Rights Agreement, dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., as representative of the several purchasers of the Notes (filed as Exhibit 4.9 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
4.39	Joinder to the Registration Rights Agreement, dated as of May 25, 2018, among Maple Escrow Subsidiary, Inc. and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., as representative of the several purchasers of the Notes (filed as Exhibit 4.10 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
10.1	Term Loan Agreement, dated as of February 28, 2018, among Maple Parent Holdings Corp., the banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
10.2	Term Loan Agreement, dated as of February 8, 2019, among Keurig Dr Pepper Inc., the banks party thereto and JPMorgan Chase, Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on February 11, 2019) and incorporated herein by reference).
10.3	Credit Agreement, dated as of February 28, 2018, among Maple Parent Holdings Corp., the banks and issuers of credit party thereto and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
10.4	Borrower Joinder (Term Loan Agreement), dated as of July 9, 2018, among Keurig Dr Pepper Inc., Maple Parent Holdings Corp. and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
10.5	Borrower Joinder (Credit Agreement), dated as of July 9, 2018, among Keurig Dr Pepper Inc., Maple Parent Holdings Corp. and JPMorgan Chase Bank, N.A. as administrative agent (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K (filed on July 9, 2018) and incorporated herein by reference).
10.6	Credit Agreement, dated as of May 29, 2019, among Keurig Dr Pepper Inc., the banks party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on May 29, 2019) and incorporated herein by reference).
10.7	Amended and Restated Employment Agreement, dated as of July 2, 2018, by and between Keurig Green Mountain, Inc. and Robert J. Gamgort (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
10.8	Employment Agreement, dated as of April 12, 2016, by and between Keurig Green Mountain, Inc. and Ozan Dokmecioglu (filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
10.9	Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
10.10	Matching Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
10.11	Directors' Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Incentive Plan of 2009 (filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q (filed on November 8, 2018) and incorporated herein by reference). ++
10.12	Keurig Dr Pepper Inc. Omnibus Stock Incentive Plan of 2019 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on June 11, 2019) and incorporated herein by reference).++

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10.13*	Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019.* ++
10.14*	Matching Restricted Stock Unit Award Terms and Conditions under the Keurig Dr Pepper Omnibus Stock Incentive Plan of 2019.* ++
31.1*	Certification of Chief Executive Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act.
31.2*	Certification of Chief Financial Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act.
32.1**	Certification of Chief Executive Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
32.2**	Certification of Chief Financial Officer of Keurig Dr Pepper Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
101*	The following financial information from Keurig Dr Pepper Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statement of Changes in Stockholders' Equity, and (vi) the Notes to Condensed Consolidated Financial Statements. The Instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

* Filed herewith.

** Furnished herewith.

++ Indicates a management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Keurig Dr Pepper Inc.

	By:	/s/ Ozan Dokmecioglu

	Name:	Ozan Dokmecioglu
	Title:	Chief Financial Officer of Keurig Dr Pepper Inc.
		(Principal Financial Officer)
Date: August 8, 2019