KDP · Read the filing

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This section of this Annual Report on Form 10-K generally discusses the years ended December 31, 2021 and 2020 and year-over-year comparisons between the years ended December 31, 2021 and 2020. Discussions of the periods prior to the year ended December 31, 2020 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 and the discussion therein for the year ended December 31, 2020 compared to the year ended December 31, 2019 is incorporated by reference into this Annual Report.

This Annual Report on Form 10-K contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands. All of the product names included in this Annual Report on Form 10-K are either our registered trademarks or those of our licensors.

OVERVIEW

KDP is a leading beverage company in North America, with a diverse portfolio of flavored (non-cola) CSDs, NCBs, including water (enhanced and flavored), ready-to-drink tea and coffee, juice, juice drinks, mixers and specialty coffee, and is a leading producer of innovative single serve brewers. 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 system. KDP markets and sells its products to retailers, including supermarkets, mass merchandisers, club stores, pure-play e-commerce retailers, and office superstores; to restaurants, hotel chains, office product and coffee distributors, and partner brand owners; and directly to consumers through its website. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.

SEGMENTS

Effective January 1, 2021, we modified our internal reporting and operating segments to reflect changes in the executive leadership team to further enhance speed-to-market and decision effectiveness. These modifications did not change our reportable segments. As of December 31, 2021, our reportable segments were as follows:

•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 single-serve brewers, K-Cup pods and other coffee products.

•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 our DSD and WD systems. DSD and WD have both been identified as operating segments that the Company aggregated into Packaged Beverages due to similar economic characteristics and similarities in the nature of finished goods sales and route-to-markets.

•The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third-party bottlers, primarily in the U.S. and Canada. Most of the brands in this segment are CSDs. Our FFS operating segment is aggregated with our Branded Concentrates operating segment into our Beverage Concentrates reportable segment due to similar economic characteristics and similarities in the nature of the product sold.

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

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VOLUME

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

Coffee Systems K-Cup Pod and Appliance Sales Volume

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

Packaged Beverages and Latin America Beverages Sales Volume

In our Packaged Beverages and Latin America Beverages segments, we measure volume as case sales to customers. A case sale represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case sales include both our owned brands and certain brands licensed to and/or distributed by us.

Beverage Concentrates Sales Volume

In our Beverage Concentrates segment, we measure our sales volume as concentrate case sales for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings. It does not include any other component of the finished beverage other than concentrate.

USE OF NON-GAAP FINANCIAL MEASURES

Non-GAAP financial measures are provided in addition to U.S. GAAP measures, including adjusted income from operations, adjusted net income and adjusted diluted earnings per share. See Non-GAAP Financial Measures for more information, including reconciliations to the corresponding U.S. GAAP measures.

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EXECUTIVE SUMMARY

Financial Overview

As Reported, in millions (except Diluted EPS)

As Adjusted, in millions (except Diluted EPS)

During the years ended December 31, 2021 and 2020, we made net repayments of our Notes, our commercial paper and our other credit agreements of $1,721 million and $951 million, respectively.

On November 1, 2021, Coca-Cola announced that it had acquired full ownership of BodyArmor. On December 15, 2021, we received $576 million of cash proceeds, net of holdback liabilities, from the sale of our equity interests in BodyArmor to Coca-Cola. As a result, we recorded an estimated gain on the sale of approximately $524 million during the fourth quarter of 2021. Refer to Note 14 of the Notes to our Consolidated Financial Statements for further information about the transaction.

In the fourth quarter of 2021, we announced that our Board of Directors authorized a share repurchase program of up to $4 billion of our outstanding common stock, beginning on January 1, 2022, potentially enabling us to return value to shareholders.

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Uncertainties and Trends Affecting Our Business

We believe the North American beverage market is influenced by certain key trends and uncertainties. Refer to Item 1A, Risk Factors, as well as the Uncertainties and Trends Affecting Liquidity section below, for more information about risks and uncertainties facing us.

Some of these items, such as the ongoing COVID-19 pandemic and its resulting impacts on the global economy, including supply chain challenges and labor shortages, have led to broad-based inflation in input costs, logistics, manufacturing and labor costs. During the year ended December 31, 2021, we have experienced supply chain disruptions and a significant inflationary impact compared to the prior year. These challenges intensified during the later part of the year due to the surge in cases resulting from the Omicron variant. These impacts have created headwinds for our products that we expect to continue into 2022.

These inflationary pressures could impact our margins and operating results. We, along with our competitors, have increased the pricing on a number of products in response to widespread inflation. These pricing increases may result in future reductions in volume.

Refer to Note 6 of the Notes to our Consolidated Financial Statements and Item 7A, Quantitative and Qualitative Disclosures About Market Risk for management's discussion of how we manage our exposure to commodity risk.

Impact of COVID-19 on our Financial Statements

The following table sets forth our reconciliation of significant COVID-19-related expenses. Employee compensation expense and employee protection costs, which impact our SG&A expenses and cost of sales, are included as the COVID-19 item affecting comparability and are excluded in our Adjusted financial measures. In addition, reported amounts under U.S. GAAP also include additional costs, not included as the COVID-19 item affecting comparability, as presented in tables below.

Items Affecting Comparability(1)

For the year ended December 31, 2021

Coffee Systems $ 4 $ 16 $ (2) $ — $ 18

Packaged Beverages 8 7 (8) — 7

Beverage Concentrates — — (3) — (3)

Latin America Beverages — 2 — — 2

For the year ended December 31, 2020

Beverage Concentrates — — 4 — 4

Latin America Beverages — 2 — — 2

(1)Employee compensation expense and employee protection costs are both included as the COVID-19 items affecting comparability in the reconciliation of our Adjusted Non-GAAP financial measures.

(2)In 2021, amounts primarily included incremental benefits provided to frontline workers such as extended sick leave, in order to maintain essential operations during the COVID-19 pandemic. In 2020, amounts primarily reflected temporary incremental frontline incentive pay and benefits, as well as pay for temporary employees, including the associated taxes. Impacts both cost of sales and SG&A expenses.

(3)Includes costs associated with personal protective equipment, temperature scans, cleaning and other sanitization services. Impacts both cost of sales and SG&A expenses.

(4)In 2020, allowances reflected the expected impact of the economic uncertainty caused by COVID-19, leveraging estimates of credit worthiness, default and recovery rates for certain of our customers. In 2021, reversals of those previously recorded allowances reflect improving economic conditions. Impacts SG&A expenses.

(5)Impacts cost of sales.

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RESULTS OF OPERATIONS

We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees.

References in the financial tables to percentage changes that are not meaningful are denoted by "NM".

Non-GAAP financial measures are provided in addition to U.S. GAAP measures. Such non-GAAP financial measures are excluded from the Results of Operations by Segment when there is no difference between the non-GAAP and the corresponding U.S. GAAP measure. See Non-GAAP Financial Measures for more information, including reconciliations to the corresponding U.S. GAAP measures.

Consolidated Operations

The following table sets forth our consolidated results of operations for the years ended December 31, 2021 and 2020:

For the Year Ended December 31, Dollar Percentage

(in millions, except per share amounts) 2021 2020 Change Change

Impairment of intangible assets — 67 (67) NM

Other operating (income) expense, net (70) (39) (31) NM

Loss on early extinguishment of debt 105 4 101 NM

Gain on sale of equity method investment (524) — (524) NM

Impairment of investments and note receivable 17 102 (85) NM

Other (income) expense, net (2) 17 (19) NM

Less: Net loss attributable to non-controlling interest (1) — (1) NM

Earnings per common share:

Sales Volume. The following table sets forth changes in sales volume for the year ended December 31, 2021 compared to the prior year:

K-Cup pod volume 5.6 %

Brewer volume 10.0 %

CSD sales volume 4.8 %

NCB sales volume (5.5) %

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Net Sales.Net sales increased $1,065 million, or 9.2%, to $12,683 million for the year ended December 31, 2021 compared to $11,618 million in the prior year. This performance reflected volume/mix of 5.7%, net price realization of 2.7% and favorable FX translation of 0.8%.

Gross Profit.Gross profit increased $491 million, or 7.6%, to $6,977 million for the year ended December 31, 2021 compared to $6,486 million in the prior year. This performance primarily reflected strong growth in net sales and the benefit of productivity and merger synergies. These benefits were partially offset by higher input and manufacturing costs, driven by both volume/mix growth and inflation, and unfavorable FX effects on our cost of sales. Gross margin decreased 80 bps versus the year ago period to 55.0%.

Selling, General and Administrative Expenses. SG&A expenses increased $175 million, or 4.4%, to $4,153 million for the year ended December 31, 2021 compared to $3,978 million in the prior year. The increase was driven by increases in logistics, driven by both inflation and higher volumes, higher marketing expense, and unfavorable FX effects. These increases were partially offset by reduced expenses of $100 million related to the COVID-19 pandemic and productivity and merger synergies.

Impairment of Intangible Assets. Impairment of intangible assets had a favorable change of $67 million for the year ended December 31, 2021 compared to the prior year, as a result of a non-cash impairment charge recorded for the Bai brand in the prior year as a result of our annual impairment analysis.

Other Operating Income, Net. Other operating income, net had a favorable change of $31 million for the year ended December 31, 2021 compared to the prior year, largely driven by the increased gain of $28 million year-over-year on asset sale-leaseback transactions related to our strategic asset investment program.

Income from Operations.Income from operations increased $414 million, or 16.7%, to $2,894 million for the year ended December 31, 2021 compared to $2,480 million in the prior year, driven by growth in all four segments. The increase in gross profit and the favorable change in impairment of intangible assets and other operating income, net, were partially offset by the increase in SG&A expenses. Operating margin increased 150 bps versus the year ago period to 22.8%.

Interest Expense. Interest expense decreased $104 million, or 17.2%, to $500 million for the year ended December 31, 2021 compared to $604 million for the prior year. This change was primarily the result of lower interest rates resulting from our strategic refinancing initiatives, as well as our continued deleveraging and favorable unrealized mark-to-market activity on interest rate contracts.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt reflected expense of $105 million during the year ended December 31, 2021 due to our strategic refinancing initiatives, as compared to $4 million in the prior year period.

Gain on Sale of Equity Method Investment. Gain on sale of investment reflects the gain recognized on the sale of our equity interests in BodyArmor during the year ended December 31, 2021.

Impairment of Investments and Note Receivable.For the year ended December 31, 2021, Impairment on investments and note receivable reflected a charge of $17 million, as the investment in Bedford and the associated notes receivable made during the year were determined to be impaired as Bedford used these funds to begin the wind-down of their operations. In the prior year, Impairment on investments and note receivable reflected a non-cash impairment charge of $102 million associated with the Bedford and LifeFuels investments.

Effective Tax Rate. The effective tax rate decreased 110 bps to 23.3% for the year ended December 31, 2021, compared to 24.4% in the prior year, primarily driven by the release of our valuation allowance against our U.S. foreign tax credit carryforwards, the tax benefit received from excess tax deductions that were generated from the vesting of RSUs, and the benefit received from the deferred rate change on the deferred tax liability related to our indefinite-lived intangible assets during the year ended December 31, 2021. These benefits were partially offset by an increase in our valuation allowance related to a deferred tax asset on our historical investment in Bedford.

Net Income Attributable to KDP.Net income attributable to KDP increased $821 million, or 62.0%, to $2,146 million for the year ended December 31, 2021 as compared to $1,325 million in the prior year, driven by the gain on sale of our equity method investment in BodyArmor, improved income from operations and reduced interest expense.

Diluted EPS. Diluted EPS increased 61.3% to $1.50 per diluted share as compared to $0.93 in the prior year.

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Adjusted Results of Operations

The following table sets forth selected consolidated adjusted results of operations for the years ended December 31, 2021 and 2020:

For the Year Ended December 31, Dollar Percentage

(in millions, except per share amounts) 2021 2020 Change Change

Adjusted operating margin 27.0 % 27.5 % (50) bps

Adjusted effective tax rate 22.7 % 24.5 % (180) bps

Adjusted Income from Operations. Adjusted income from operations increased $230 million, or 7.2%, to $3,421 million for the year ended December 31, 2021 compared to Adjusted income from operations of $3,191 million in the prior year. Driving this performance in the current period was strong growth in net sales, the benefit of productivity and merger synergies, and the favorable year-over-year comparison of asset sale-leaseback activities related to our strategic asset investment program. Partially offsetting these positive drivers were the impacts of broad-based inflation, higher marketing expense, increased operating costs due to higher volumes, and unfavorable foreign currency effects on our expenses. Adjusted operating margin declined 50 bps versus the year ago period to 27.0%.

Adjusted Interest Expense. Adjusted interest expense decreased $62 million, or 11.4%, to $480 million for the year ended December 31, 2021 compared to Adjusted interest expense of $542 million in the prior year, driven by reduced interest rates resulting from our strategic refinancing initiatives and continued deleveraging.

Adjusted Effective Tax Rate. The Adjusted effective tax rate decreased 180 bps to 22.7% for the year ended December 31, 2021, compared to 24.5% in the prior year, primarily driven by the tax benefit received from the release of our valuation allowance against our U.S. foreign tax credit carryforwards, as well as the benefit of excess tax deductions that were generated from the vesting of RSUs, during the year ended December 31, 2021.

Adjusted Net Income Attributable to KDP. Adjusted net income attributable to KDP increased $292 million, or 14.7%, to $2,280 million for the year ended December 31, 2021 as compared to Adjusted net income of $1,988 million in the prior year. This performance was driven primarily by strong growth in Adjusted income from operations and the decrease in Adjusted interest expense.

Adjusted Diluted EPS.Adjusted diluted EPS increased 14.3% to $1.60 per diluted share as compared to $1.40 per diluted share in the prior year.

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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 years ended December 31, 2021 and 2020, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:

(in millions) For the Year Ended December 31,

Latin America Beverages 599 497

For the Year Ended December 31,

Segment Results — Income from Operations

Latin America Beverages 133 105

Unallocated corporate costs (611) (647)

COFFEE SYSTEMS

The following table provides selected information for our Coffee Systems segment for the years ended December 31, 2021 and 2020:

For the Year Ended December 31, Dollar Percentage

Adjusted operating margin 32.1 % 34.2 % (210) bps

Sales Volume.Sales volume growth in the year ended December 31, 2021 compared to the prior year included K-Cup pod volume growth of 5.6%, reflecting strength in at-home consumption and improvement in the away-from-home businesses. Brewer volume increased 10.0% in the year ended December 31, 2021, successfully lapping growth of 21.2% in the year-ago period, driven by our successful brewer innovation program and continued marketing investment.

Net Sales. Net sales increased $283 million, or 6.4%, to $4,716 million for the year ended December 31, 2021 compared to $4,433 million in the prior year, driven by volume/mix growth of 6.5% and favorable FX translation of 0.8%, partially offset by lower net price realization of 0.9%. Our net price realization primarily reflected continued moderation in strategic pod pricing and customer fines in the second half of the year stemming from challenged service levels, which was only partially offset by the benefit of list price increases on owned and licensed pods and brewers.

Income from Operations. Income from operations increased $50 million, or 3.9%, to $1,318 million for the year ended December 31, 2021, compared to $1,268 million in the prior year, driven by the continued benefit of productivity and merger synergies, strong volume/mix, and reduced costs associated with our productivity projects. These benefits were partially offset by the impacts of broad-based inflation, continued moderation in strategic pod pricing, increased operating costs due to higher volumes and the unfavorable comparison to a strategic asset investment program gain of $16 million on an asset sale-leaseback of a manufacturing facility in the prior year. Operating margin decreased 70 bps versus the year ago period to 27.9%.

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Adjusted Income from Operations. Adjusted income from operations increased $1 million, or 0.1%, to $1,515 million for the year ended December 31, 2021, compared to $1,514 million in the prior year, driven by the continued benefit of productivity and merger synergies and strong volume/mix. These benefits were largely offset by declines due to the impacts of broad-based inflation, continued moderation in strategic pod pricing, increased operating costs due to higher volumes, the unfavorable comparison to a strategic asset investment program gain of $16 million on an asset sale-leaseback of a manufacturing facility in the prior year, and customer fines in the second half of the year stemming from challenged service levels. Adjusted operating margin declined 210 bps versus the year ago period to 32.1%.

PACKAGED BEVERAGES

The following table provides selected information for our Packaged Beverages segment for the years ended December 31, 2021 and 2020:

For the Year Ended December 31, Dollar Percentage

Adjusted operating margin 18.9 % 19.0 % (10) bps

Sales Volume. Sales volume for the year ended December 31, 2021 increased 3.0% compared to the prior year, reflecting continued market share growth across the portfolio, with particular strength in CSDs across our flavor portfolio, the addition of Polar to our portfolio of partner brands, and growth in Mott’s. This was partially offset by declines in Hawaiian Punch and lower contract manufacturing.

Net Sales. Net sales increased $519 million, or 9.7%, to $5,882 million in the year ended December 31, 2021, compared to $5,363 million in the prior year, driven by volume/mix of 6.0%, net price realization of 3.5% and favorable FX translation of 0.2%.

Income from Operations.Income from operations increased $188 million, or 22.9%, to $1,010 million for the year ended December 31, 2021 compared to $822 million for the prior year, driven primarily by strong net sales growth, the benefit of productivity and merger synergies, lower COVID-19-related expenses, the favorable comparison to both a non-cash impairment charge of $67 million related to the Bai brand and year-over-year favorable asset sale-leaseback activity of $44 million from our strategic asset investment program. These increases were partially offset by the impacts of broad-based inflation, increased operating costs due to higher volumes, driven by an expansion of our route to market network and strong consumer demand, increased expenses associated with productivity projects and higher marketing expense. Operating margin grew 190 bps from the year ago period to 17.2%.

Adjusted Income from Operations.Adjusted income from operations increased $88 million, or 8.6%, to $1,109 million for the year ended December 31, 2021 compared to $1,021 million for the prior year, driven primarily by strong net sales growth, the benefit of productivity and merger synergies, and the favorable comparison of year-over-year asset sale-leaseback activity of $44 million from our strategic asset investment program. These increases were partially offset by the impacts of broad-based inflation, increased operating costs due to higher volumes, driven by an expansion of our route to market network and strong consumer demand, and higher marketing expense. Adjusted operating margin decreased 10 bps versus the year ago period to 18.9%.

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BEVERAGE CONCENTRATES

The following table provides selected information for our Beverage Concentrates segment for the years ended December 31, 2021 and 2020:

For the Year Ended December 31, Dollar Percentage

Operating margin 70.3 % 70.3 % 0 bps

Adjusted operating margin 71.0 % 70.8 % 20 bps

Sales Volume. Sales volume for the year ended December 31, 2021 increased 1.1% compared to the prior year, primarily reflecting improving trends in our fountain foodservice component of the business, which services restaurants and hospitality, driven by increasing levels of consumer mobility during the year ended December 31, 2021.

Net Sales.Net sales increased $161 million, or 12.2%, to $1,486 million in the year ended December 31, 2021, compared to $1,325 million in the prior year, reflecting higher net price realization of 9.7%, volume/mix growth of 2.0% and favorable FX translation of 0.5%.

Income from Operations. Income from operations increased $112 million, or 12.0%, to $1,044 million for the year ended December 31, 2021 compared to $932 million in the prior year. This performance reflected the impact of net sales growth, partially offset by higher marketing expense. Operating margin was flat versus the year ago period at 70.3%.

Adjusted Income from Operations. Adjusted income from operations increased $117 million, or 12.5%, to $1,055 million for the year ended December 31, 2021 compared to $938 million in the prior year. This performance reflected the impact of net sales growth, partially offset by higher marketing expense. Adjusted operating margin increased 20 bps versus the year ago period to 71.0%.

LATIN AMERICA BEVERAGES

The following table provides selected information for our Latin America Beverages segment for the years ended December 31, 2021 and 2020:

For the Year Ended December 31, Dollar Percentage

Adjusted operating margin 22.5 % 21.7 % 80 bps

Sales Volume.Sales volume for the year ended December 31, 2021 as compared to the prior year increased 3.0%, driven by Peñafiel and Clamato, partially offset by declines in Crush.

Net Sales. Net sales grew $102 million, or 20.5%, to $599 million for the year ended December 31, 2021, compared to $497 million in the prior year, reflecting volume/mix growth of 7.3%, net price realization of 6.8%, and favorable FX translation of 6.4%.

Income from Operations. Income from operations increased $28 million, or 26.7%, to $133 million for the year ended December 31, 2021 compared to $105 million in the prior year, driven by higher net price realization, favorable volume/mix and the benefit of productivity, partially offset by the impacts of broad-based inflation and higher marketing expense. Operating margin increased 110 bps versus the year ago period to 22.2%.

Adjusted Income from Operations.Adjusted income from operations increased $27 million, or 25.0%, to $135 million for the year ended December 31, 2021 compared to $108 million in the prior year, driven by higher net price realization, favorable volume/mix and the benefit of productivity, partially offset by the impacts of broad-based inflation, and higher marketing expense. Adjusted operating margin improved 80 bps versus the year ago period to 22.5%.

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LIQUIDITY AND CAPITAL RESOURCES

Overview

We believe our financial condition and liquidity remain strong. Net cash provided by operations was $2,874 million for the year ended December 31, 2021 compared to $2,456 million for the prior year. Although there is continued uncertainty related to the impact of the ongoing COVID-19 pandemic on our future results, we believe we are uniquely positioned, with our broad portfolio and unmatched distribution network, to successfully navigate through this pandemic, and the steps we have taken over the course of the pandemic to strengthen our balance sheet leave us well positioned to manage our business. We continue to manage all aspects of our business, including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies through our integration and productivity initiatives, and developing new opportunities for growth such as innovation and agreements with partners to distribute brands that are accretive to our portfolio.

The following summarizes our cash activity for the years ended December 31, 2021, 2020 and 2019:

Cash, cash equivalents, restricted cash and restricted cash equivalents increased $313 million from December 31, 2020 to December 31, 2021 primarily as a result of the proceeds from the sale of our BodyArmor investment and an increase in cash generated from our operations, which outpaced deleveraging.

Cash generated by our foreign operations is generally repatriated to the U.S. periodically as working capital funding requirements where allowed. Foreign cash balances were $216 million and $165 million as of December 31, 2021 and 2020, respectively.

Principal Sources of Capital Resources

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from our operations and borrowing capacity currently available under our KDP Revolver and 2021 364-Day Credit Agreement. Additionally, we have an uncommitted commercial paper program where we can issue unsecured commercial paper notes on a private placement basis. 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.

Sources of Liquidity - Operations

Net cash provided by operating activities increased $418 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020, driven by the increase in net income, which includes the impact of the gain on the sale of our BodyArmor investment, adjusted for non-cash items and working capital.

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Cash Conversion Cycle

Our cash conversion cycle is defined as DIO and DSO less DPO. The calculation of each component of the cash conversion cycle is provided below:

Component Calculation (on a trailing twelve month basis)

DIO (Average inventory divided by cost of sales) * Number of days in the period

DSO (Accounts receivable divided by net sales) * Number of days in the period

The following table summarizes our cash conversion cycle.

December 31,

Cash conversion cycle (69) (63)

Accounts Payable Program

As part of our ongoing efforts to improve our cash flow and related liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. Excluding our suppliers who require cash at date of purchase or sale, our current payment terms with our suppliers generally range from 10 to 360 days. We also enter into agreements with third party administrators to allow participating suppliers to track payment obligations from us, and if voluntarily elected by the supplier, sell payment obligations from us to financial institutions. Suppliers can sell one or more of our payment obligations at their sole discretion and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted.

We have been informed by the third party administrators that as of December 31, 2021 and December 31, 2020, $3,194 million and $2,578 million, respectively, of our outstanding payment obligations were voluntarily elected by the supplier and sold to financial institutions. The amounts settled through the program and paid to the financial institutions were $3,331 million, $2,770 million and $1,745 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Impact of the CARES Act

Beginning in the second quarter of 2020, we deferred payments of employer-related payroll taxes as allowed under the U.S. Coronavirus Aid, Relief and Economic Security Act, commonly known as the CARES Act. Payment of at least 50% of the deferred amount was due by January 3, 2022, with the remainder due by December 31, 2022. We deferred a total of $59 million in such payments since the CARES Act was implemented, and we timely paid approximately $30 million as of January 3, 2022.

Sources of Liquidity - Financing

In March 2021, we undertook a strategic refinancing and issued $2,150 million aggregate face value of Notes, consisting of $1,150 million aggregate principal amount of 0.750% 2024 Notes, $500 million aggregate principal amount of 2.250% 2031 Notes, and $500 million aggregate principal amount of 3.350% 2051 Notes. The proceeds from the issuance were used to voluntarily prepay several tranches of our existing Notes and our 2019 KDP Term Loan in order to benefit from current market conditions to refinance our debt maturities at more attractive interest rates, while also extending the duration of our debt. We also terminated our 2020 364-Day Credit Agreement, which would have expired in April 2021, and replaced it with our 2021 364-Day Credit Agreement, which has a term-out option allowing us to extend the maturity date by converting the facility into a term loan agreement for an additional one-year term.

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Additionally, in March 2021, we filed a prospectus supplement with the SEC in order to sell up to 4,300,000 shares to or through Goldman in at-the-market offerings, known as an ATM Program. The ATM Program was completed effective March 15, 2021, and the net proceeds of approximately $140 million were primarily used to cover our obligation to remit cash to local, state and federal tax authorities in connection with the net settlement of vesting restricted stock units during the first quarter of 2021. Commissions and fees paid under the ATM program were less than $1 million for the year ended December 31, 2021.

Refer to Note 3 of the Notes to our Consolidated Financial Statements for management's discussion of our financing arrangements.

We also have an active shelf registration statement, filed with the SEC on August 27, 2019, which allows us to issue an indeterminate number or amount of common stock, preferred stock, debt securities and warrants from time to time in one or more offerings at the direction of our Board of Directors.

Debt Ratings

As of December 31, 2021, our credit ratings were as follows:

Moody's Baa2 P-2 Stable February 26, 2021

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

As of December 31, 2021, we were in compliance with all debt covenants and we have no reason to believe that we will be unable to satisfy these covenants.

LIBOR Considerations

In 2017, the U.K. Financial Conduct Authority announced that LIBOR will no longer be published after 2021. In the U.S., the Alternative Reference Rates Committee selected the Secured Overnight Financing Rate as the preferred alternative reference rate to LIBOR. In December 2020, it was announced that certain LIBOR tenors will continue to be published through June 30, 2023.

We have a number of financing arrangements which incorporate LIBOR as a benchmark rate and which extend past 2021. The agreements related to such financing arrangements use LIBOR tenors which will continue to be published through June 30, 2023. Additionally, these agreements contain provisions for alternative reference rates. We do not expect a significant change to our cost of debt as a result of the transition from LIBOR to an alternative reference rate.

Principal Uses of Capital Resources

Through 2021, our principal uses of our capital resources following the DPS Merger were deleveraging, providing shareholder return to our investors through regular quarterly dividends, and investing in KDP to capture market share and drive growth through innovation and routes to market.

Beginning in 2022, now that we have met our post-merger goals, we will look to invest in inorganic value creation through M&A, including portfolio expansion, distribution scale, geographic expansion, and new capabilities. In addition to M&A, we may consider share repurchases and special dividends to our investors. Our Board of Directors authorized a four-year share repurchase program of up to $4 billion of our outstanding common stock, beginning on January 1, 2022, potentially enabling us to return value to shareholders. See Expansion of Our Capital Allocation Strategy below.

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Deleveraging and Other Debt Repayments

In 2018, management set deleveraging targets for a 2-3 year time period following the DPS Merger in order to optimize our balance sheet. Since the DPS Merger, we have made net repayments of $4,896 million of our Notes, our commercial paper and our other credit agreements, including $1,721 million for the year ended December 31, 2021. These amounts include a make-whole premium paid during the year ended December 31, 2021 of $95 million.

In May 2021, our 2021 Merger Notes were repaid at maturity, using cash generated from operations and the issuance of commercial paper.

Regular Quarterly Dividends

In February 2021, we announced that our Board of Directors approved a 25% increase in our annualized dividend rate to $0.75 per share, from the current annualized rate of $0.60 per share, effective with the Company’s regular quarterly dividend for the second quarter of 2021. For the year ended December 31, 2021, we have declared total dividends of $0.7125 per share.

Capital Expenditures

We have significantly invested in state-of-the-art manufacturing and warehousing facilities, including expansive investments in new facilities in Newbridge, Ireland; Spartanburg, South Carolina; and Allentown, Pennsylvania, in order to optimize our supply chain network through integration and productivity projects and to mitigate risk of business interruption.

Purchases of property, plant and equipment were $423 million, $461 million and $330 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Capital expenditures, which includes both purchases of property, plant and equipment and amounts included in accounts payable and accrued expenses, for the years ended December 31, 2021, 2020 and 2019 primarily related to our continued investment in state-of-the-art manufacturing and warehousing facilities. Capital expenditures included in accounts payable and accrued expenses were $189 million, $280 million and $163 million for the years ended December 31, 2021, 2020 and 2019, respectively, which primarily related to these investments.

As we begin to move past the three-year period after the DPS Merger, we expect that purchases of property, plant and equipment will be approximately 3% of net sales on an annualized basis.

Purchases of Intangible Assets

We have invested in the expansion of our DSD network through transactions with strategic independent bottlers to ensure competitive distribution scale for our brands. These transactions are generally accounted for as an asset acquisition, as the majority of the transaction price represents the cost to re-acquire our distribution rights. Purchases of intangible assets were $32 million, $56 million and $35 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Expansion of Our Capital Allocation Strategy

Beginning on January 1, 2022, we intend to expand our capital allocation strategy to include inorganic options to drive total shareholder return. Strategic acquisitions are our primary inorganic option. However, to the extent our primary option does not occur, we may employ secondary options, which may include the repurchase of shares or special dividends. See Part II, Item 5, for further information.

Residual Value Guarantees

We have a number of leasing arrangements and one licensing arrangement with special purpose entities associated with the same sponsor. Each one of these arrangements contain a residual value guarantee. As of December 31, 2021, we have not recorded any liabilities as it is not probable that we will have to make any payments required under the residual value guarantee. Refer to Note 19 of the Notes to our Consolidated Financial Statements for further information about the residual value guarantees.

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UNCERTAINTIES AND TRENDS AFFECTING LIQUIDITY AND CAPITAL RESOURCES

Disruptions in financial and credit markets, including those caused by the ongoing COVID-19 pandemic, may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials.

Customer and consumer demand for our products may also be impacted by the risk factors discussed under "Risk Factors" in Part 1, Item 1A of our Annual Report, as well as subsequent filings with the SEC, that could have a material effect on production, delivery and consumption of our products, which could result in a reduction in our sales volume.

We believe that the following events, trends and uncertainties may also impact liquidity:

•Our ability to either repay existing debt maturities through cash flow from operations or refinance through future issuances of senior unsecured notes;

•Our ability to access and/or renew our committed financing arrangements;

•A significant downgrade in our credit ratingscould limit i) our ability to issue debt at terms that are favorable to us, or ii) a financial institution's willingness to participate in our accounts payable program and reduce the attractiveness of the accounts payable program to participating suppliers who may sell payment obligations from us to financial institutions, which could impact our accounts payable program;

•Our continued payment of regular quarterly dividends;

•Our continued capital expenditures;

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

•Our ability to issue unsecured uncommitted commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $2,400 million;

•Future mergers or acquisitions, which may include brand ownership companies, regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage;

•Future opportunistic repurchases of our common stock or special dividends to drive total shareholder return;

•Future equity investments; and

•Fluctuations in our tax obligations.

CRITICAL ACCOUNTING ESTIMATES

The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. We have not made any material changes in the accounting methodology we use to assess or measure our critical accounting estimates. We have identified the items described below as our critical accounting estimates. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use in our critical accounting estimates. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material to our consolidated financial statements. See Note 2 of the Notes to our Consolidated Financial Statements for a discussion of these and other accounting policies.

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Goodwill and Other Indefinite Lived Intangible Assets

We conduct tests for impairment of our goodwill and our other indefinite lived intangible assets annually, as of October 1, or more frequently if events or circumstances indicate the carrying amount may not be recoverable. We use present value and other valuation techniques to make this assessment. If the carrying amount of goodwill or an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For purposes of impairment testing, we assign goodwill to the reporting unit that benefits from the synergies arising from each business combination, and we also assign indefinite lived intangible assets to our reporting units.

Effective January 1, 2021, we modified our internal reporting and operating segments to reflect changes in the executive leadership team to further enhance speed-to-market and decision effectiveness. Although this did not change our reportable segments, our reporting units and operating segments were redefined. For 2021, we defined our six reporting units as the following:

Reportable Segments Reporting Units

Packaged Beverages DSD

Coffee Systems Coffee Systems

Beverage Concentrates Branded Concentrates

Fountain Foodservice

Latin America Beverages Latin America Beverages

For both goodwill and other indefinite lived intangible assets, we have the option to first assess qualitative factors to determine whether the fair value of either the reporting unit or indefinite lived intangible asset is not "more likely than not" less than its carrying value, also known as a Step 0 analysis. If a quantitative analysis is required, the following would be required:

•The impairment test for indefinite lived intangible assets encompasses calculating a fair value of an indefinite lived intangible asset and comparing the fair value to its carrying value. If the carrying value exceeds the estimated fair value, impairment is recorded.

•The impairment tests for goodwill include comparing fair value of the respective reporting unit with its carrying value, including goodwill and considering any indefinite lived intangible asset impairment charges.

For the year ended December 31, 2021, we performed a quantitative analysis for goodwill and certain indefinite lived brand assets, whereby we used an income approach, or in some cases a combination of income and market based approaches, to determine the fair value of our assets, as well as an overall consideration of market capitalization and enterprise value. We performed a qualitative Step 0 analysis for other indefinite lived intangible assets, including trade names, contractual arrangements, and distribution rights. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. These assumptions could be negatively impacted by various risks discussed in Item 1A, Risk Factors, in this Annual Report on Form 10-K.

Critical assumptions for quantitative analyses include revenue growth and profit performance, including the achievability of productivities, over the next five year period, as well as an appropriate discount rate and long-term growth rate, as applicable. Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums. Long-term growth rates are based on the long-term inflation forecast, industry growth and the long-term economic growth potential.

The following table provides the range of rates used in the analysis as of October 1, 2021:

Rate Minimum Maximum

Discount rates 6.5 % 10.0 %

Long-term growth rates — % 3.8 %

The carrying values of goodwill and indefinite lived intangible assets as of December 31, 2021, were $20,182 million and $22,553 million, respectively. No impairment was identified for the years ended December 31, 2021 or 2019. We recorded impairment of $67 million for the year ended December 31, 2020 for Bai, an indefinite lived brand asset.

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Sensitivity Analysis - Discount Rate

For goodwill, holding all other assumptions in the analysis constant, including the revenue and profit performance assumption, the effect of a 0.50% increase in the discount rate used to determine the fair value of the reporting units as of October 1, 2021, would not change our conclusion.

For the indefinite-lived intangible assets, holding all other assumptions in the analysis constant, including the revenue and profit performance assumption, the effect of a 0.50% increase in the discount rate used to determine the fair value of our brands as of October 1, 2021, would impact the amount of headroom over the carrying value of our brands as follows (in millions):

Selected Discount Rate Discount Rate Increase of 0.50%

Headroom Percentage Carrying Value Fair Value Carrying Value Fair Value

Brands

Potential impairment $ — $ — $ 1,848 $ 1,769

Sensitivity Analysis - Long-Term Growth Rate

For goodwill, holding all other assumptions in the analysis constant, including the discrete period revenue and profit performance assumptions as well as the discount rates, the effect of a 0.50% decrease in the long-term growth rate used to determine the fair value of the reporting units as of October 1, 2021, would not change our conclusion.

For the indefinite-lived intangible assets, holding all other assumptions in the analysis constant, including the discrete period revenue and profit performance assumptions as well as the discount rates, the effect of a 0.50% decrease in the long-term revenue growth rate used to determine the fair value of our brands as of October 1, 2021, would impact the amount of headroom over the carrying value of our brands as follows (in millions):

Selected Long-Term Growth Rate Long-Term Growth Rate Decrease of 0.50%

Headroom Percentage Carrying Value Fair Value Carrying Value Fair Value

Brands

Potential impairment $ — $ — $ 1,848 $ 1,806

Revenue Recognition

We recognize revenue when performance obligations under the terms of a contract with the customer are satisfied. Accruals for customer incentives, sales returns and marketing programs are established for the expected payout based on contractual terms, volume-based metrics and/or historical trends.

Our customer incentives, sales returns and marketing accrual methodology contains uncertainties because it requires management to make assumptions and to apply judgment regarding our contractual terms in order to estimate our customer participation and volume performance levels which impact the expense recognition. Our estimates are based primarily on a combination of known or historical transaction experiences. Differences between estimated expenses and actual costs are normally insignificant and are recognized to earnings in the period differences are determined.

Additionally, judgment is required to ensure the classification of the spend is correctly recorded as either a reduction from gross sales or advertising and marketing expense, which is a component of our SG&A expenses.

A 10% change in the accrual for our customer incentives, sales returns and marketing programs would have affected our income from operations by $53 million for the year ended December 31, 2021.

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Income Taxes

We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following:

•the tax position is not “more likely than not” to be sustained,

•the tax position is “more likely than not” to be sustained, but for a lesser amount, or

•the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken.

Our liability for uncertain tax positions contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various tax positions.

Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. As these audits progress, events may occur that cause us to change our liability for uncertain tax positions. To the extent we prevail in matters for which a liability for uncertain tax positions has been established, or are required to pay amounts in excess of our established liability, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective tax rate in the period of resolution.

We also assess the likelihood of realizing our deferred tax assets. Valuation allowances reduce deferred tax assets to the amount more likely than not to be realized. We base our judgment of the recoverability of our deferred tax assets primarily on historical earnings, our estimate of current and expected future earnings and prudent and feasible tax planning strategies.

If results differ from our assumptions, a valuation allowance against deferred tax assets may be increased or decreased which would impact our effective tax rate.

Business Combinations

We record acquisitions using the purchase method of accounting. All of the assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill.

The application of the purchase method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed, in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. The fair value assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Significant assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset, if applicable.

If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the consolidated financial statements may be exposed to potential impairment of the intangible assets and goodwill, as discussed in the Goodwill and Other Indefinite Lived Intangible Assets critical accounting estimate section above.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

On November 19, 2020, the SEC issued a final rule intended to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K related to Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information. Early adoption on an item-by-item basis is permitted after February 10, 2021, the effective date of the rule, and we must apply the rule to our Form 10-K for the year ending December 31, 2021. We early adopted the amendments to one item resulting in the elimination of Item 301, Selected Financial Data, from Part II, Item 6 of our Form 10-K for the year ended December 31, 2020, and we adopted the remaining amendments in this Annual Report for the year ended December 31, 2021.

Refer to Note 2 of the Notes to our Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP.

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SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The Notes are fully and unconditionally guaranteed by certain of our direct and indirect subsidiaries (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by us and jointly and severally guarantee, subject to the release provisions described below, our obligations under the Notes. None of our subsidiaries organized outside of the U.S., immaterial subsidiaries used for charitable purposes, any of the subsidiaries held by Maple Parent Holdings Corp. prior to the DPS Merger or any of the subsidiaries acquired after the DPS Merger (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of our other indebtedness, our exercise of the legal defeasance option with respect to the Notes and the discharge of our obligations under the applicable indenture.

The following schedules present the summarized financial information for the Parent and the Guarantors on a combined basis after intercompany eliminations; the Parent and the Guarantors' amounts due from; amounts due to, and transactions with Non-Guarantors are disclosed separately. The consolidating schedules are provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.

The summarized financial information for the Parent and Guarantors were as follows:

(in millions) For the Year Ended December 31, 2021

Income from operations 1,565

Net income attributable to KDP 2,146

December 31,

(1)Includes $209 million and $423 million of intercompany receivables due to the Parent and Guarantors from the Non-Guarantors as of December 31, 2021 and December 31, 2020, respectively.

(2)Includes $40 million and $30 million of intercompany payables due to the Non-Guarantors from the Parent and Guarantors as of December 31, 2021 and December 31, 2020, respectively.

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NON-GAAP FINANCIAL MEASURES

To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented for the years ended December 31, 2021 and 2020 (i) Adjusted income from operations, (ii) Adjusted interest expense, (iii) Adjusted provision for income taxes, (iv) Adjusted net income attributable to KDP, (v) Adjusted diluted EPS, (vi) Adjusted gross margin, (vii) Adjusted operating margin, and (viii) Adjusted effective tax rate, which are considered non-GAAP financial measures. The non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way as we do. The adjusted measures are not substitutes for their comparable U.S. GAAP financial measures, such as income from operations, net income, diluted EPS, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

For the years ended December 31, 2021 and 2020, we define our Adjusted non-GAAP financial measures as certain financial statement captions and metrics adjusted for certain items affecting comparability. The items affecting comparability are defined below.

Items affecting comparability:

Defined as certain items that are excluded for comparison to prior years, 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, as well as the unrealized mark-to-market impact of our Vita Coco investment; (ii) the amortization associated with definite-lived intangible assets; (iii) the amortization of the deferred financing costs associated with the DPS Merger; (iv) the amortization of the fair value adjustment of the senior unsecured notes obtained as a result of the DPS Merger; (v) stock compensation expense and the associated windfall tax benefit attributable to the matching awards made to employees who made an initial investment in KDP; (vi) non-cash changes in deferred tax liabilities related to goodwill and other intangible assets as a result of tax rate or apportionment changes; and (vii) other certain items that are excluded for comparison purposes to prior years.

For the year ended December 31, 2021, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant non-routine legal matters; (iv) the loss on early extinguishment of debt related to the redemption of debt; (v) incremental costs to our operations related to risks associated with the COVID-19 pandemic; (vi) gains from insurance recoveries related to the February 2019 organized malware attack on our business operation networks in the Coffee Systems segment; (vii) the gain on the sale of our investment in BodyArmor; (viii) impairment recognized on our equity method investment with Bedford as a result of funding our share of their wind-down costs; and (ix) transaction costs for significant business combinations (completed or abandoned).

For the year ended December 31, 2020, the other certain items excluded for comparison purposes include (i) restructuring and integration expenses related to significant business combinations; (ii) productivity expenses; (iii) costs related to significant non-routine legal matters; (iv) the loss on early extinguishment of debt related to the redemption of debt, (v) incremental costs to our operations related to risks associated with the COVID-19 pandemic, (vi) impairment recognized on our equity method investments with Bedford and LifeFuels and (vii) impairment recognized on the Bai brand.

Costs related to significant non-routine legal matters relate to the antitrust litigation. Incremental costs to our operations related to risks associated with the COVID-19 pandemic include incremental expenses incurred to either maintain the health and safety of our front-line employees or temporarily increase compensation to such employees to ensure essential operations continue during the pandemic.

We believe removing these costs reflects how management views our business results on a consistent basis. See Impact of COVID-19 on our Financial Statements for further information.

For the years ended December 31, 2021 and 2020, the supplemental financial data set forth below includes reconciliations of Adjusted gross margin, Adjusted income from operations, Adjusted operating margin, Adjusted net income and Adjusted diluted EPS to the applicable financial measure presented in the consolidated financial statement for the same year.

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KEURIG DR PEPPER INC.

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

For the Year Ended December 31, 2021

(Unaudited, in millions, except per share data)

Items Affecting Comparability:

Amortization of intangibles — — (134) 134

Stock compensation — — (18) 18

Restructuring and integration costs — — (202) 202

Non-routine legal matters — — (30) 30

Transaction costs — — (2) 2

Malware incident — — 2 (2)

Items Affecting Comparability:

Amortization of deferred financing costs (7) — — — — 7 2 5 —

Amortization of fair value debt adjustment (19) — — — — 19 5 14 0.01

Stock compensation — — — — — 18 15 3 —

Restructuring and integration costs — — — — — 202 47 155 0.11

Non-routine legal matters — — — — — 30 7 23 0.02

Gain on sale of equity-method investment — — — 524 — (524) (124) (400) (0.28)

Transaction costs — — — — — 2 — 2 —

Malware incident — — — — — (2) — (2) —

Diluted EPS may not foot due to rounding.

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KEURIG DR PEPPER INC.

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

For the Year Ended December 31, 2020

(Unaudited, in millions, except per share data)

Items Affecting Comparability:

Amortization of intangibles — — (133) — 133

Stock compensation — — (27) — 27

Restructuring and integration costs — — (199) — 199

Impairment on intangible asset — — — (67) 67

Non-routine legal matters — — (57) — 57

Items Affecting Comparability:

Mark to market (27) — — (1) (1) — —

Amortization of deferred financing costs (11) — — 11 3 8 0.01

Amortization of fair value debt adjustment (24) — — 24 6 18 0.01

Restructuring and integration costs — — — 199 49 150 0.11

Impairment on intangible asset — — — 67 15 52 0.04

Loss on early extinguishment of debt — (4) — 4 1 3 —

Diluted EPS may not foot due to rounding.

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KEURIG DR PEPPER INC.

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

(Unaudited)

(in millions) Reported Items Affecting Comparability Adjusted

For the Year Ended December 31, 2021

Income from Operations

(in millions) Reported Items Affecting Comparability Adjusted

For the Year Ended December 31, 2020

Income from Operations

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ITEM 7A. 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. Refer to Note 6 of the Notes to our Consolidated Financial Statements for further information about our derivative instruments.

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, the Mexican peso and the Euro 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 December 31, 2021, the impact to our income from operations of a 10% swing (up or down) in exchange rates is estimated to be an increase or decrease of approximately $48 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 December 31, 2021, we had derivative contracts outstanding with notional values of $848 million maturing at various dates through September 25, 2024.

INTEREST RATE RISK

We centrally manage our debt portfolio through the use of interest rate contracts and monitor our mix of fixed-rate and variable-rate debt. As of December 31, 2021, the carrying value of our fixed-rate debt, excluding lease obligations, was $11,733 million and our variable-rate debt was $149 million, comprised entirely of commercial paper. Additionally, as of December 31, 2021, the total notional value of receive-fixed, pay-variable interest rate swaps was $400 million. Our variable-rate instruments are generally based on LIBOR and a credit spread.

We estimate that the potential impact to our interest rate expense associated with variable rate debt and derivative instruments resulting from a hypothetical interest rate change of 1%, based on variable-rate debt and derivative instrument levels as of December 31, 2021, would be an increase of approximately $5 million or decrease of approximately $1 million. Our estimate of the annual impact to interest expense reflects our assumption that LIBOR will not fall below 0%.

COMMODITY RISK

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, sucrose and natural gas (for use in processing and packaging).

We utilize commodities derivative instruments and supplier pricing agreements to hedge the risk of movements in commodity prices for limited time periods for certain commodities. As of December 31, 2021, we had derivative contracts outstanding with a notional value of $529 million maturing at various dates through November 28, 2023. The fair market value of these contracts as of December 31, 2021 was a net asset of $106 million.

As of December 31, 2021, the impact of a 10% change (up or down) in market prices for these commodities where the risk of movements has not been hedged is estimated to have a $40 million impact to our income from operations for the year ended December 31, 2022.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page Number

Reports of Independent Registered Accounting Firm (PCAOB ID No. 34) 50

Consolidated Statements of Income 53

Consolidated Statements of Comprehensive Income 54

Consolidated Balance Sheets 55

Consolidated Statements of Cash Flows 56

Consolidated Statements of Changes in Stockholders' Equity 58

Notes to Consolidated Financial Statements 59

1. Business and Basis of Presentation 59

2. Significant Accounting Policies 60

3. Long-Term Obligations and Borrowing Arrangements 68

4. Goodwill and Other Intangible Assets 72

5. Restructuring and Integration Costs 74

6. Derivatives 75

8. Employee Benefit Plans 81

10. Earnings per Share 87

11. Stock-Based Compensation 87

12. Revenue Recognition 90

14. Acquisitions and Investments in Unconsolidated Subsidiaries 93

15. Accumulated Other Comprehensive Income (Loss) 95

16. Property, Plant and Equipment 96

17. Other Financial Information 96

18. Commitments and Contingencies 99

19. Transactions with Variable Interest Entities 101

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of

Keurig Dr Pepper Inc.

Burlington, Massachusetts

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Keurig Dr Pepper Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years ended December 31, 2021, 2020 and 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Indefinite-Lived Intangible Assets Valuation - Certain Brand Assets - Refer to Notes 2 and 4 to the financial statements

Critical Audit Matter Description

As discussed in Notes 2 and 4, the Company has indefinite-lived brand intangible assets (“brand assets”). The Company’s evaluation of the brand assets for impairment is performed annually as of October 1, and involves the comparison of the fair value of each brand asset to its carrying value. Management estimates the fair value of the brand assets using a multi-period excess earnings method, which is a specific discounted cash flow method. The fair value determination of these assets requires management to make significant estimates and assumptions related to revenue growth projections, discount rates, and operating margins. Each of these assumptions is sensitive to future market or industry conditions, as well as company-specific conditions. Changes in these assumptions could have a significant impact on the fair value of certain indefinite-lived brand intangible assets (“certain brand assets”) that have a lower headroom percentage, the amount of any impairment, or both. Given the significant judgments made by management to estimate the fair value of certain brand assets, a high degree of auditor judgment and an increased extent of effort were required to perform audit procedures that evaluated the reasonableness of management’s estimates and assumptions.

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How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the underlying business and valuation assumptions for certain brand assets included the following, among others:

•We tested the effectiveness of controls over the Company’s indefinite-lived brand intangible asset impairment review process. This included controls over management’s review of the revenue growth rates, operating margins, and discount rates used in the valuation models.

•We performed risk assessment procedures and for certain brand assets with a higher risk of impairment, we evaluated the reasonableness of management’s ability to forecast revenue growth and operating margins by comparing the forecasts to:

–Historical revenue and operating margins.

–Underlying analysis of business strategies and growth plans.

–Internal communication to senior management.

–Forecasted information in industry reports.

–Historical and forecasted peer data.

•We considered the impact of changes in management's forecast from the October 1, 2021 annual assessment date to December 31, 2021.

•With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and discount rates, including testing the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the discount rates selected by management.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 24, 2022

We have served as the Company’s auditor since 2016.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of

Keurig Dr Pepper Inc.

Burlington, Massachusetts

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Keurig Dr Pepper Inc. and subsidiaries (the "Company") as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021 of the Company and our report dated February 24, 2022 expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s Report on Internal Control over Financial Reporting, appearing under item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 24, 2022

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KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,

Selling, general and administrative expenses 4,153 3,978 3,962

Impairment of intangible assets — 67 —

Other operating (income) expense, net (70) (39) 2

Loss on early extinguishment of debt 105 4 11

Gain on sale of equity method investment (524) — —

Impairment of investments and note receivable 17 102 —

Other (income) expense, net (2) 17 19

Net income including non-controlling interest 2,145 1,325 1,254

Less: Net loss attributable to non-controlling interest (1) — —

Earnings per common share:

Weighted average common shares outstanding:

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

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KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

Net income including non-controlling interest $ 2,145 $ 1,325 $ 1,254

Other comprehensive income

Foreign currency translation adjustments (14) (9) 230

Total other comprehensive income (loss) (103) (27) 234

Comprehensive income attributable to non-controlling interest — — —

Comprehensive income attributable to KDP $ 2,042 $ 1,298 $ 1,488

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

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KEURIG DR PEPPER INC.

CONSOLIDATED BALANCE SHEETS

December 31,

(in millions, except share and per share data) 2021 2020

Assets

Current assets:

Cash and cash equivalents $ 567 $ 240

Restricted cash and restricted cash equivalents 1 15

Trade accounts receivable, net 1,148 1,048

Prepaid expenses and other current assets 447 323

Property, plant and equipment, net 2,494 2,212

Investments in unconsolidated affiliates 30 88

Other non-current assets 937 894

Deferred tax assets 42 45

Liabilities and Stockholders' Equity

Current liabilities:

Short-term borrowings and current portion of long-term obligations 304 2,345

Other current liabilities 613 416

Other non-current liabilities 1,577 1,119

Commitments and contingencies

Stockholders' equity:

Accumulated other comprehensive (loss) income (26) 77

Non-controlling interest — 1

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

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KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

Operating activities:

Provision for sales returns 63 54 43

Deferred income taxes 31 (51) (23)

Employee stock-based compensation expense 88 85 64

Loss on early extinguishment of debt 105 4 11

Gain on sale of equity method investment (524) — —

Gain on disposal of property, plant and equipment (75) (36) (14)

Unrealized (gain) loss on foreign currency 9 (1) (24)

Unrealized (gain) loss on derivatives (70) 8 36

Equity in losses of unconsolidated affiliates 5 20 51

Impairment of intangible assets — 67 —

Changes in assets and liabilities:

Trade accounts receivable (152) (5) (7)

Income taxes receivable and payables, net 114 (91) 36

Other current and non current assets (243) (435) (324)

Accounts payable and accrued expenses 762 624 583

Other current and non current liabilities 3 180 102

Net change in operating assets and liabilities 351 166 366

Investing activities:

Proceeds from sale of investment in unconsolidated affiliates 578 — —

Purchases of property, plant and equipment (423) (461) (330)

Proceeds from sales of property, plant and equipment 122 203 247

Purchases of intangibles (32) (56) (35)

Acquisitions of businesses — — (8)

Issuance of related party note receivable (19) (6) (32)

Investments in unconsolidated affiliates — (5) (16)

Net cash provided by (used in) investing activities $ 210 $ (316) $ (150)

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

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KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

Year Ended December 31,

Financing activities:

Proceeds from issuance of Notes $ 2,150 $ 1,500 $ —

Proceeds from KDP Revolver — 1,850 —

Repayment of KDP Revolver — (1,850) —

Proceeds from term loan — — 2,000

Proceeds from issuance of common stock 140 — —

Payments on structured payables (167) (341) (531)

Tax withholdings related to net share settlements (125) — —

Payments on finance leases (54) (52) (38)

Proceeds from controlling shareholder stock transactions — 29 —

Other, net (36) — 5

Net cash used in financing activities (2,762) (1,990) (2,364)

Net change from:

Operating, investing and financing activities 322 150 (40)

Effect of exchange rate changes (9) (6) 12

Non-cash investing activities:

Conversion of note receivable to equity method investment 15 — —

Non-cash acquisition of controlling interest — 3 —

Measurement period adjustment of Core purchase price — — (11)

Non-cash purchases of intangibles — — 2

Non-cash financing activities:

Dividends declared but not yet paid 265 212 211

Supplemental cash flow disclosures:

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

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KEURIG DR PEPPER INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in millions) Shares Amount

Adoption of new accounting standards — — — (5) — (5) — (5)

Other comprehensive income — — — — 234 234 — 234

Measurement period adjustment for acquisition of Core — — 11 — — 11 — 11

Dividends declared, $0.60 per share — — — (845) — (845) — (845)

Stock-based compensation — — 75 — — 75 — 75

Other comprehensive loss — — — — (27) (27) — (27)

Dividends declared, $0.60 per share — — — (846) — (846) — (846)

Proceeds from sale of stock by JAB — — 29 — — 29 — 29

Non-cash acquisition of controlling interest — — 3 — — 3 1 4

KDP US Equity

KDP · 10-K · period ended 2021-12-31

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

KDP US Equity☆

KDP · 10-K · period ended 2021-12-31

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

KDP US Equity