UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x A NNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
OR
o 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
KDPA02.JPG
Keurig Dr Pepper Inc.
(Exact name of Registrant as specified in its charter)
Delaware
 
98-0517725
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
identification number)
 
 
 
53 South Avenue, Burlington, Massachusetts
 
01803
(Address of principal executive offices)
 
(Zip code)
(781) 418-7000
(Registrant's telephone number, including area code)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x     No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  o     No  x
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    x No   o
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   x   No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K. x
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 x
Accelerated Filer o
Non-Accelerated Filer   o
Smaller Reporting Company o
Emerging Growth Company o
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. o  
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     o    No     x
As of June 30, 2018, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's common equity held by non-affiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and directors as of that date are "affiliates" of the registrant) was approximately $21.8 billion (based on the closing sales price of the registrant's common stock on that date as reported on the New York Stock Exchange). Subsequent to that date, the DPS Merger (described below) was consummated on July 9, 2018.
As of February 26, 2019 , there were 1,406,081,521 shares of the registrant's common stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant's Annual Meeting of Stockholders or on an amendment on Form 10–K/A are incorporated by reference in Part III.
 


KEURIG DR PEPPER INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 



Part I
ITEM 1. BUSINESS
OUR COMPANY
Keurig Dr Pepper Inc. is a leading beverage company in North America with a diverse portfolio of flavored (non-cola) carbonated soft drinks ("CSDs"), specialty coffee and non-carbonated beverages ("NCBs"), and the #1 single serve coffee brewing system in North America. 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. We have a highly competitive distribution system that enables our portfolio of more than 125 owned, licensed and partner brands to be available nearly everywhere people shop and consume beverages.
References in this Annual Report on Form 10-K to "we", "our", "us", "KDP", and the "Company" refer to Keurig Dr Pepper Inc. and its subsidiaries, unless otherwise noted.
HISTORY OF OUR BUSINESS
Dr Pepper Snapple Group, Inc.
Dr Pepper Snapple Group, Inc. (" DPS ") was built over time through a series of strategic acquisitions that brought together iconic beverage brands in North America within Cadbury Schweppes plc ("Cadbury"), building on the Schweppes business by adding brands such as Dr Pepper, Snapple, 7UP, Canada Dry, Mott's, A&W and the Peñafiel business in Mexico.
DPS was incorporated in Delaware on October 24, 2007. In 2008, Cadbury contributed its beverage subsidiaries in the United States ("U.S."), Canada, Mexico and the Caribbean to DPS . DPS continued to add to its portfolio with the acquisition of Bai in 2017.
Keurig Green Mountain, Inc.
Maple Parent Holdings Corp. (" Maple ") is a holding company that conducts substantially all of its business through Keurig Green Mountain, Inc. ("Keurig"), a leading producer of innovative single-serve brewing systems and specialty coffee in the United States and Canada. Green Mountain Coffee Roasters, Inc. was incorporated in July 1993 and acquired Keurig, Incorporated in June 2006 to form Keurig.
In December 2015, JAB Holding Company S.a.r.l ("JAB") formed an indirect wholly-owned subsidiary, Maple Holdings Acquisition Corp. ("Maple acquisition merger sub"). In February 2016, Maple was formed by JAB. In March 2016, Maple, through Maple acquisition merger sub, acquired Keurig and its subsidiaries (" Keurig Acquisition "). Refer to Note 3 of the Notes to our Audited Consolidated Financial Statements for further information related to the Keurig Acquisition .
In contemplation of the Keurig Acquisition, JAB agreed with Mondelēz International, Inc. ("Mondelēz") that Mondelēz would acquire a 24.24% interest in Maple from JAB, which was also consummated in March 2016.
The Merger of DPS and Keurig
On January 29, 2018, DPS entered into an Agreement and Plan of Merger (the " Merger Agreement ") by and among DPS , Maple and a wholly owned subsidiary of DPS , 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. " and began trading on the New York Stock Exchange ("NYSE") under the symbol "KDP".
Immediately prior to the consummation of the DPS Merger (the “ Effective Time ”), each share of common stock of Maple issued and outstanding was converted into the right to receive a number of fully paid and nonassessable shares of common stock of Merger Sub determined pursuant to an exchange ratio set forth in the Merger Agreement (the “ Acquisition Shares ”). As a result of the DPS Merger , the stockholders of Maple as of immediately prior to the Effective Time owned approximately 87% of KDP common stock on a fully diluted basis following the closing, and the stockholders of DPS as of immediately prior to the Effective Time owned approximately 13% of KDP common stock on a fully diluted basis following the closing of the DPS Merger. Upon consummation of the DPS Merger , KDP declared a special cash dividend equal to $103.75 per share, subject to any withholding of taxes required by law, payable to holders of its common stock as of July 6, 2018. Refer to Note 3 of the Notes to our Audited Consolidated Financial Statements for further information related to the DPS Merger .

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PRODUCTS AND DISTRIBUTION
Through the DPS Merger , we have brought together two iconic companies to create a unified business with a fresh approach to the beverage industry and the size and scale to achieve things not possible separately. We have a family of brands with the ability to satisfy every consumer need, anytime and anywhere – hot or cold, at home or on-the-go, at work or at play. We are a leading integrated brand owner, manufacturer, and distributor of non-alcoholic beverages in the U.S., Canada, and Mexico and the Caribbean. We also sell certain of our products to distributors in Europe and Asia.
The following presents highlights of our major owned and licensed brands as of December 31, 2018 :
Category
Major Brands
North America Market Position
CSDs
Dr Pepper
#1 in its flavor category and #2 overall flavored CSD in the U.S.
 
Canada Dry
#1 ginger ale in the U.S. and Canada
 
Squirt
#1 grapefruit CSD in the U.S. and a leading grapefruit CSD in Mexico
 
Peñafiel
#1 carbonated mineral water in Mexico
 
Crush
#3 orange flavored CSD in the U.S.
 
7UP
#2 lemon-lime CSD in the U.S.
 
A&W
#1 root beer in the U.S.
 
Schweppes
#2 ginger ale in the U.S. and Canada
 
Sunkist soda
#1 orange flavored CSD in the U.S.
NCBs
Snapple
#2 premium shelf stable ready-to-drink tea in the U.S.
 
Hawaiian Punch
#1 branded shelf-stable fruit punch in the U.S.
 
Mott's
#1 branded multi-serve apple juice and apple sauce in the U.S.
 
Clamato
A leading spicy tomato juice in the U.S., Canada and Mexico
 
Bai
#3 enhanced water in the U.S.
Single Serve Coffee
Green Mountain
#2 K-cup pod in the U.S.
 
The Original Donut Shop
#5 K-cup pod in the U.S.
 
Van Houtte
#2 K-cup pod in Canada
Single Serve Brewing Systems
Keurig
#1 single serve brewing system in the U.S.
All information regarding our brand market positions in the U.S. is based on retail market dollars in 2018 . U.S. beverage information is from Information Resources, Inc. (" IRi "); U.S. brewing system information is from NPD Total Market Dataset ("NPD").

In the CSD market segment in the U.S. and Canada, we participate primarily in the flavored segment of the CSD category. In addition to our major brands above, we also own regional and smaller niche brands, such as Sun Drop, Big Red and Vernors. In the CSD market, we distribute finished beverages and manufacture beverage concentrates and fountain syrups. Our beverage concentrates, which are highly concentrated proprietary flavors used to make syrup or finished beverages, are used by our own Packaged Beverages segment, as well as sold to third party bottling companies through our Beverage Concentrates segment. According to IRi , we had a  22.1%  share of the U.S. CSD market in  2018  (measured by retail sales), an increase of 4 points versus  2017 . We also manufacture fountain syrup that we sell to the foodservice industry directly, through bottlers or through other third parties.
In the NCB market segment in the U.S., we participate primarily in the ready-to-drink tea, juice, juice drinks, water, including enhanced and flavored water, and mixer categories. In addition to our major brands above, we also sell regional and smaller niche brands, such as Nantucket Nectars. We manufacture most of our NCBs as ready-to-drink beverages and distribute them through our own distribution network and through third parties or direct to our customers' warehouses. In addition to NCB beverages, we also manufacture Mott's apple sauce as a finished product.
In Mexico and the Caribbean, we participate primarily in the carbonated mineral water, flavored CSDs, bottled water and vegetable juice categories. In Mexico, we manufacture and sell our brands through both our own manufacturing and distribution operations as well as third party bottlers. In the Caribbean, we distribute our products solely through third party distributors and bottlers. We have also begun to distribute certain products in other international jurisdictions through various third party bottlers and distributors.



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Our Keurig open platform single serve 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 brewing systems and, in addition to specialty coffee, produce and sell a variety of other specialty beverages in K-Cup pod s (including hot and iced teas, hot cocoa and other beverages) for use with Keurig brewing systems. We also offer traditional whole bean and ground coffee in other package types, including bags, fractional packages and cans. We, together with our partners, are able to bring consumers high-quality coffee and other beverage experiences from the brands they love, all through the one-touch simplicity and convenience of Keurig brewing systems. We currently offer more than 600 beverage varieties from over 75 owned, licensed, partner and private label brands, including the top ten best-selling coffee brands in the U.S. based on IRi , as part of the Keurig brewing system.
OUR STRENGTHS AND STRATEGY
The key strengths of our business are:
Strong portfolio of leading, consumer-preferred brands. We own a diverse portfolio of well-known CSD, coffee and NCB brands. Many of our brands enjoy high levels of consumer awareness, preference and loyalty rooted in their rich heritage. This portfolio provides our retailers, bottlers and distributors, and other customers with a wide variety of products to meet consumers' needs and provides us with a platform for growth and profitability.
Scale distribution and selling system. We have strategically-located distribution capabilities, which enables us to better align our operations with our customers, to ensure our products are available to meet consumer demand, to reduce transportation costs and to have greater control over the timing and coordination of new product launches. We actively manage transportation of our products using our fleet (owned and leased) of approximately 5,800 and 1,600 vehicles in the U.S. and Mexico, respectively, as well as third party logistics providers.
Innovation, renovation, acquisition and partnering capabilities. We drive growth in our business by a combination of innovating and renovating our portfolio of owned brands and partnerships with other leading beverage brands. We have a robust consumer-centric innovation program, which is designed to meet consumers' changing flavor and beverage preferences and to drive new household penetration of our single serve brewing systems. We have cultivated relationships with leading beverage brands to create long-term partnerships that enable us and our partners to benefit equitably in future value creation, and where appropriate, we bring these partner brands into our owned portfolio through acquisitions.
Highly efficient business model. Our highly efficient business model, both from a cost and a cash perspective, gives us optionality to invest internally and look outside for acquisitions or other options to continue to drive growth.
OUR BUSINESS OPERATIONS
As of December 31, 2018 , our operating structure consists of four reporting segments: Beverage Concentrates, Packaged Beverages, Latin America Beverages and Coffee Systems. Segment financial data, including financial information about foreign and domestic operations, is included in Note 21 of the Notes to our Audited Consolidated Financial Statements .
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.
In 2018 , the PepsiCo affiliated and Coca-Cola affiliated bottler systems represent a small number of customers where the loss of any one or more of those customers could have a material adverse effect on the Beverage Concentrates segment. Unlike the majority of our other CSD brands, approximately 60%  of Dr Pepper, Schweppes and Crush finished good volumes are distributed through either the PepsiCo affiliated or Coca-Cola affiliated bottler systems.

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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  2018  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  2018 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.
We sell our Packaged Beverages products both through our Direct Store Delivery system ("DSD") and our Warehouse Direct delivery system ("WD"), both of which include the sales to all major retail channels, including supermarkets, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.
In  2018 , Walmart represents the largest customer of our Packaged Beverages segment, where its loss could have a material adverse effect on the Packaged Beverages segment.
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.
In 2018 , Walmart and OXXO represent a small number of customers where the loss of one of those customers would have a material adverse effect on the Latin America Beverages segment.
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 pod s (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 pod s 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 over 80% of the K-Cup pod s in the U.S. and Canada, including brands such as Starbucks, Peet's Coffee, 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 pod s for tea under brands such as Celestial Seasonings, Lipton and Tazo in addition to K-Cup pod s of our own brand, Snapple. We also produce and sell K-Cup pod s for cocoa, including through a licensing agreement for the Swiss Miss brand, and hot apple cider.

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Our Coffee Systems segment manufactures its K-Cup pod s 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.
In 2018 , Walmart and Costco Wholesale Corporation ("Costco") represent a small number of customers where the loss of one of those customers would have a material adverse effect on the Coffee Systems segment.
OUR CUSTOMERS
We primarily serve the following types of customers:
Retailers
Retailers, including supermarkets, mass merchandisers, club stores, e-commerce retailers, office superstores, and convenience stores, purchase finished beverages, appliances, accessories, and K-Cup pod s directly from us. Our portfolio of strong brands, operational scale and experience in the beverage industry has enabled us to maintain strong relationships with major retailers in the U.S., Canada and Mexico. In 2018 , our largest retailer was Walmart, representing approximately 14% of our consolidated net sales.
Bottlers and Distributors
In the U.S. and Canada, we generally grant perpetual, exclusive licenses for CSD brands and packages to bottlers for specific geographic areas. These agreements prohibit bottlers and distributors from selling the licensed products outside their exclusive territory and selling any imitative products in that territory. Generally, we may terminate bottling and distribution agreements only for cause, change in control or breach of agreements and the bottler or distributor may terminate without cause upon giving certain specified notice and complying with other applicable conditions. Fountain agreements for bottlers generally are not exclusive for a territory, but do restrict bottlers from carrying imitative product in the territory.
In 2010, we completed the licensing of certain brands to PepsiCo, Inc. ("PepsiCo") and The Coca-Cola Company ("Coca-Cola"). The agreements have an initial period of 20 years with automatic 20-year renewal periods and require PepsiCo, Coca-Cola and certain Coca-Cola affiliated bottlers to meet certain performance conditions.
Certain brands, such as Snapple, Yoo-Hoo, Mistic and Nantucket Nectars are licensed for distribution in various territories to bottlers and a number of smaller distributors such as beer wholesalers, wine and spirit distributors, independent distributors and retail brokers.
Partners
We have differentiated ourselves and the Keurig brand through our ability to create and sustain partnerships with other leading coffee, tea and beverage brand companies through multi-year licensing and manufacturing agreements that best suit each brand's interests and strengths. Typically, we manufacture pods on behalf of our partners, who in turn sell them to retailers.
As of December 31, 2018 , our partner brands included, but were not limited to, Starbucks, Peet's Coffee, Dunkin' Donuts, Caribou Coffee, Eight O’Clock, Folgers, Maxwell House, Newman’s Own Organics, Tim Hortons, Kirkland Signature, Great Value, Kroger, Celestial Seasonings, Lipton and Tazo.
Away from Home Channel Participants
We distribute brewers, accessories and K-Cup pod s (both Keurig and partner brands) to away from home channel participants, which include restaurants, hotel chains, and office coffee distributors.
End-use Consumers
We developed a robust ecommerce platform at www.keurig.com where end-use consumers can purchase brewers, accessories, and K-Cup pod s.
OUR ALLIED BRANDS
As a result of our distribution capabilities, we believe brand owners view us as a partner with a strong route-to-market resources to grow their brands. These partnerships allow us to rapidly participate in growth in emerging and fast growing categories where we do not currently have a brand presence. We sometimes make an investment in each company. As of December 31, 2018 , our portfolio of allied brands we distribute included, but was not limited to, evian, Peet's Ready to Drink coffee, Forto Coffee, Vita Coco coconut waters, High Brew coffee and Neuro drinks.

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OUR COMPETITORS
The beverage industry is highly competitive and continues to evolve in response to changing consumer preferences. Competition is generally based on brand recognition, taste, quality, price, availability, selection and convenience. We compete with multinational corporations with significant financial resources. In our bottling and manufacturing businesses, we also compete with a number of smaller bottlers and distributors and a variety of smaller, regional and private label manufacturers.
The following represents a list of our major competitors:
Competitor
Categories
PepsiCo
CSDs, NCBs
Coca-Cola
CSDs, NCBs
Monster Energy
CSDs (Energy)
Red Bull
CSDs (Energy)
The Campbell Soup Company ("Campbell")
NCBs (Juice)
Ocean Spray Cranberries, Inc.
NCBs (Juice)
Welch's
NCBs (Juice)
Nestlé S.A. ("Nestle")
NCBs (Water), Packaged Coffee
The Kraft Heinz Company ("Kraft Heinz")
Packaged Coffee
The J.M. Smucker Company ("Smucker")
Packaged Coffee
Although these companies offer competing brands in categories we participate in, several of these companies are also our partners and customers, such as Coca-Cola, PepsiCo and Kraft Heinz, as they purchase beverage concentrates or K-Cup pod s directly from us.
OUR INTELLECTUAL PROPERTY
We possess a variety of intellectual property rights that are important to our business. We rely on a combination of trademarks, copyrights, patents and trade secrets to safeguard our proprietary rights, including our brands, our technologies, and ingredient and production formulas for our products.
We own numerous trademarks in our portfolio within the U.S., Canada, Mexico and other countries. Depending upon the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained.
In many countries outside the U.S., Canada and Mexico, our rights to many of our CSD brands, including our Dr Pepper trademark and formula, were sold by Cadbury beginning over a decade ago to third parties including, in certain cases, to competitors such as Coca-Cola.
We license various trademarks from third parties, which generally allow us to manufacture and distribute certain products or brands throughout the U.S. and/or Canada and Mexico. For example, we license from third parties the Sunkist soda, Stewart's, Rose's and Margaritaville trademarks. Although these licenses vary in length and other terms, they generally are long-term, cover the entire U.S. and/or Canada and Mexico and generally include a royalty payment to the licensor.
We hold U.S. and international patents related to Keurig brewing systems and K-Cup pod technology. Of these, a majority are utility patents and the remainder are design patents. We view these patents as valuable assets but we do not view any single patent as critical to our success. We also have pending patent applications associated with Keurig brewing systems and K-Cup pod technology. We take steps that we believe appropriate to protect such innovation.
OUR RAW MATERIALS
The principal raw materials we use in our business, which we commonly refer to as ingredients and packaging, are aluminum cans and ends, PET bottles and caps, K-Cup pod packaging materials, glass bottles and enclosures, green coffee, paper products, juices, teas, fruit, sweeteners, water, and other ingredients. We also use post-consumer recycled materials in the manufacturing of our single-serve brewing systems.These ingredients and packaging costs can fluctuate substantially and comprise approximately 55% of our cost of sales.
When appropriate, we mitigate the exposure to volatility in the prices of certain commodities used in our production process and transportation to our customers through the use of various commodity derivative contracts or supplier pricing agreements. The intent of the contracts and agreements is to provide a certain level of short-term predictability in our operating margins and our overall cost structure, while remaining in what we believe to be a competitive cost position.

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Ingredients and materials, excluding green coffee . Under many of our supply arrangements for these raw materials, the price we pay fluctuates along with certain changes in underlying commodities costs, such as aluminum in the case of cans and ends, natural gas in the case of glass bottles, resin in the case of PET bottles and caps, corn in the case of sweeteners and pulp in the case of paperboard packaging.
Green coffee. We use a combination of outside brokers and direct relationships with farms, estates, cooperatives, and cooperative groups for our supply of green coffee. Outside brokers are the largest source of our green coffee supply. In 2018 , 31% of our purchases of green coffee were responsibly sourced, and 84% were traceable back to the exporter mill, group or farm. We believe that traceability helps us secure long-term supplies of high-quality coffee. The majority of our green coffee purchases are high-quality, premium grade, which results in higher prices as compared to regular green coffee.
Fuel costs. In addition to ingredients and packaging costs, we are significantly impacted by changes in fuel costs, which can also fluctuate substantially, due to the large truck fleet we operate in our distribution businesses and the energy costs consumed in the production process. The fuels costs associated with our distribution businesses are reflected within our selling, general and administrative ("SG&A") expenses.
SEASONALITY
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 also be influenced by the timing of holidays and weather fluctuations.
EMPLOYEES
As of December 31, 2018 , we had approximately 25,500 employees.
In the U.S., we have approximately 20,000 full-time employees. We have collective bargaining agreements covering approximately 4,500 full-time employees. These agreements address working conditions as well as wage rates and benefits.
In Mexico, we have approximately 4,000 employees, of which approximately 3,000 are covered by collective bargaining agreements. In Canada, we have approximately 1,500 employees, of which approximately 500 are covered by collective bargaining agreements. We do not have a significant number of employees in other countries.
We believe we have good relations with our employees.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
In the normal course of our business, we are subject to a variety of federal, state and local environmental, health and safety laws and regulations. We maintain environmental, health and safety policies and a quality, environmental, health and safety program designed to ensure compliance with applicable laws and regulations. The cost of such compliance measures does not have a material financial impact on our operations.
Sustainability
We are committed to making a positive impact in the communities in which we live and work and to leave the world better than we found it. We continue to focus on efforts to improve sustainability throughout our value chain, working to reduce our environmental impact while helping to ensure the Company's financial growth. These efforts include:
Designing our packaging to enhance circular material use, including recyclability and recoverability;
Driving initiatives with industry, government and community partners to educate consumers on recycling behaviors, develop infrastructure and processing capabilities and increase packaging recycling rates;
Expanding responsible sourcing practices with suppliers and growers across our supply chain;
Working through partnerships in coffee-growing communities to engage more people in our supply chain, with the goal of significantly improving their lives;
Identifying opportunities to reduce energy consumption in our fleet and in our facilities while also building climate resiliency across our value chain;
Reducing waste sent from our manufacturing facilities to landfills; and
Supporting freshwater protection and restoration projects in watersheds where we have production facilities, while increasing the efficiency of our water use for beverage production.

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Post-consumer Recycling
For CSDs and NCBs, the vast majority of our beverage containers are 100% recyclable. For our Coffee Systems products, we completed the conversion to 100% recyclable K-Cup pod s in Canada at the end of 2018, targeting to have all our manufactured K-Cup pod s recyclable by 2020. Our third-party manufacturers also use post-consumer recycled materials in the manufacturing of our single-serve brewing systems.
We are looking beyond our own operations to address the issue of post-consumer recycling. We continue to work with industry, government and community partners on goals and efforts to increase U.S. beverage container recycling rates. We maintain active involvement, partnerships and investments in efforts to improve consumer recycling, including focused efforts with Keep America Beautiful, The Closed Loop Fund and The Recycling Partnership.
REGULATORY MATTERS
We are subject to a variety of federal, state and local laws and regulations in the countries in which we do business. Regulations apply to many aspects of our business, including our products and their ingredients, manufacturing, safety, labeling, transportation, recycling, advertising and sale. For example, our products and their manufacturing, labeling, marketing and sale in the U.S. are subject to various aspects of the Federal Food, Drug, and Cosmetic Act, the Federal Trade Commission Act, the Lanham Act, state consumer protection laws and state warning and labeling laws. Certain cities and municipalities within the U.S. have also passed various taxes on the distribution of sugar-sweetened and diet beverages, which are at different stages of enactment. In Canada and Mexico, the manufacture, distribution, marketing and sale of many of our products are also subject to similar statutes and regulations. Additionally, the government of Mexico enacted broad based tax reform in 2016, including a tax on every liter of certain sugar-sweetened beverages we manufacture.
Various states and other authorities require deposits, eco-taxes or fees on certain containers. Similar legislation or regulations may be proposed in the future at local, state and federal levels, both in the U.S. and elsewhere. In Mexico, the government has encouraged the soft drink industry to comply voluntarily with collection and recycling programs for plastic materials, and we are in compliance with these programs.
AVAILABLE INFORMATION
Our website address is www.keurigdrpepper.com . Information on our website is not incorporated by reference in this document. We make available, free of charge through this website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after such material is electronically filed, or furnished to, the Securities and Exchange Commission ("SEC").
MARKET AND INDUSTRY DATA
The market and industry data in this Annual Report on Form 10-K is from IRi , an independent industry source, and is based on retail dollar sales and sales volumes in  2018 . Although we believe that this independent source is reliable, we have not verified the accuracy or completeness of this data or any assumptions underlying such data. IRi is a marketing information provider, primarily serving consumer packaged goods manufacturers and retailers. We use IRi data as our primary management tool to track market performance because it has broad and deep data coverage, is based on consumer transactions at retailers, and is reported to us monthly. IRi data provides measurement and analysis of marketplace trends such as market share, retail pricing, promotional activity and distribution across various channels, retailers and geographies. Measured categories provided to us by IRi include K-Cup pod s, CSDs, including energy drinks and carbonated waters, and NCBs, including ready-to-drink teas and coffee, single-serve and multi-serve juice and juice drinks, sports drinks, still waters and non-alcoholic mixers. IRi also provides data on other food items such as apple sauce. IRi data we present in this report is from IRi service, which compiles data based on scanner transactions in key retail channels, including grocery stores, mass merchandisers (including Walmart), club stores (excluding Costco), drug chains, convenience stores and gas stations. However, this data does not include the fountain or vending channels, or small independent retail outlets, which together represent a meaningful portion of the U.S. beverage market. This data does not include certain customers and e-commerce sales which represents a meaningful portion of our Coffee Systems segment.
Our market share data for our brewers is based on information provided by NPD. NPD data is based upon Consumer Panel Track SM (consumer-reported sales) calibrated with selected retailers' point of sale data, based on NPD's definition of the coffeemaker category. The data presented is based upon The NPD/Consumer Tracking Service for Coffeemakers in the United States ("U.S.") and represents the twelve month period ended December 31, 2018.


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ITEM 1A. RISK FACTORS
RISKS RELATING TO US FOLLOWING THE DPS MERGER
Combining the hot and cold businesses may be more difficult, costly or time-consuming than expected and the anticipated benefits and cost savings of the DPS Merger may not be realized.
Prior to the DPS Merger , Dr Pepper Snapple Group, Inc., a Delaware corporation (“DPS”), and Keurig Green Mountain, Inc., a Delaware corporation (“Keurig”) operated independently. The success of the DPS Merger , including anticipated benefits and cost savings, will depend, in part, on our ability to successfully combine and integrate its hot and cold businesses.
Integration of the hot and cold businesses following the DPS Merger is a complex, costly and time-consuming process. If we experience difficulties with the integration process as it progresses, the anticipated benefits of the DPS Merger may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on us for an undetermined period after completion of the DPS Merger . In addition, the actual cost savings of the DPS Merger could be less than anticipated.
Our future results may be adversely impacted if we do not effectively manage our expanded operations.
Following the completion of the DPS Merger, the size of our combined business is significantly larger than the size of either DPS or Keurig’s respective businesses prior to the DPS Merger. Our ability to successfully manage this expanded business depends, in part, upon management’s ability to design and implement strategic initiatives that address not only the integration of two discrete companies, but also the increased scale and scope of the combined business with its associated increased costs and complexity. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the DPS Merger.
We incurred substantial expenses related to the completed DPS Merger and will continue to incur substantial expenses in connection with the integration of the hot and cold businesses.
We have incurred, and expect to continue to incur, a number of nonrecurring costs associated with the DPS Merger and combining the hot and cold businesses. The substantial majority of nonrecurring expenses were comprised of transaction and regulatory costs related to the DPS Merger. We are also incurring transaction fees and costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the integration of the hot and cold businesses.
The unaudited pro forma combined financial statements are presented for illustrative purposes only and our actual financial condition and results of operations following the DPS Merger may differ materially.
The unaudited pro forma combined financial statements are presented for illustrative purposes only; are based on various adjustments, assumptions and preliminary estimates; and may not be an indication of our financial condition or results of operations for several reasons. Our actual financial condition and results of operations following the completion of the integration of the businesses may not be consistent with, or evident from, these unaudited pro forma combined financial statements. In addition, the assumptions used in preparing the unaudited pro forma combined financial statements may not be realized, and other factors may affect our financial condition or results of operations. Any potential decline in our financial condition or results of operations may cause significant variations in the pro forma financial statements and our stock price.
In connection with the DPS Merger, we incurred significant additional indebtedness, which could adversely affect us, including by decreasing our business flexibility and increasing our interest expense.
In connection with the DPS Merger, we incurred significant additional indebtedness, which could adversely affect us, including by decreasing our business flexibility and increasing our interest expense. The amount of cash required to pay interest on our increased indebtedness levels following completion of the DPS Merger, and thus the demands on our cash resources, is greater than the amount of cash flows required to service DPS’s and Maple’s respective indebtedness prior to the DPS Merger. The increased levels of indebtedness could also reduce funds available for working capital, capital expenditures, acquisitions, the repayment or refinancing of our indebtedness as it becomes due and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the DPS Merger, or if our financial performance does not meet current expectations, then our ability to service our indebtedness may be adversely impacted.
In addition, in assessing our credit strength, credit rating agencies consider our capital structure and financial policies as well as our results of operations and financial position at the time. If our credit ratings were to be downgraded as a result of changes in our capital structure, changes in the credit rating agencies’ methodology in assessing our credit strength, the credit agencies’ perception of the impact of credit market conditions on our current or future results of operations and financial position or for any other reason, our cost of borrowing could increase. On May 11, 2018 and May 14, 2018, DPS’s long-term credit ratings were downgraded by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor's ("S&P"), respectively, but still maintained an investment grade rating.

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Moreover, in the future we may be required to raise substantial additional financing to fund working capital, capital expenditures, the repayment or refinancing of its indebtedness, acquisitions or other general corporate requirements. Our ability to arrange additional financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. There can be no assurance that we will be able to obtain additional financing or refinancing on terms acceptable to us or at all.
RISKS RELATING TO OUR CAPITAL STRUCTURE
JAB, through its affiliate, is our largest stockholder and owns approximately 72% of the fully diluted shares of our common stock, and has the ability to exercise significant influence over decisions requiring our stockholders’ approval.
We are controlled by JAB, through its affiliate, Maple Holdings B.V. (" Sponsor"), which owns approximately 72% of the fully diluted shares of our common stock, which gives them the ability to exercise significant influence over decisions requiring approval of our stockholders including the election of directors, amendments to our certificate of incorporation and approval of significant corporate transactions, such as a merger or other sale of us or our assets.
This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of us and may negatively affect the market price of our common stock. Also, JAB and its affiliates are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete with us. JAB or its affiliates may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us.
We meet the requirements to be a “controlled company” within the meaning of the rules of the NYSE and, as a result, we qualify for, and rely on, exemptions from certain corporate governance standards, which limit the presence of independent directors on our board of directors and board committees.
As discussed above, approximately 72% of the outstanding shares of our common stock are held by JAB and its affiliates. As a result, we are a “controlled company” for purposes of Section 303A of the NYSE Listed Company Manual and are exempt from certain governance requirements otherwise required by the NYSE. Under Section 303A, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and is exempt from certain corporate governance requirements, including requirements that (1) a majority of the board of directors consist of independent directors, (2) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors and (3) director nominees be selected or recommended for selection by a majority of the independent directors or by a nominating/corporate governance committee composed solely of independent directors. We continue to have an audit committee that is composed entirely of independent directors.
As a result of relying on the controlled company exemptions, the procedures for approving significant corporate decisions could be determined by directors who have a direct or indirect interest in such decisions, and our stockholders do not have the same protections afforded to stockholders of other companies that are required to comply with all of the independence rules of the NYSE.
RISKS RELATING TO OUR BUSINESS
We operate in intensely competitive categories.
The industries in which we operate are highly competitive and continue to evolve in response to changing consumer preferences. Competition is generally based upon brand recognition and perception, taste, quality, price, availability, product selection, performance and convenience. Brand recognition and perception may be impacted by the effectiveness of our advertising campaigns and marketing programs, as well as our use of social media and online ratings and reviews of its products, including our appliances. In addition, our success in maintaining, extending and expanding our brands' image will depend on our ability to adapt to a rapidly changing media environment, including an increasing reliance on social media and online dissemination of advertising campaigns and marketing programs. Within the Liquid Refreshment Beverage ("LRB") category, we compete with multinational corporations with significant financial resources.
Our two largest competitors in the LRB category are Coca-Cola and PepsiCo, each of which has a significantly higher share of the U.S. LRB category than us. We also compete in the LRB category against other large companies, including Nestle, Campbell and Kraft Heinz. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, changing their route to market, reducing prices or increasing promotional activities. Within the LRB category, we also compete with a number of smaller brands and a variety of smaller, regional and private label manufacturers, such as Refresco Group. Smaller companies may be more innovative, better able to bring new products to market and better able to quickly exploit and serve niche markets. We also compete for contract manufacturing with other bottlers and manufacturers. In Canada, Mexico and the Caribbean, we compete with many of these same international companies as well as a number of regional competitors.

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Our hot business competes with major international beverage and appliance companies that operate in multiple geographic areas, as well as numerous companies that are primarily local in operation. Our hot business also competes against local and regional brands as well as against private label brands developed by retailers. Our ability to gain or maintain share of sales in the countries in which we operate or in various local marketplaces or maintain or enhance our relationships with our partners and customers may be limited as a result of actions by competitors, including as a result of increased consolidation in the food and beverage industry and a significant increase in the number of competitive pod contract manufacturers, several of whom offer what they market as more environmentally friendly pods than the current K-Cup pod s we manufacture.
If we are unable to compete effectively against these hot beverage and appliance companies, our sales, volume, growth and overall financial results could be negatively affected.
We may not effectively respond to changing consumer preferences, trends, health concerns and other factors, which could impact our financial results.
Consumers’ preferences can change due to a variety of factors, including the age and ethnic demographics of the population, social trends, changes in consumer lifestyles, negative publicity, competitive product and pricing pressures, economic downturn or other factors.
For example, in the LRB industry, consumers are increasingly concerned about health and wellness, focusing on the caloric intake associated with regular CSDs, the use of artificial sweeteners in diet CSDs and the use of natural, organic or simple ingredients in LRB products. As such, the demand for CSDs has decreased as consumers have shifted towards NCBs, such as water, ready-to-drink coffee and teas, and sports drinks.
A key component of our growth strategy is continuing to develop, partner with or acquire products to cater to the next wave of beverage preferences, including NCBs and the growing cold brew and ready-to-drink coffee-based beverage categories.
If we do not effectively anticipate these trends and changing consumer preferences and quickly develop new products or partner with a current or new brand partner in that category in response, our sales could suffer. Developing and launching new products can be risky and expensive. We may not be successful in responding to changing markets and consumer preferences, and some of our competitors may be better able to respond to these changes, either of which could negatively affect our business and financial performance.
We depend on a small number of large retailers for a significant portion of our sales.
Food and beverage retailers in the U.S. have been consolidating, resulting in large, sophisticated retailers with increased buying power. They are in a better position to resist our price increases and demand lower prices and more favorable trade terms. To the extent we provide concessions or trade terms that are favorable to retailers, our respective margins would be reduced. Retailers also have leverage to require us to provide increased marketing and promotional expenditures, including larger, more tailored promotional and product delivery programs. If we and our partners, including bottlers, distributors and licensees, do not successfully provide appropriate marketing, product, packaging, pricing and service to these retailers, our product availability, sales and margins could suffer. In addition, certain retailers make up a significant percentage of our products’ retail volume, including volume sold by our bottlers and distributors. Some retailers also offer their own private label products that compete with some of our brands. Accordingly, the success of our business depends in part on our ability to maintain good relationships with key retail customers, such as Walmart and Costco, key ecommerce retailers such as Amazon.com, and grocery customers.
If we are unable to offer terms that are acceptable to our significant customers, or such customers determine that they need fewer inventories to service consumers, these customers could reduce purchases of our products or may increase purchases of products from competitors, which would harm our sales and profitability. Furthermore, the loss of sales from a major retailer could have a material adverse effect on our business and financial performance.
Product safety and quality concerns could negatively affect our business.
The success of our business depends in part on our ability to maintain consumer confidence in the safety and quality of all of our products, including beverage products and our brewing systems. We have various quality, environmental, health and safety standards. A failure or perceived failure to meet our quality or safety standards or allegations of mislabeling, whether actual or perceived, could occur in our operations or those of our bottlers, manufacturers, distributors or suppliers. This could result in time consuming and expensive production interruptions, recalls, market withdrawals, product liability claims, and negative publicity. It could also result in the destruction of product inventory, lost sales due to the unavailability of product for a period of time and higher-than-anticipated rates of warranty returns and other returns of goods. Moreover, negative publicity also could be generated from false, unfounded or nominal liability claims or limited recalls.
Any or all of these events may lead to a loss of consumer confidence and trust, could damage the goodwill associated with our brands and may cause consumers to choose other products and could negatively affect our business and financial performance.

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Costs and supply for commodities, such as raw materials and energy, may change substantially and shortages may occur.
Price increases for our raw materials could exert pressure on our costs and we may not be able to effectively hedge or pass along any such increases to our customers or consumers. Furthermore, any price increases passed along to our customers or consumers could reduce demand for our products. Such increases could negatively affect our business and financial performance. Furthermore, price decreases in commodities that we have effectively hedged could also increase our cost of goods sold for mark-to-market changes in the derivative instruments.
The principal raw materials we use in our cold business include aluminum cans and ends, glass bottles, polyethylene terephthalate (“PET”) bottles and caps, paperboard packaging, sweeteners, juice, fruit, and water. These raw materials are sourced from industries characterized by a limited supply base and their cost can fluctuate substantially. Under many of our supply arrangements, the price we pay for raw materials fluctuates along with certain changes in underlying commodities costs, such as aluminum in the case of cans, natural gas in the case of glass bottles, resin in the case of PET bottles and caps, corn in the case of sweeteners and pulp in the case of paperboard packaging.
Our principal raw materials in our hot business include coffee beans and K-Cup pod raw materials (including cups, filter paper and other ingredients) used in the manufacturing of our K-Cup pod s. We purchase, roast and sell high-quality whole bean Arabica coffee and related coffee products. The Arabica coffee of the quality we seek tends to trade on a negotiated basis at a premium above the “C” price of coffee. This premium depends upon the supply and demand at the time of purchase, and the amount of the premium can vary significantly. Increases in the “C” coffee commodity price do increase the price of high-quality Arabica coffee and also impacts our ability to enter into fixed-price purchase commitments. We frequently enter into supply contracts whereby the quality, quantity, delivery period and other negotiated terms are agreed upon, but the date, and therefore price, at which the base “C” coffee commodity price component will be fixed has not yet been established. These are known as price-to-be-fixed contracts. The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, including weather, natural disasters, crop disease (such as coffee rust), general increase in farm inputs and costs of production, inventory levels and political and economic conditions, as well as the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in coffee commodities can also influence coffee prices. If we are unable to purchase sufficient quantities of green coffee due to any of the factors described herein or a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have an adverse impact on our business and financial results.
We also have a limited number of suppliers for certain strategic raw materials critical for the manufacture of K-Cup pod s and the processing of certain key ingredients in our K-Cup pod s, particularly for cups and filter paper. In addition, in order to ensure a continuous supply of high-quality raw materials some of our inventory purchase obligations include long-term purchase commitments for certain strategic raw materials critical for the manufacture of K-Cup pod s and appliances. The timing of these may not always coincide with the period in which we need the supplies to fulfill customer demand. This could lead to higher and more variable inventory levels and/or higher raw material costs for us.
If our suppliers are unable or unwilling to meet our requirements, we could suffer shortages or substantial cost increases. Changing suppliers can require long lead times. The failure of our suppliers to meet our needs could occur for many reasons, including fires, natural disasters, weather, manufacturing problems, disease, crop failure, strikes, transportation interruption, government regulation, political instability, cybersecurity attacks and terrorism. A failure of supply could also occur due to suppliers’ financial difficulties, including bankruptcy. Some of these risks may be more acute where the supplier or its plant is located in riskier or less-developed countries or regions. Any significant interruption to supply or cost increase could substantially harm our business and financial performance.
In addition, we use a significant amount of energy in our business, and therefore may be significantly impacted by changes in fuel costs due to the large truck fleet we operate in our distribution business and our use of third-party carriers. Additionally, conversion of raw materials into our products for sale uses electricity and natural gas.
Determinations in the future that a significant impairment of the value of our goodwill and other indefinite-lived intangible assets has occurred could have a material adverse effect on our operating results.
As of December 31, 2018, we had  $48,918 million of total assets, of which approximately  $20,011 million  were goodwill and $23,967 million were other intangible assets. Intangible assets include both definite and indefinite-lived intangible assets in connection with brands, trade names, acquired technology, customer relationships, contractual arrangements and favorable leases. We conduct impairment tests on goodwill and all indefinite-lived intangible assets annually, as of October 1, or more frequently if circumstances indicate that all or a portion of the carrying amount of an asset may not be recoverable. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For additional information about these intangible assets, see "Critical Accounting Estimates — Goodwill and Other Indefinite-Lived Intangible Assets" in Item 7 and Note 3 and Note 5 to our Audited Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," in this Annual Report on Form 10-K.

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The impairment tests require us to make an estimate of the fair value of our reporting units and other intangible assets. An impairment could be recorded as a result of changes in assumptions, estimates or circumstances, some of which are beyond our control. Factors which could result in an impairment include, but are not limited to: (i) reduced demand for our products and/or the product category; (ii) higher commodity prices; (iii) lower prices for our products or increased marketing as a result of increased competition; (iv) significant disruptions to our operations as a result of both internal and external events; and (v) changes in our discount rates, which could change due to factors such as movement in risk free interest rates, changes in general market interest rate and market beta volatility, among others. Since a number of factors may influence determinations of fair value of intangible assets, we are unable to predict whether impairments of goodwill or other indefinite-lived intangibles will occur in the future. Any such impairment would result in us recognizing a non-cash charge in our Consolidated Statements of Income, which could adversely affect our results of operations and increase our effective tax rate.
If we do not successfully manage our investments in new business strategies or integrate and manage our acquired businesses or brands, our operating results may adversely be affected.
We expect to acquire businesses or brands to expand our product portfolio and distribution rights and may invest in new business strategies and/or joint ventures. In evaluating such endeavors, we will be required to make difficult judgments regarding the value of business strategies, opportunities, technologies and other assets, and the risks and cost of potential liabilities. Furthermore, we may incur unforeseen liabilities and obligations in connection with any of our completed acquisitions and any future acquisitions, including in connection with the integration or management of the acquired businesses or brands and may encounter unexpected difficulties and costs in integrating them into our operating and internal control structures. We may also experience delays in extending our respective internal control over financial reporting to newly acquired businesses, which may increase the risk of failure to prevent misstatements in our financial records and in our consolidated financial statements. Additionally, new ventures and investments are inherently risky and may not be successful, and we may face challenges in achieving strategic objectives and other benefits expected from such investments or ventures. Any acquisitions, investments or ventures may also result in the diversion of management attention and resources from other initiatives and operations. Our financial performance will depend in large part on how well we can manage and improve the performance of acquired businesses or brands and the success of our other investments and ventures. We may not achieve the strategic and financial objectives for such transactions. If we are unable to achieve such objectives, our consolidated results could be negatively affected.
We will continue to depend on third-party bottling and distribution companies for a significant portion of our business.
Net sales from our Beverage Concentrates segment represent sales of beverage concentrates to third-party bottling companies that we do not own. The Beverage Concentrates segment’s operations generate a significant portion of our overall income from operations. Some of these bottlers, such as PepsiCo, are also our competitors, or also bottle and distribute a competitor’s products, such as PepsiCo and Coca-Cola affiliated bottlers. The majority of these bottlers’ business comes from selling either their own products or our competitors’ products. In addition, some of the products we manufacture are distributed by third parties. As independent companies, these bottlers and distributors make their own business decisions. They may have the right to determine whether, and to what extent, they produce and distribute our products, our competitors’ products and their own products. They may devote more resources to other products or take other actions detrimental to our brands. In most cases, they are able to terminate their bottling and distribution arrangements with us without cause. We may need to increase support for our brands in their territories and may not be able to pass price increases through to them. Their financial condition could also be adversely affected by conditions beyond their control, and their business could suffer as a result. Deteriorating economic conditions could negatively impact the financial viability of third-party bottlers.
Our hot business' financial performance depends upon the sales of Keurig brewing systems and K-Cup pod s.
A significant percentage of the hot business' financial performance is attributable to sales of K-Cup pod s for use with Keurig brewing systems. For the year ended December 31, 2018, revenue from K-Cup pod s represented approximately 43% of the hot business' consolidated net revenue. Continued acceptance of Keurig brewing systems and sales of K-Cup pod s to an increasing installed customer base will be significant factors in our hot business' growth plans. Any substantial or sustained decline in the sale of Keurig brewing systems, failure to continue to reduce the cost of Keurig brewing systems, or substantial or sustained decline in the sales of K-Cup pod s could materially adversely affect our business. Keurig brewing systems compete against all sellers and types of coffeemakers. If we do not succeed in continuing to reduce the costs of manufacturing Keurig brewing systems or differentiating Keurig brewing systems from our competitors in the coffeemaker category, based on technology, quality of products, desired brands or otherwise, or our competitors adopt their respective strategies, our competitive position may be weakened and our sales of Keurig brewing systems and K-Cup pod s, and accordingly, our business and financial performance may be materially adversely affected.

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We will continue to rely on the performance of a limited number of suppliers, manufacturers and order fulfillment companies.
A small number of companies manufacture the vast majority of our brewing systems, with a majority of the brewing systems we sell procured from one third-party brewing system manufacturer. If these manufacturers are not able to scale their manufacturing operations to match increasing consumer demand for our brewing systems at competitive costs, our overall results will be negatively affected. Our reliance on third-party manufacturers also exposes us to increased risk that certain minerals and metals, known as "conflict minerals", that are contained in our brewing systems have originated from "covered countries" (as defined in Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010) but cannot be determined to be "conflict free". As a result of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted disclosure requirements for public companies whose products contain conflict minerals that are necessary to the functionality or production of such products. Under these rules, we are required to obtain sourcing data from suppliers, perform supply chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD covering the prior calendar year. We have incurred and expect to incur additional costs to comply with the rules, including costs related to the determination of the origin, source and chain of custody of the conflict minerals used in our products and the adoption of conflict minerals-related governance policies, processes and controls.  Moreover, the implementation of these compliance measures could adversely affect the sourcing, availability and pricing of materials used in the manufacture of our products to the extent that there may be only a limited number of suppliers that are able to meet our sourcing requirements. There can be no assurance that we will be able to obtain such materials in sufficient quantities or at competitive prices. We may also encounter customers who require that all of the components of our products be certified as conflict-free. If we are not able to meet customer requirements, such customers may choose to not purchase our products, which could impact our sales and the value of portions of our inventory.
In addition, we rely on a limited number of key suppliers and distribution and fulfillment partners for material aspects of our business. As a result, we may have limited negotiation leverage with regards to these suppliers, which could negatively affect the business and financial performance of our business following the DPS Merger.
Substantial disruption to production at our manufacturing and distribution facilities could occur.
A disruption in production at our beverage concentrates manufacturing facility, which manufactures almost all of our concentrates, or at our facilities, could have a material adverse effect on our business. In addition, a disruption could occur at any of our other facilities or those of our suppliers, bottlers, contract manufacturers or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, water scarcity, manufacturing problems, disease, strikes, transportation or supply interruption, contractual dispute, government regulation, cybersecurity attacks or terrorism. Moreover, if demand increases more than we forecast, we will need to either expand our capabilities internally or acquire additional capacity. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more than existing facilities or may take a significant time to start production, each of which could negatively affect our business and financial performance.
Increases in our cost of benefits in the future could reduce our profitability.
Our profitability is substantially affected by costs for employee health care, pension and other retirement programs and other benefits. In recent years, these costs have increased significantly due to factors such as increases in health care costs, declines in investment returns on pension assets and changes in discount rates used to calculate pension and related liabilities. These factors plus the enactment of the Patient Protection and Affordable Care Act in March 2010 will continue to put pressure on our business and financial performance. Although we will actively seek to control increases in costs, there can be no assurance that it will succeed in limiting future cost increases, and continued upward cost pressure could have a material adverse effect on our business and financial performance.
We may not be able to renew collective bargaining agreements on satisfactory terms, or we could experience union activity including labor disputes or work stoppages.
Approximately 8,000 of our employees are covered by collective bargaining agreements. These agreements typically expire every three to four years at various dates. We may not be able to renew our collective bargaining agreements on satisfactory terms or at all. This could result in labor disputes, strikes or work stoppages, which could impair our ability to manufacture and distribute our products and result in a substantial loss of sales. The terms of existing, renewed or expanded agreements could also significantly increase our costs or negatively affect our ability to increase operational efficiency.

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Failure to maintain strategic relationships with well-recognized brands/brand owners and private label brands could adversely impact our future growth and business.
We have entered into strategic relationships for the manufacturing, distribution, and sale of K-Cup pod s with well-regarded beverage companies such as Dunkin’ Brands Group, Inc., Smucker, Tim Hortons, Newman’s Own Organics, Kraft Heinz, Peet’s Coffee & Tea, and Starbucks Corporation, as well as with retailers such as Costco, The Kroger Co. and WalMart for their private label brands. As independent companies, our strategic partners make their own business decisions which may not align with our interests. If we are unable to provide an appropriate mix of incentives to our strategic partners through a combination of premium performance and service, pricing, and marketing and advertising support, or if these strategic partners are not satisfied with our brand innovation and technological or other development efforts, they may take actions, including entering into agreements with competing pod contract manufacturers or vertically integrating to manufacture their own K-Cup pod s. Increasing competition among K-Cup pod manufacturers and the move to vertical integration may result in price compression, which could have an adverse effect on our gross margins. The loss of strategic partners could also adversely impact our future profitability and growth, awareness of Keurig brewing systems, our ability to attract additional branded or private label parties to do business with us or our ability to attract new consumers to buy Keurig brewing systems.
Our agreements with our allied brands could be terminated.
Approximately  90%  of our  2018  Packaged Beverages net sales come from the manufacturing and distribution of our own brands and the manufacturing of certain private label beverages, with the remaining from the distribution of third party brands. Currently, our allied brands include, but not limited to, Vita Coco coconut water, AriZona tea, Neuro drinks, High Brew, evian, Peet's Coffee and Forto Coffee.
We are subject to a risk of our allied brands terminating their agreements with us, which could negatively affect our business and financial performance. During 2018, both BA Sports Nutrition, LLC ("BODYARMOR") and FIJI mineral water terminated their agreements with us. Within each distribution agreement, we have certain protections in case the allied brands terminate their agreements, including a one-time termination payment.
We depend on key information systems and third-party service providers.
We depend on key information systems to accurately and efficiently transact our business, provide information to management and prepare financial reports. We rely on third-party providers for a number of key information systems and business processing services, including hosting, collecting, storing and transmitting our primary data center and processing various benefit-related accounting and transactional services. Our information systems contain proprietary and other confidential information related to our business. These systems and services are vulnerable to interruptions or other failures resulting from, among other things, natural disasters, terrorist attacks, software, equipment or telecommunications failures, processing errors, computer viruses, other security issues or supplier defaults. Security, backup and disaster recovery measures may not be adequate or implemented properly to avoid such disruptions or failures. Any disruption or failure of these systems or services could cause substantial errors, processing inefficiencies, security breaches, inability to use the systems or process transactions, loss of customers or other business disruptions, all of which could negatively affect our business and financial performance.
In addition, because we accept debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (the “PCI Standard”), issued by the Payment Card Industry Security Standards Council. The PCI Standard contains compliance guidelines with regard to our security surrounding the physical and electronic storage, processing and transmission of cardholder data. We are not fully compliant with the PCI Standard and there can be no assurance that in the future we will be able to operate our facilities and our customer service and sales operations in accordance with PCI or other industry recommended or contractually required practices. We are in the process to be in compliance with the PCI Standard. However, complying with the PCI Standard and implementing related procedures, technology and information security measures requires significant resources and ongoing attention. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology such as those necessary to achieve compliance with the PCI Standard or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Even if we are compliant with PCI Standard, we still may not be able to prevent security breaches. Any material interruptions or failures in our payment-related systems could negatively affect our business and financial performance.
In addition, some of our commercial partners may receive or store information provided by us or our users through their websites, including information entrusted to them by customers. If we or these third-party commercial partners fail to adopt or adhere to adequate information security practices, or fail to comply with their respective online policies, or in the event of a breach of our networks, our users’ data and customer information may be improperly accessed, used or disclosed.
As cybersecurity attacks continue to evolve and increase, our information systems could also be penetrated or compromised by internal and external parties intent on extracting confidential information, disrupting business processes or corrupting information. These risks could arise from external parties or from acts or omissions of internal or service provider personnel. Such unauthorized access could disrupt our business and could result in the loss of assets, litigation, regulatory actions or investigations, remediation costs, damage to our reputation and failure to retain or attract customers following such an event, which could adversely affect our business.

15


Our use of information technology and third party service providers exposes us to cybersecurity breaches and other business disruptions that could adversely affect us.
Our use of information technology and third party service providers exposes us to cybersecurity breaches and other business disruptions that could adversely affect us.
We use information technology and third party service providers to support our global business processes and activities, including supporting critical business operations; communicating with our suppliers, customers and employees; maintaining financial information and effective accounting processes and financial and disclosure controls; engaging in mergers and acquisitions and other corporate transactions; conducting research and development activities; meeting regulatory, legal and tax requirements; and executing various digital marketing and consumer promotion activities. Global shared service centers managed by third parties provide an increasing amount of services to conduct our business, including a number of accounting, internal control, human resources and computing functions.
Continuity of business applications and services has been, and may in the future be, disrupted by events such as infection by viruses or malware. Our continuity of business applications and operations has been, and may in the future be, also disrupted by other cybersecurity attacks; issues with or errors in systems’ maintenance or security; migration of applications to the cloud; power outages; hardware or software failures; denial of service; telecommunication failures; natural disasters; terrorist attacks; and other catastrophic occurrences. Further, cybersecurity breaches of our or third party systems, whether from circumvention of security systems, denial-of-service attacks or other cyberattacks, hacking, phishing attacks, computer viruses, ransomware or malware, employee or insider error, malfeasance, social engineering, physical breaches or other actions may cause confidential information belonging to us or our employees, customers, consumers, partners, suppliers, or governmental or regulatory authorities to be misused or breached. When risks such as these materialize, the need for us to coordinate with various third party service providers and for third party service providers to coordinate amongst themselves might make it more challenging to resolve the related issues. Additionally, in the event of a cybersecurity breach confidential information that we process and maintain about our employees or consumers through our ecommerce platform could be potentially exposed. If our controls, disaster recovery and business continuity plans or those of our third party providers do not effectively respond to or resolve the issues related to any such disruptions in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we might experience delays in reporting our financial results, loss of intellectual property, breach of confidential information and damage to our reputation or brands.
In February 2019, our business operation networks in the Coffee Systems segment were disrupted by an organized malware attack. We have taken actions to address this attack and to implement further safeguards against similar attacks. We continue to evaluate the impact on our business and are working to finalize the resolution of these actions.
We continue to devote focused resources to network security, backup and disaster recovery, upgrading systems and networks, enhanced training and other security measures to protect our systems and data; we are also in the process of enhancing the monitoring and detection of threats in our environment. However, security measures cannot provide absolute security or guarantee that we will be successful in preventing or responding to every breach or disruption on a timely basis. In addition, due to the constantly evolving nature of security threats, we cannot predict the form and impact of any future incident, and the cost and operational expense of implementing, maintaining and enhancing protective measures to guard against increasingly complex and sophisticated cyber threats could increase significantly. Although we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of a breach or disruption, such insurance coverage may be insufficient to cover all losses.
We regularly move data across national borders to conduct our operations and consequently are subject to a variety of continuously evolving and developing laws and regulations in numerous jurisdictions regarding privacy, data protection and data security, including those related to the collection, storage, handling, use, disclosure, transfer and security of personal data. Privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. Our efforts to comply with privacy and data protection laws may impose significant costs and challenges that are likely to increase over time, and we could incur substantial penalties or litigation related to violation of existing or future data privacy laws and regulations.
U.S. and international laws and regulations could adversely affect our business.
Our products are subject to a variety of federal, state and local laws and regulations in the U.S., Canada, Mexico and other countries in which we conduct business. These laws and regulations apply to many aspects of our business including the manufacture, safety, sourcing, labeling, storing, transportation, marketing, advertising, distribution and sale of our products. Other laws and regulations that may impact our business relate to the environment, relations with distributors and retailers, employment, privacy, health and trade practices. Our expanding international business will also expose us to economic factors, regulatory requirements, increasing competition and other risks associated with doing business in foreign countries. Our international business are also subject to U.S. laws, regulations and policies, including anti-corruption and export laws and regulations.

16


Violations of these laws or regulations in the manufacture, safety, sourcing, labeling, storing, transportation, advertising, distribution and sale of our products could damage our reputation and/or result in criminal, civil or administrative actions with substantial financial penalties and operational limitations. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations, could result in increased compliance costs or capital expenditures or significant challenges to our ability to continue to produce and sell products that generate a significant portion of our sales and profits. For example, changes in recycling and bottle deposit laws or special taxes on soft drinks or ingredients could increase our costs. In addition, changes in legislation imposing tariffs on or restricting the importation of our products or raw materials required to make our products, restricting the sale of K-Cup pod s, requiring compostability of K-Cup pod s, limiting the ability of consumers to put K-Cup pod s into municipal waste or recycling streams or requiring manufacturers of K-Cup pod s to pay so-called responsible producer or other fees to local or other governmental entities in connection with the collection, recycling or disposition of K-Cup pod s could increase costs for us or, at least for some period of time, cut off a significant source of our sales and profits. Regulatory focus on the health, safety and marketing of food products is increasing. Certain federal or state regulations or laws affecting the labeling of our products, such as California’s “Prop 65,” which requires warnings on any product with substances that the state lists as potentially causing cancer or birth defects, are or could become applicable to our products.
The agreements that govern the indebtedness contain various covenants that impose restrictions on us and may affect our ability to operate our business.
The agreements that govern the indebtedness, including the indentures governing the $11,975 million aggregate principal amount of senior unsecured notes (the “Notes”), the credit agreement governing the current $2,000 million term loan facility (the “Term Loan Facility”) and the $2,400 million in revolving credit facilities (the “Revolving Credit Facilities”), contain various affirmative and negative covenants that may, subject to certain significant exceptions, restrict our ability, including certain subsidiaries, to incur debt and our ability, including certain subsidiaries, to, among other things, have liens on our property, and/or merge or consolidate with any other person or sell or convey certain of our assets to any one person, and engage in certain sale and leaseback transactions. Our ability, including certain subsidiaries, to comply with these provisions may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations and could result in a default and acceleration under other agreements containing cross-default provisions. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations.
We could lose key personnel or may be unable to recruit qualified personnel.
Our future success depends upon the continued contributions of senior management and other key personnel and the ability to retain and motivate them. If we are unable to retain and motivate the senior management team and other key personnel sufficiently to support the projected growth and initiatives of our business, our business and financial performance may be adversely affected.
Fluctuations in our effective tax rate may result in volatility in our financial results.
We are subject to income taxes and non-income-based taxes in many U.S. and certain foreign jurisdictions. Income tax expense includes a provision for uncertain tax positions. At any one time, many tax years are subject to audit by various taxing jurisdictions. As these audits and negotiations progress, events may occur that change our expectation about how the audit will ultimately be resolved. As a result, there could be ongoing variability in our quarterly and/or annual tax rates as events occur that cause a change in our provision for uncertain tax positions. In addition, our effective tax rate in any given financial statement period may be significantly impacted by changes in the mix and level of earnings or by changes to existing accounting rules, tax regulations or interpretations of existing law. In addition, tax legislation may be enacted in the future, domestically or abroad, that impacts our effective tax rate. Among other things, a number of countries are considering changes to their tax laws applicable to multinational corporate groups, such as the recently enacted U.S. tax reform legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA”). Some foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financial position and operating results. Moreover, many of the new provisions of the TCJA will need to be implemented through U.S. Department of Treasury regulations and other guidance that could impact the interpretation and effect of these provisions. Changes in tax laws, regulations, related interpretations, and tax accounting standards in the U.S. and various foreign jurisdictions in which we operate may adversely affect our financial results.
Fluctuations in foreign currency exchange rates in Mexico and Canada may adversely affect our operating results.
While our operations are predominately in the U.S., we are exposed to foreign currency exchange rate risk with respect to our sales, expenses, profits, assets and liabilities denominated in the Mexican peso, the Canadian dollar as well as other foreign currencies in which we transact business. We may continue to hedge a small portion of our exposure to foreign currency fluctuations by utilizing derivative instruments for certain transactions. However, we are not protected against most foreign currency fluctuations.
As a result, our financial performance may be affected by changes in foreign currency exchange rates. Moreover, any favorable or unfavorable impacts to gross profit, gross margin and income from operations from fluctuations in foreign currency exchange rates are likely to be inconsistent year over year.
We continue to be exposed to foreign currency exchange rate risk that we may not be able to manage through derivative instruments and may incur material losses from such transactions utilizing derivative instruments.

17


Our intellectual property rights could be infringed or we could infringe the intellectual property rights of others, and adverse events regarding licensed intellectual property, including termination of distribution rights, could harm our business.
We possess intellectual property that is important to our business. This intellectual property includes ingredient formulas, trademarks, copyrights, patents, business processes and other trade secrets. We and third parties, including competitors, could come into conflict over intellectual property rights. Litigation could disrupt our business, divert management attention and cost a substantial amount to protect our rights or defend against claims. We cannot be certain that the steps it takes to protect our rights will be sufficient or that others will not infringe or misappropriate our rights. If we are unable to protect our intellectual property rights, our brands, products and business could be harmed.
We will continue to license various trademarks from third parties and license our trademarks to third parties. In some countries, third parties own a particular trademark or other intellectual property that we own in the U.S., Canada or Mexico. For example, the Dr Pepper trademark and formula is owned by Coca-Cola outside North America. Adverse events affecting those third parties or their products could negatively impact our brands.
In some cases, we license rights to distribute third-party products. The licensor may be able to terminate the license arrangement upon an agreed period of notice, in some cases without payment to us of any termination fee. The termination of any material license arrangement could adversely affect our business and financial performance.
Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.
From time to time we may be a party to various litigation claims and legal proceedings that may include employment, tort, real estate, antitrust, environmental, intellectual property, commercial, securities, false advertising, product labeling, consumer protection and other claims. From time to time we may be a defendant in class action litigation, including litigation regarding employment practices, product labeling, including under California’s “Proposition 65,” public statements and disclosures under securities laws, antitrust, advertising, consumer protection and wage and hour laws. Plaintiffs in class action litigation may seek to recover amounts that are large and may be indeterminable for some period of time. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and estimate, if possible, the amount of potential losses. We will establish a reserve as appropriate based upon assessments and estimates in accordance with our accounting policies. We will base our assessments, estimates and disclosures on the information available to us at the time and rely on legal and management judgment. Actual outcomes or losses may differ materially from assessments and estimates. Costs to defend litigation claims and legal proceedings and the cost and any required actions arising out of actual settlements, judgments or resolutions of these claims and legal proceedings may negatively affect our business and financial performance. Any adverse publicity resulting from allegations made in litigation claims or legal proceedings may also adversely affect our reputation, which in turn could adversely affect our results of operations.
Our financial results may be negatively impacted by recession, financial and credit market disruptions and other economic conditions.
Changes in economic and financial conditions in the U.S., Canada, Mexico, the Caribbean or other geographies where we do business may negatively impact consumer confidence and consumer spending, which could result in a reduction in our sales volume and/or switching to lower price offerings. We may be impacted by consumer price sensitivity associated with many of our products. Similarly, disruptions in financial and credit markets worldwide may impact our ability to manage normal commercial relationships with customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations, thus reducing our cash flow, or the ability of our vendors to timely supply materials. Additionally, these disruptions could have a negative effect on our ability to raise capital through the issuance of unsecured commercial paper or senior notes.
We also face counterparty risk for our cash investments and derivative instruments. Declines in the securities and credit markets could also affect our marketable securities and pension fund, which in turn could increase funding requirements.
Our facilities and operations may require substantial investment and upgrading.
We have programs of investment and upgrading in our manufacturing, distribution and other facilities. We may continue to incur significant costs to upgrade or keep up-to-date various facilities and equipment or restructure our operations, including closing existing facilities or opening new ones. If our investment and restructuring costs are higher than anticipated or our business does not develop as anticipated to appropriately utilize new or upgraded facilities, our costs and financial performance could be negatively affected.
Due to the seasonality of many of our products and other factors, our operating results are subject to fluctuations.
Historically, we have experienced increased sales of the Keurig brewing systems in our fourth quarter (generally October through December) due to the holiday season. If sales of Keurig brewing systems during the holiday season do not meet expectations, sales of our K-Cup pod s throughout the remainder of the year will be negatively impacted. The impact on sales volume and operating results due to the timing and extent of these factors can significantly impact our business. In addition, our operating results can be impacted by seasonal fluctuation. As a result, our quarterly operating results are subject to these same seasonality factors.

18


Failure to comply with applicable transfer pricing and similar regulations could harm our business and financial results.
In many countries, including the U.S., we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned and are taxed accordingly.
Although we believe that we are in substantial compliance with all applicable regulations and restrictions, we are subject to the risk that governmental authorities could audit our transfer pricing and related practices and assert that additional taxes are owed.
In the event that the audits or assessments are concluded adversely to our positions, we may or may not be able to offset or mitigate the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we will in fact be able to take advantage of any foreign tax credits in the future.
Weather, natural disasters, climate change legislation and the availability of water could adversely affect our business.
Unseasonable or unusual weather, natural disasters or long-term climate changes may negatively impact the price or availability of raw materials, energy and fuel, our ability to produce and demand for our products. Unusually cool weather during the summer months or unusually warm weather during the winter months may result in reduced demand for our products and have a negative effect on our business and financial performance.
There is growing political and scientific sentiment that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns (“global warming”). Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas (“GHG”) emissions. For example, proposals that would impose mandatory requirements on GHG emissions continue to be considered by policy makers in the countries in which we will operate. Laws enacted that directly or indirectly affect our production, distribution, packaging (including K-Cup pod s and the disposal of K-Cup pod s), cost of raw materials, fuel, ingredients and water could all negatively impact our business and financial results.
We also may be faced with water availability risks. Water is the main ingredient in substantially all of our products. Climate change may cause water scarcity and a deterioration of water quality in areas where we maintain operations. The competition for water among domestic, agricultural and manufacturing users is increasing in the countries where we operate, and as water becomes scarcer or the quality of the water deteriorates, we may incur increased production costs or face manufacturing constraints which could negatively affect our business and financial performance. Even where water is widely available, water purification and waste treatment infrastructure limitations could increase costs or constrain our operations.
We are also faced with the impact of decreased or shifting agricultural productivity in certain regions of the world as a result of changing weather patterns which may limit availability or increase the cost of key agricultural commodities, such as coffee and tea, which are important sources of ingredients for our products.
We rely on independent certification for a number of products. Loss of certification within our supply chain or as related to manufacturing processes could harm our business.
We rely on independent certification, such as certifications of products as “organic” or “responsibly sourced,” to differentiate some products from others. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. The loss of any independent certifications could adversely affect our marketplace position, which could harm our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

19


ITEM 2. PROPERTIES
We have two corporate headquarters, located in Burlington, Massachusetts and Plano, Texas.
The following table summarizes our principal manufacturing plants and principal warehouse and distribution facilities by geography and reportable segment as of December 31, 2018 :
 
Beverage Concentrates
 
Packaged Beverages
 
Latin America Beverages
 
Coffee Systems
 
Total
 
Owned
 
Leased
 
Owned
 
Leased
 
Owned
 
Leased
 
Owned
 
Leased
 
Owned
 
Leased
United States
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Production facilities
1

 

 
12

 
5

 

 

 
3

 
3

 
16

 
8

Warehouse and distribution facilities

 

 
33

 
62

 

 

 
1

 
3

 
34

 
65

International
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Production facilities

 

 

 

 
4

 

 
4

 
1

 
8

 
1

Warehouse and distribution facilities

 

 

 

 
3

 
23

 
2

 
36

 
5

 
59

Total
1

 

 
45

 
67

 
7

 
23

 
10

 
43

 
63

 
133

We believe our facilities are well-maintained and adequate, that they are being appropriately utilized and that they have sufficient production capacity for their present intended purposes. The extent of utilization of such facilities varies based on seasonal demand for our products. It is not possible to measure with any degree of certainty or uniformity the productive capacity and extent of utilization of these facilities. We periodically review our space requirements, and we look to consolidate and dispose or sublet facilities we no longer need as and when appropriate.
ITEM 3. LEGAL PROCEEDINGS
We are occasionally subject to litigation or other legal proceedings relating to our business. Refer to Note 19 for additional information related to commitments and contingencies, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

20

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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Since July 9, 2018, our common stock has been listed and traded on the New York Stock Exchange under the ticker symbol "KDP". Prior to July 9, 2018 and the closing of the DPS Merger, our common stock was listed and traded on the New York Stock Exchange under the ticker symbol "DPS".
As of February 26, 2019, there were approxim ately 11,250 stock holders of record of our common stock.
The information that will be included under the principal heading "Equity Compensation Plan Information" in our definitive Proxy Statement for the Annual Meeting of Stockholders or an amendment on Form 10-K/A, to be filed with the SEC, is incorporated herein by reference.
DIVIDEND INFORMATION
During 2018, our Board established a quarterly dividend program and declared aggregate dividends of $0.30 per share on outstanding common stock from the period commencing upon the closing of the DPS Merger on July 9, 2018 through December 31, 2018 . Additionally, the Company declared and paid $23 million in dividends during the period commencing January 1, 2018 through July 8, 2018 (prior to the DPS Merger ).
ISSUER REPURCHASES OF EQUITY SECURITIES
None.

21

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COMPARISON OF TOTAL STOCKHOLDER RETURN
The following performance graph compares the cumulative total returns of DPS through July 9, 2018 and KDP from July 10, 2018 through December 31, 2018 with the cumulative total returns of the Standard & Poor's ("S&P") 500 Index and the S&P Food and Beverage Select Industry Index. We believe that these indices convey an accurate assessment of our performance as compared to the industry.
The graph assumes that $100 was invested on December 31, 2013, with dividends reinvested quarterly. The graph additionally assumes that the special cash dividend of $103.75 which was declared and paid as a result of the DPS Merger was reinvested in KDP once shares resumed trading on July 10, 2018.
CHART-E71C7E71F6362E364BD.JPG

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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for the successor periods consisting of the year ended December 31, 2018, three months ended December 2017, fiscal year ended September 30, 2017 and successor period of December 4, 2015 through September 24, 2016, as well as the predecessor periods of September 27, 2015 through March 2, 2016, fiscal year ended September 26, 2015 and fiscal year ended September 27, 2014. These periods have been derived from our Audited Consolidated Financial Statements.
You should read this information along with the information included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Audited Consolidated Financial Statements and the related Notes thereto included elsewhere in this Annual Report on Form 10-K. The Company has not made reclassifications to the historical predecessor periods of the Fiscal Year Ended September 26, 2015 and the Fiscal Year Ended September 27, 2014, as they are not presented in the Consolidated Financial Statements within Item 8.
 
Successor
 
Predecessor
  (in millions, except per share data)
Year Ended December 31, 2018
 
Three Months Ended December 31, 2017
 
Fiscal Year Ended September 30, 2017
 
December 4, 2015 through September 24, 2016
 
September 27, 2015 through March 2, 2016
 
Fiscal Year Ended September 26, 2015
 
Fiscal Year Ended September 27, 2014
Statements of Income Data:
 

 
 

 
 

 
 

 
 

 
 
 
 
Net sales
$
7,442

 
$
1,170

 
$
4,269

 
$
2,293

 
$
2,025

 
$
4,520

 
$
4,708

Gross profit
3,882

 
527

 
2,044

 
1,073

 
800

 
1,608

 
1,816

Income from operations
1,237

 
229

 
897

 
393

 
147

 
765

 
947

Net income (2)
589

 
619

 
383

 
109

 
100

 
499

 
597

Basic earnings per share (1)
$
0.54

 
$
0.77

 
$
0.48

 
$
0.19

 
$
0.66

 
$
3.17

 
$
3.80

Diluted earnings per share (1)
0.53

 
0.77

 
0.47

 
0.18

 
0.66

 
3.14

 
3.74

Dividends declared per share (3)
0.30

 

 

 

 
0.33

 
1.15

 
1.00

Statements of Cash Flows Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
$
1,613

 
$
385

 
$
1,749

 
$
280

 
$
837

 
$
755

 
$
719

Investing activities
(19,131
)
 
(18
)
 
180

 
(13,772
)
 
(75
)
 
(498
)
 
(472
)
Financing activities
17,577

 
(620
)
 
(2,026
)
 
13,937

 
(647
)
 
(972
)
 
253

(1)
The weighted average number of shares of common stock outstanding used in the calculation of earnings per share ("EPS") during the year ended December 31, 2018 was impacted by the issuance of KDP common stock and the shares retained by the DPS stockholders. Refer to the Consolidated Statements of Changes in Stockholders' Equity and Note 1 of the Notes to our Audited Consolidated Financial Statements for further information. Additionally, the EPS for periods owned by the predecessor were computed under the predecessor's ownership structure and were not adjusted as a result of the DPS Merger.
(2)
For the three months ended December 31, 2017, net income, basic earnings per share, and diluted earnings per share were impacted by the initial impact of the legislation commonly referred to as the Tax Cuts and Jobs Act of 2017. Refer to Note 6 of the Notes to our Audited Consolidated Financial Statements for further information.
(3)
During the periods of the Three Months Ended December 31, 2017, Fiscal Year Ended September 30, 2017 and the Successor period of December 4, 2015 through September 24, 2016 the Company did not declare dividends on a per share basis, as Maple was a privately-held company. The Company did declare and pay dividends of $10 million , $54 million and $10 million in the respective periods. Additionally, during the year ended December 31, 2018, prior to the DPS Merger, the Company declared and paid $23 million in dividends.

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Table of Contents


 
Successor
 
Predecessor
 
December 31,
 
September 30, 2017
 
September 24, 2016
 
September 26, 2015
 
September 27, 2014
  (in millions)
2018
 
2017
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
Goodwill and other intangible assets, net
$
43,978

 
$
13,653

 
$
13,691

 
$
14,060

 
$
1,171

 
$
1,121

Total assets
48,918

 
15,744

 
16,107

 
16,609

 
4,002

 
4,797

Short-term borrowings and current portion of long-term obligations
1,458

 
219

 
219

 
186

 

 
19

Current portion of capital lease and financing obligations
26

 
6

 
6

 
3

 
3

 
2

Structured payables
526

 

 

 

 

 

Long-term obligations
14,201

 
4,879

 
5,475

 
7,322

 
331

 
141

Capital lease and financing obligations, less current
305

 
97

 
99

 
111

 
117

 
116

Total stockholders’ equity
22,533

 
7,398

 
6,828

 
6,510

 
2,709

 
3,459



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ITEM 7. 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 the related Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors, including the factors described under "Risk Factors" within Item 1A and elsewhere in this Annual Report on Form 10-K, including documents incorporated by reference.
References in the following discussion to "we", "our", "KDP" or "the Company" refer to Keurig Dr Pepper Inc. and all entities included in our Audited Consolidated Financial Statements.
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.
DR PEPPER SNAPPLE GROUP, INC. MERGER
On January 29, 2018, DPS entered into a Merger Agreement by and among DPS, Maple and Merger Sub, whereby Merger Sub would be merged with and into Maple , with Maple surviving the DPS Merger as a wholly-owned subsidiary of DPS. The DPS Merger was consummated on July 9, 2018, at which time DPS changed its name to "Keurig Dr Pepper Inc.".
Maple owns Keurig, a leader in specialty coffee and innovative single-serve brewing systems. The combined businesses created 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 1 and Note 3 of the Notes to our Audited 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.

25

Table of Contents


UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS
We believe the North American beverage market is influenced by certain key trends and uncertainties. Some of these items, such as increased health consciousness and changes in consumer preferences and economic factors, have previously created category headwinds for a number of our products. Refer to Item 1A, "Risk Factors", of this Annual Report on Form 10-K for information about risks and uncertainties facing us.
We expect Adjusted diluted EPS growth for the year ending December 31, 2019 in the range of 15% to 17%, or $1.20 to $1.22, in line with our long-term merger target. Supporting this guidance are the following expectations:
Net sales growth of approximately 2%, consistent with our long-term merger target of 2-3%, despite the impact of the changes in partner brands in the Packaged Beverage segment.
Merger synergies of $200 million for the year ending December 31, 2019, consistent with our long-term merger target for $200 million per year over the 2019-2021 period.
Other (income) expense, net is expected to be approximately $30 million of expense for the year ending December 31, 2019 and assumes no gains related to changes in our Packaged Beverages partner brands, such as the impacts during the year ended December 31, 2018 from BODYARMOR and Core Nutrition, LLC ("Core"), which recorded gains of $24 million and $12 million , respectively.
The Adjusted effective tax rate is expected to be in the range of 25.0% - 25.5%.
Adjusted interest expense is expected to be in the range of $570 million - $590 million, reflecting ongoing deleveraging and the continued benefit of unwinding swaps.
Shares outstanding of approximately 1,420 million.
SEASONALITY
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.
SEGMENTS
As of December 31, 2018 , we report our business in four operating segments:
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.
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.
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.
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 brewing system, K-Cup pod s and other coffee products.

26

Table of Contents


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 K-Cup Pod Sales Volume
In our Coffee Systems segments, we measure our sales volume as the number of appliances and the number of individual K-Cup pod s sold to our customers.
COMPARABLE RESULTS OF OPERATIONS
As a result of the recent DPS Merger , in order for management to discuss our results on a comparable basis, we prepared unaudited pro forma condensed combined financial information 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 on a pro forma basis 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 Pro Forma Results of Operations section, which is located at the end of Management's Discussion and Analysis discussion, as Adjusted pro forma net sales, Adjusted pro forma income from operations, Adjusted pro forma net income and Adjusted pro forma diluted EPS.

27



EXECUTIVE SUMMARY
2018 Financial Overview
The following table details our net income and diluted earnings per share for 2018 compared to the year ended December 31, 2017:
 
For the Year Ended December 31,
 
Dollar
 
Percent
(in millions, except per share data)
2018
 
2017
 
Change
 
Change
Net income attributable to KDP
$
586

 
$
847

 
$
(261
)
 
(31
)%
Diluted EPS
0.53

 
1.07

 
(0.54
)
 
(50
)%
Net income attributable to KDP decreased $261 million to $586 million , or $0.53 per diluted EPS, compared to $847 million , or $1.07 per diluted EPS, driven primarily by the unfavorable comparison of the income tax benefits related to the TCJA in 2017 and the higher interest expense, transaction costs and restructuring and integration charges associated with the DPS Merger, partially offset by the incremental income from operations impact of the DPS Merger.
During the last six months of 2018, we paid down approximately $938 million of our Term Loan, Commercial Paper and Revolver since the DPS Merger.
Recent Developments
In late October 2018, we entered into a long-term distribution agreement with Danone Waters of America to sell, distribute and merchandise evian, the leading global brand of premium natural spring water, across the U.S.
On November 30, 2018, we completed our acquisition of Core, a rapidly-growing brand that participates in the premium enhanced water segment.
On December 3, 2018, we announced that our Board of Directors declared a quarterly dividend of $0.15 per share, which was paid on January 18, 2019, to shareholders of record on January 4, 2019.
On February 14, 2019, we announced that our Board of Directors declared a quarterly dividend of $0.15 per share, which will be paid on April 19, 2019 to shareholders of record on April 5, 2019.
RESULTS OF OPERATIONS
As our financial information prior to the Keurig Acquisition is not comparable to the financial information subsequent to the Keurig Acquisition, predecessor and successor periods are presented to indicate the application of the different bases of accounting between the periods presented. As a result and when combined with the change in year-end for Maple as of December 31, 2017, we have provided our results of operations for individual periods that are also not comparable. See Note 1 of the Notes to our Audited Consolidated Financial Statements for additional information.
Our results of operations include the following periods, which reflect the results of operations of Maple :
year ended December 31, 2018 ("2018"), which also includes 176 days of the results of operations of DPS subsequent to the DPS Merger , which was completed on July 9, 2018,
three months ended December 31, 2017 ("Transition 2017"),
fiscal year ended September 30, 2017 ("Fiscal 2017"), and
the period of December 4, 2015 through September 24, 2016 ("Successor 2016").
Additionally, the predecessor period of September 27, 2015 through March 2, 2016 ("Predecessor 2016") is included and only reflects Keurig activity within the period.
Predecessor 2016, combined with 2018, Transition 2017, Fiscal 2017 and Successor 2016, collectively, are defined herein as the "Periods".
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."

28



2018
Consolidated Operations
The following table sets forth our consolidated results of operations for 2018 and the calendar year ended December 31, 2017:
 
2018
 
For the Year Ended December 31, 2017 (1)
($ in millions)
Dollars
 
Percent of Net Sales
 
Dollars
 
Percent of Net Sales
Net sales
$
7,442

 
100.0
 %
 
$
4,226

 
100.0
 %
Cost of sales
3,560

 
47.8

 
2,201

 
52.1

Gross profit
3,882

 
52.2

 
2,025

 
47.9

Selling, general and administrative expenses
2,635

 
35.4

 
1,163

 
27.5

Other operating (income) expense, net
10

 
0.1

 

 

Income from operations
1,237

 
16.6

 
862

 
20.4

Interest expense
401

 
5.4

 
86

 
2.0

Interest expense - related party
51

 
0.7

 
100

 
2.4

Loss on early extinguishment of debt
13

 
0.2

 
59

 
1.4

Other (income) expense, net
(19
)
 
(0.3
)
 
95

 
2.2

Income before provision (benefit) for income taxes
791

 
10.6

 
522

 
12.4

Provision (benefit) for income taxes
202

 
2.7

 
(335
)
 
(7.9
)
Net income
589

 
7.9

 
857

 
20.3

Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards
3

 

 
10

 
0.2

Net income attributable to KDP
$
586

 
7.9
 %
 
$
847

 
20.0
 %
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.54

 
 
 
$
1.07

 
 
Diluted
0.53

 
 
 
1.07

 
 
Effective tax rate
25.5
%
 
 
 
(64.2
)%
 
 
(1)
The calendar year ended December 31, 2017 was prepared in order to populate the unaudited pro forma combined financial information for calendar year ended December 31, 2017 which will then provide a comparable period to 2018. See Reconciliation of Calendar Year Statement of Income for the Year Ended December 31, 2017 for the full reconciliation of the calendar year ended December 31, 2017.
Net Sales . Net sales for 2018 were $7,442 million . The primary change in our net sales during 2018 as compared to the calendar year ended December 31, 2017 of $3,328 million was the result of the DPS Merger.
Gross Profit. Gross profit for 2018 was $3,882 million , or 52.2% of net sales as compared to $2,025 million , or 47.9% of net sales for the calendar year ended December 31, 2017. This increase in gross profit is driven primarily by the higher margins associated with net sales as a result of the DPS Merger.
Selling, General and Administrative Expenses. SG&A expenses for 2018 were $2,635 million , or 35.4% of net sales as compared to $1,163 million , or 27.5% of net sales for the calendar year ended December 31, 2017. The increase in SG&A expenses was driven by the DPS Merger and reflects the incremental expenses associated with the DPS operations as well as the transaction costs and restructuring and integration charges associated with the DPS Merger.
Income from Operations. Total operating costs during 2018 were $6,205 million , resulting in an operating income of $1,237 million , or 16.6% of net sales.
Interest Expense. Interest expense during 2018 was $401 million , or 5.4% of net sales, due primarily to the increased borrowings and assumption of the existing senior unsecured notes as a result of the DPS Merger, partially offset by the realized gains associated with the termination of receive-variable, pay-fixed interest rate swaps during the fourth quarter of 2018.
Interest Expense - Related Party. Interest expense - related party during 2018 was $51 million , or 0.7% of net sales. These related party loans were capitalized into additional paid in capital at the time of the DPS Merger and no longer incur any future interest expense.

29



Loss on Early Extinguishment of Debt. We recognized a $13 million loss on early extinguishment of debt during 2018 as we voluntarily paid off the Term Loan A upon the consummation of the DPS Merger, compared to a $59 million loss on extinguishment of debt generated from voluntary prepayments of long term debt during calendar year ended December 31, 2017.
Other (income) expense, net. Other (income) expense, net in 2018 was a benefit of $19 million , primarily due to the distribution from BODYARMOR, which resulted in a gain of approximately $24 million, compared to expense of $95 million during the calendar year ended December 31, 2017, primarily due to the termination of our cross currency swap on Euro denominated debt during the period.
Effective Tax Rate. The effective tax rate for 2018 and the calendar year ended December 31, 2017 was 25.5% and (64.2)% , respectively. For the year ended December 31, 2017, the provision for income taxes included an income tax benefit of $484 million driven by the impact of the TCJA. See Note 6 of the Notes to our Audited Consolidated Financial Statements for additional information.
Results of Operations by Segment
The following tables set forth net sales and income from operations for our segments for 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)
 
Segment Results — Net sales
2018
Beverage Concentrates
$
669

Packaged Beverages
2,415

Latin America Beverages
244

Coffee Systems
4,114

Net sales
$
7,442

 
 
(in millions)
2018
Segment Results — Income from Operations
 
Beverage Concentrates
$
430

Packaged Beverages
257

Latin America Beverages
29

Coffee Systems
1,163

Unallocated corporate costs
642

Income from operations
1,237

Interest expense
401

Interest expense - related party
51

Loss on early extinguishment of debt
13

Other (income) expense, net
(19
)
Income before provision for income taxes
$
791

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and income from operations for 2018:
 
2018
(in millions)
Dollars
 
Percent of Net Sales
Net sales
$
669

 
100.0
%
Income from operations
430

 
64.3
%
Sales volume. The following table details the sales volume mix by product type within our Beverage Concentrates segment for 2018:
CSDs
99
%
NCBs
1
%
Net Sales. Net sales were $669 million for 2018, which were wholly incremental as a result of the DPS Merger.

30



Income from Operations. Income from operations was $430 million for 2018, 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.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and income from operations for 2018:
 
2018
(in millions)
Dollars
 
Percent of Net Sales
Net sales
$
2,415

 
100.0
%
Income from operations
257

 
10.6
%
Sales Volume. The following table details the sales volume mix by product type within our Packaged Beverages segment for 2018:
CSDs
46
%
NCBs
40
%
Other (1)
14
%
Total Packaged Beverages volume
100
%
 
 
(1)
Includes contract manufacturing
Net Sales. Net sales were $2,415 million for 2018, which were wholly incremental as a result of the DPS Merger.
Income from Operations. Income from operations was $257 million for 2018, 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.
LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and income from operations for 2018:
 
2018
(in millions)
Dollars
 
Percent of Net Sales
Net sales
$
244

 
100.0
%
Income from operations
29

 
11.9
%
Sales Volume. The following table details the sales volume mix by product type within our Latin America Beverages segment for 2018:
CSDs
88
%
NCBs
12
%
Total Latin America Beverages volume
100
%
 
 
Net Sales. Net sales were $244 million for 2018, which were wholly incremental as a result of the DPS Merger.
Income from Operations . Income from operations was $29 million for 2018, 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.

31



COFFEE SYSTEMS
The following table details our Coffee Systems segment's net sales and income from operations for 2018 and the calendar year ended December 31, 2017:
 
2018
 
For the Year Ended December 31, 2017
(in millions)
Dollars
 
Percent of Net Sales
 
Dollars
 
Percent of Net Sales
Net sales
$
4,114

 
100.0
%
 
$
4,226

 
100.0
%
Income from operations
1,163

 
28.3
%
 
1,039

 
24.6
%
Net Sales. Net sales were $4,114 million for 2018, compared to $4,226 million for the year ended December 31, 2017. Our net sales declined as a result of lower net price realization, reflecting the continued moderation in strategic K-cup pod pricing and the absence of the 53rd week of operations in 2018 that were reflected for the year ended December 31, 2017, partially offset by volume/mix growth and favorable foreign currency translation.
Income from Operations. Income from operations was $1,163 million for 2018, compared to $1,039 million for the year ended December 31, 2017, primarily reflecting strong productivity that more than offset inflation in input costs and logistics as well as the absence of the 53rd week of operations in 2018.
Transition 2017
Consolidated Operations
The following table sets forth our consolidated results of operations for Transition 2017 and the three months ended December 31, 2016:
 
 
 
 
 
Three Months Ended December 31, 2016
 
 
 
 
 
Transition 2017
 
(unaudited)
 
 
 
 
(in millions)
Dollars
 
Percent of Net Sales
 
Dollars
 
Percent of Net Sales
 
Dollar Change
 
Percentage Change
Net sales
$
1,170

 
100.0
 %
 
$
1,213

 
100.0
 %
 
$
(43
)
 
(3.5
)%
Cost of sales
643

 
55.0
 %
 
667

 
55.0
 %
 
(24
)
 
(3.6
)%
Gross profit
527

 
45.0
 %
 
546

 
45.0
 %
 
(19
)
 
(3.5
)%
Selling, general and administrative expenses
298

 
25.5
 %
 
282

 
23.2
 %
 
16

 
5.7
 %
Other operating (income) expense, net

 
 %
 

 
 %
 

 
NM
Income from operations
229

 
19.6
 %
 
264

 
21.8
 %
 
(35
)
 
(13.3
)%
Interest expense
10

 
0.9
 %
 
25

 
2.1
 %
 
(15
)
 
(60.0
)%
Interest expense - related party
25

 
2.1
 %
 
25

 
2.1
 %
 

 
 %
Loss on early extinguishment of debt
5

 
0.4
 %
 
31

 
2.6
 %
 
(26
)
 
(83.9
)%
Other (income) expense, net
7

 
0.6
 %
 
(44
)
 
(3.6
)%
 
51

 
NM
Income before provision (benefit) for income taxes
182

 
15.6
 %
 
227

 
18.7
 %
 
(45
)
 
(19.8
)%
Provision (benefit) for income taxes
(437
)
 
(37.4
)%
 
82

 
6.8
 %
 
(519
)
 
NM
Net income
619

 
52.9
 %
 
145

 
12.0
 %
 
474

 
326.9
 %
Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards
7

 
0.6
 %
 
2

 
0.2
 %
 
5

 
NM
Net income attributable to KDP
$
612

 
52.3
 %
 
$
143

 
11.8
 %
 
469

 
328.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.77

 
 
 
$
0.18

 
 
 
 
 
 
Diluted
0.77

 
 
 
0.18

 
 
 
 
 
 
Effective tax rate
(240.1
)%
 
 
 
36.1
%
 
 
 
 
 
 
Sales Volumes. Brewer sales volumes increased 3%, driven primarily by new brewer models, while pod sales volumes increased by 5%, as a result of growth in the pod category.

32


Net Sales . Net sales for Transition 2017 decreased by $43 million , or 3.5% , to  $1,170 million  as compared to  $1,213 million  reported in the same fiscal period in 2016. The primary drivers of the change in net sales included:
Unfavorable rate, primarily driven by strategic price alignment and increased trade spend with our pod business partners, which decreased net sales by 5%;
Unfavorable product mix, which lowered net sales by 3%; and
Increase in sales volume, which increased net sales by 4%.
Gross Profit. Gross profit for Transition 2017 was  $527 million , or 45.0% of net sales (gross margin), a decrease of 3.5% as compared to  $546 million , or 45.0% of net sales (gross margin), in the same fiscal period in 2016. The following significant drivers impacted the gross margin for Transition 2017 compared to the same fiscal period in 2016:
Unfavorable pod net price realization which reduced gross margin by approximately 360 basis points;
Unfavorable pod mix due to a higher mix of partner and private label brands, which reduced gross margin by approximately 60 basis points; and
Approximately 340 basis points improvement driven primarily by ongoing pod and brewer productivity improvements.
Selling, General and Administrative Expenses. SG&A expenses increased 5.7% to  $298 million  in Transition 2017 from  $282 million  in the same fiscal period in 2016. As a percentage of net sales, SG&A expenses increased to 25.5% in Transition 2017 compared to 23.2% in the same fiscal period in 2016. The 5.7% increase was primarily attributable to a 38%, or $14 million, increase in planned advertising and promotional spending primarily associated with television media campaigns aimed at driving household penetration of the Keurig single-serve system.
Income from Operations. Income from operations in Transition 2017 was  $229 million , a decrease of $35 million as compared to  $264 million in the same fiscal period in 2016.
Interest Expense. Interest expense was $10 million in Transition 2017 as compared to $25 million in the same fiscal period in 2016. The $15 million decrease in interest expense was primarily due to mark-to-market gains from interest rate swaps that economically hedge our variable interest rate exposure.
Loss on Extinguishment of Debt. We realized  $5 million  in losses related to the extinguishment of debt from voluntary prepayments of our long term debt in Transition 2017 as compared to  $31 million  in losses related to the extinguishment of debt in the same fiscal period in 2016.
Effective Tax Rate. Our effective income tax rate was (240.1)% for Transition 2017 as compared to a 36.1% effective tax rate for the same fiscal period in 2016. The effective tax rate for Transition 2017 was primarily impacted by a 24.5% blended (as defined in the Internal Revenue Code) U.S. federal statutory rate as well as the net tax benefits related to a U.S. deferred tax rate change of $493 million as a result of the enactment of the TCJA, and Section 199 deduction, which is partially offset by a repatriation tax as a result of the enactment of the TCJA and state taxes. The effective tax rate for the three months ended December 24, 2016 was primarily impacted by a 35% U.S. Federal statutory rate, and net tax benefits related to Section 199 deductions and foreign tax rate differential, which was partially offset by state taxes.
Net Income. Net income in Transition 2017 was  $619 million , an increase of $474 million , or 326.9% , as compared to  $145 million  in the same fiscal period in 2016.

33


Fiscal 2017
Consolidated Operations
The following table sets forth our consolidated results of operations for Fiscal 2017:
 
Fiscal 2017
($ in millions)
Dollars
 
Percent
Net sales
$
4,269

 
100.0
%
Cost of sales
2,225

 
52.1

Gross profit
2,044

 
47.9

Selling, general and administrative expenses
1,147

 
26.9

Other operating (income) expense, net

 

Income from operations
897

 
21.0

Interest expense
101

 
2.4

Interest expense - related party
100

 
2.3

Loss on early extinguishment of debt
85

 
2.0

Other (income) expense, net
44

 
1.0

Income before provision (benefit) for income taxes
567

 
13.3

Provision (benefit) for income taxes
184

 
4.3

Net income
383

 
9.0

Less: Net income attributable to employee redeemable non-controlling interest and mezzanine equity awards
5

 
0.1

Net income attributable to KDP
$
378

 
8.9
%
 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.48

 
NM

Diluted
$
0.47

 
NM

Effective tax rate
32.5
%
 
NM

Net Sales. Net sales for Fiscal 2017 were $4,269 million . Fiscal 2017 included a 53rd week which added approximately $91 million or 2.1% to Fiscal 2017 net sales growth. Our net sales were positively impacted by improved volume, but such improvements were offset by negative mix and increased trade spend.
Gross Profit. Gross profit for Fiscal 2017 was $2,044 million , or 47.9% of net sales. Our gross profit was positively impacted by ongoing pod and brewer productivity programs, the discontinuation of the Keurig Kold product line, product mix primarily associated with selling fewer Keurig K2.0 brewing systems versus Keurig 1.0 brewing systems and negatively impacted by an increase in other manufacturing costs.
Selling, General and Administrative Expenses. SG&A expenses for Fiscal 2017 were $1,147 million , or 26.9% of net sales. Our SG&A expenses were primarily attributable to increased expenses related to amortization of intangible assets of $96 million, stock compensation of $54 million and restructuring charges of $45 million.
Income from Operations. For Fiscal 2017, total operating costs were $1,147 million resulting in income from operations of $897 million , or 21.0% of net sales.
Interest Expense and Interest Expense—Related Party. For Fiscal 2017, third party interest expense was $101 million and related party interest expense was $100 million for a total interest expense of $201 million. The change in interest expenses was primarily attributable to incurring a full year of interest expense on the outstanding debt obtained in March 2016 in connection with the Keurig Acquisition partially offset by mark to market activity on interest rate swaps, as well as the outstanding term loans with two related parties, the Sponsor and Mondelēz, with a combined principal balance of approximately $1,815 million which bear an interest rate of 5.5% and mature in 2023.
Loss on Extinguishment of Debt. For Fiscal 2017, we realized a net loss of $85 million from voluntary prepayments of our long term debt.
Other (income) expense, net. For Fiscal 2017, we realized expense of $44 million , which was primarily attributable to a realized loss of $61 million upon termination of a cross currency swap on our Euro denominated debt. The realized loss was partially offset by a realized gain on the extinguishment of the related debt.

34


Effective Tax Rate. For Fiscal 2017, income tax expense was $184 million , or 32.5% of income before income tax. The effective tax rate for Fiscal 2017 was primarily impacted by a 35.0% U.S. federal statutory rate, and the net tax benefits of tax credits generated from current year foreign earnings recognized in the U.S., Section 199 deductions, foreign tax rate differential, partially offset by U.S. taxation of foreign earnings, state taxes, valuation allowance for deferred tax assets, and uncertain tax positions.
Net Income. For Fiscal 2017, net income was $383 million , or 9.0% of net sales.
Successor 2016
The following table sets forth our consolidated results of operations for Successor 2016:
 
Successor 2016
($ in millions)
Dollars
 
Percent
Net sales
$
2,293

 
100.0
%
Cost of sales
1,220

 
53.2

Gross profit
1,073

 
46.8

Selling, general and administrative expenses
680

 
29.7

Other operating (income) expense, net

 

Income from operations
393

 
17.1

Interest expense
163

 
7.1

Interest expense - related party
60

 
2.6

Loss on early extinguishment of debt
5

 
0.2

Other (income) expense, net
1

 

Income before provision (benefit) for income taxes
164

 
7.2

Provision (benefit) for income taxes
55

 
2.4

Net income
$
109

 
4.8

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.19

 
NM

Diluted
$
0.18

 
NM

Effective tax rate
33.5
%
 
NM

Net Sales. Net sales for Successor 2016 were $2,293 million . Our net sales were negatively impacted by a decrease in hot pod sales, a decrease in hot brewers and accessories sales and a decrease in other product sales.
Gross Profit. Gross profit for Successor 2016 was $1,073 million , or 46.8% of net sales. Our gross profit was positively impacted by ongoing pod and brewer productivity initiatives and other manufacturing costs improvements, lower obsolescence expense and the accounting treatment of logistics costs following the Keurig Acquisition.
SG&A Expenses. SG&A expenses for Successor 2016 were $680 million , or 29.7% of net sales. Our SG&A expenses included Keurig Acquisition transaction costs of $102 million, which were offset by lower R&D costs and advertising and promotional spending.
Income from Operations. Total operating costs were $680 million resulting in an operating income of $393 million , or 17.1% of net sales.
Interest Expense. Third party interest expense was $163 million and related party interest expense was $60 million for a total interest expense of $223 million. Our interest expense was primarily attributable to an increase in our outstanding debt balance associated with the Keurig Acquisition and an increase in related party interest.
Loss on Early Extinguishment of Debt. Maple realized a net loss of $5 million from voluntary prepayments of its long term debt.
Effective Tax Rate. Income tax expense was $55 million , or 33.5% of income before income tax. The effective tax rate for Successor 2016 was primarily impacted by a 35.0% U.S. federal statutory rate, and the net tax benefits related to foreign tax rate differential, transaction cost deductions, deferred state rate change, and Section 199 deductions, partially offset by uncertain tax positions and U.S. state taxes.
Net Income. In Successor 2016, net income was $109 million , or 4.8% of net sales.


35


Predecessor 2016
 
Predecessor 2016
($ in millions)
Dollars
 
Percent
Net sales
$
2,025

 
100.0
 %
Cost of sales
1,225

 
60.5

Gross profit
800

 
39.5

Selling, general and administrative expenses
653

 
32.2

Other operating (income) expense, net

 

Income from operations
147

 
7.3

Interest expense
3

 
0.1

Interest expense - related party

 

Loss on early extinguishment of debt
6

 
0.3

Other (income) expense, net
(1
)
 

Income before provision (benefit) for income taxes
139

 
6.9

Provision (benefit) for income taxes
39

 
1.9

Net income
$
100

 
4.9

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.66

 
NM

Diluted
$
0.66

 
NM

Effective tax rate
28.1
%
 
NM

Net Sales. Net sales for Predecessor 2016 were $2,025 million . Our net sales were negatively impacted by a decrease in hot pod sales, decrease in hot brewers and accessories sales and a decrease in other product sales.
Gross Profit. Gross profit for Predecessor 2016 was $800 million , or 39.5% of net sales. Our gross profit was positively impacted by ongoing pod and brewer productivity initiatives and other manufacturing costs improvements, lower obsolescence expense and the accounting treatment of logistics costs following the Keurig Acquisition.
SG&A Expenses. SG&A expenses for Predecessor 2016 were $653 million , or 32.2% of net sales. Our SG&A expenses included Keurig Acquisition transaction costs of $187 million and reflected the benefit from the discontinuation of the Keurig Kold product line, which lowered recurring costs.
Income from operations . For Predecessor 2016, total operating costs were $653 million resulting in an operating income of $147 million , or 7.3% of net sales.
Interest expense . For Predecessor 2016, interest expense was $3 million . Our interest expense was primarily attributable to borrowings under the Company's revolver.
Loss on early extinguishment of debt . For Predecessor 2016, Maple realized a net loss of $6 million from voluntary prepayments of long term debt.
Effective Tax Rate. For Predecessor 2016, income tax expense was $39 million , with an effective tax rate of 28.1% . The effective tax rate was primarily impacted by a 35.0% U.S. federal statutory rate, and the net tax benefits related to state refunds, R&D credits, foreign tax rate differential, Section 199 deductions, which was partially offset by tax expenses related to uncertain tax positions, capitalization of transaction costs, and U.S. state taxes.
Net income. Net income was $100 million , or 4.9% of net sales.
LIQUIDITY AND CAPITAL RESOURCES
Trends and Uncertainties Affecting Liquidity
Customer and consumer demand for our products may be impacted by all risk factors discussed in Item 1A, "Risk Factors" that could have a material effect on production, delivery and consumption of our products in 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.

36



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 integration of DPS;
our continued payment of dividends;
our continued capital expenditures;
seasonality of our operating cash flows, which includes our payable extension program and structured payables, 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 8 of the Notes to our Audited 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 Periods:
 
Successor
 
Predecessor
(in millions)
2018
 
Transition 2017
 
Fiscal 2017
 
Successor 2016
 
Predecessor 2016
Net cash provided by operating activities
$
1,613

 
$
385

 
$
1,749

 
$
280

 
$
837

Net cash (used in) provided by investing activities
(19,131
)
 
(18
)
 
180

 
(13,772
)
 
(75
)
Net cash provided by (used in) financing activities
17,577

 
(620
)
 
(2,026
)
 
13,937

 
(647
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities for 2018 primarily consisted of $589 million in net income, adjusted for $462 million in depreciation and amortization expense. Other significant changes in assets and liabilities affecting net cash provided by operating activities were an increase in accounts payable and accrued expenses of $206 million , primarily attributable to increases in accounts payable as a result of the accounts payable program as discussed below.
Net cash provided by operating activities for Transition 2017 primarily consisted of $619 million in net income, adjusted for deferred income taxes of $484 million as a result of the enactment of the TCJA. Other significant changes in assets and liabilities affecting net cash provided by operating activities were an increase in accounts payable and accrued expenses of $98 million , primarily attributable to increases in accounts payable as a result of the accounts payable program as discussed below and a decrease in inventories of $89 million , primarily attributable to decreases in brewer and pod inventories.
Net cash provided by operating activities for Fiscal 2017 primarily consisted of $383 million in net income, adjusted for $256 million in depreciation and amortization expense. Net cash was also impacted by other changes in working capital during the period, driven primarily by the $861 million increase in accounts payable as a result of the accounts payable program as discussed below.
Net cash provided by operating activities for Successor 2016 primarily consisted of generation of $109 million in net income, adjusted for $138 million in depreciation and amortization expense related to fixed assets and intangibles. Net cash provided by operating activities was also impacted by the $128 million increase in accounts payable as a result of improved payment terms, partially offset by reduction from $84 million in accounts receivable.

37



Net cash provided by operating activities for Predecessor 2016 primarily consisted of generation of $100 million in net income, adjusted by $125 million in depreciation and amortization expense related to fixed assets and intangibles and $141 million in deferred compensation and stock compensation. Additionally, net cash was favorably impacted by an increase in accounts payable and accrued expenses of $136 million from improved payment terms.
Accounts payable program
The Company entered into agreements with third parties to allow participating suppliers to track payment obligations from the Company, and if elected, sell payment obligations from the Company to financial institutions. Suppliers can sell one or more of the the Company's payment obligations at their sole discretion and the rights and obligations of the Company to its suppliers are not impacted.  The Company has no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. The Company’s obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted. As of December 31, 2018 and 2017 , $1,676 million  and  $1,319 million , respectively, of the Company's outstanding payment obligations are payable to suppliers who utilize these third party services.
NET CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities for 2018 consisted primarily of our business acquisitions of the DPS Merger, the Big Red Acquisition and Core Acquisition of $19,114 million , net of cash acquired of $169 million , and purchases of property, plant and equipment of $180 million .
Cash used in investing activities for Transition 2017 consisted primarily of $11 million of capital expenditures, primarily related to portion pack manufacturing.
Cash provided by investing activities for Fiscal 2017 consisted primarily of $250 million of proceeds which were recovered from the sale of Keurig Kold assets, which was partially offset by $66 million of capital expenditures.
Cash used in investing activities for Successor 2016 consisted primarily of $13,717 million for the Keurig Acquisition and purchases of property, plant and equipment of $33 million .
Cash used in investing activities for Predecessor 2016 consisted primarily of purchases of property, plant and equipment of $79 million .
NET CASH USED IN FINANCING ACTIVITIES
Cash provided by financing activities for 2018 consisted primarily of proceeds from the issuance of common stock of $9,000 million , issuance of unsecured notes of $8,000 million , proceeds from the term loan facility of $2,700 million and net issuance of commercial paper of $1,080 million . These cash inflows from financing activities were partially offset by repayments on the term loan facility of $3,447 million . These activities were used to accommodate the DPS Merger and reflect subsequent repayments since the DPS Merger.
Net cash used in financing activities for Transition 2017 consisted primarily of $505 million in repayments of the term loan facility, $100 million in repayments of the revolving credit facility, and $11 million in dividend payments.
Net cash used in financing activities for Fiscal 2017 consisted primarily of $3,168 million of repayment of the term loan facility, which was refinanced by proceeds of $1,200 million of a new term loan in March 2017. In Fiscal 2017 , $100 million was drawn against our revolving credit facility, a portion of which was used to fund repayments of our long-term debt. In addition, Maple paid $55 million in dividends.
Net cash provided by financing activities for Successor 2016 consisted primarily of proceeds form the issuance of common stock of $6,385 million , proceeds from the term loan facility of $5,947 million and proceeds from the related party unsecured notes of $1,815 million , which were all used to accommodate the acquisition of Keurig Green Mountain. These cash inflows from financing activities were partially offset by repayments on the term loan facility of $147 million and payments of deferred financing fees of $122 million .
Net cash used in financing activities for Predecessor 2016 consisted primarily of the Company's share repurchases and the net change in the Company's revolving line of credit.

38



Debt Ratings
As of December 31, 2018 , 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 for 2018 were $180 million and primarily related to machinery and equipment, information technology infrastructure, logistics equipment and replacement of existing cold drink equipment.
Capital expenditures for Transition 2017 were $11 million and primarily related to machinery and equipment.
Capital expenditures for Fiscal 2017 were $66 million and primarily related to information technology infrastructure and systems and machinery and equipment.
Capital expenditures for Successor 2016 and Predecessor 2016 were $33 million and $79 million , respectively, primarily related to machinery and equipment and information technology infrastructure.
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents increased $44 million from December 31, 2017 to $139 million as of December 31, 2018 , primarily driven by by operating cash flows.
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 and $58 million as of December 31, 2018 and December 31, 2017 , respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.

39



Contractual Commitments and Obligations
We enter into various contractual obligations that impact, or could impact, our liquidity. Based on our current and anticipated level of operations, we believe that our proceeds from operating cash flows will be sufficient to meet our anticipated obligations. To the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may utilize cash on hand or amounts available under our financing arrangements, if necessary.
The following table summarizes our contractual obligations and contingencies as of December 31, 2018 :
 
Payments Due in Year
 (in millions)
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
After 2023
Long-term obligations (1)
$
14,808

 
$
385

 
$
385

 
$
2,385

 
$
385

 
$
4,543

 
$
6,725

Interest payments
5,453

 
571

 
536

 
514

 
467

 
386

 
2,979

Capital leases (2)
281

 
34

 
34

 
33

 
32

 
29

 
119

Operating leases (3)
312

 
58

 
53

 
44

 
34

 
25

 
98

Purchase obligations (4)
1,841

 
1,124

 
241

 
149

 
129

 
77

 
121

Payable to Mondelēz
15

 
15

 

 

 

 

 

Financing obligations (5)
112

 
10

 
10

 
10

 
10

 
10

 
62

Total
$
22,822

 
$
2,197

 
$
1,259

 
$
3,135

 
$
1,057

 
$
5,070

 
$
10,104

(1)
Amounts represent payments for the senior unsecured notes issued by us and the term loan credit agreement. Please refer to Note 8 of the Notes to our Audited Consolidated Financial Statements for additional information.
(2)
Amounts represent our contractual payment obligations for our lease arrangements classified as capital leases. These amounts exclude renewal options, which were not yet executed but were included in the lease term to determine capital lease obligation as the lease imposes a penalty on us in such amount that the renewal appeared reasonably assured at lease inception. Refer to Note 13 for additional information .
(3)
Amounts represent minimum rental commitments under our non-cancelable operating leases. Refer to Note 13 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.
(5)
Amounts represent our contractual payment obligations for our build-to-suit financing lease obligations. Refer to Note 13 for additional information .
Amounts excluded from our table
As of December 31, 2018 , we had $62 million of non-current unrecognized tax benefits, related interest and penalties classified as a long-term liability. The table above does not reflect any payments related to these amounts as it is not possible to make a reasonable estimate of the amount or timing of the payment. Refer to Note 6 of the Notes to our Audited Consolidated Financial Statements for further information.
The total accrued benefit liability representing the underfunded position for pension and other postretirement benefit plans recognized as of  December 31, 2018  was approximately  $30 million . This amount is impacted by, among other items, funding levels, plan amendments, changes in plan assumptions and the investment return on plan assets. We did not include estimated payments related to our total accrued benefit liability in the table above.The Pension Protection Act of 2006 was enacted in August 2006 and established, among other things, new standards for funding of U.S. defined benefit pension plans. We generally expect to fund all future contributions with cash flows from operating activities. Our international pension plans are generally funded in accordance with local laws and income tax regulations. We did not include our estimated contributions to our various single employer plans in the table above.
We have a deferred compensation plan where the assets are maintained in a rabbi trust and the corresponding liability related to the plan is recorded in other non-current liabilities. We did not include estimated payments related to the deferred compensation liability as the timing and payment of these amounts are determined by the participants and outside our control.
In general, we are covered under conventional insurance programs with high deductibles or are self-insured for large portions of many different types of claims. Our accrued liabilities for our losses related to these programs is estimated through actuarial procedures of the insurance industry and by using industry assumptions, adjusted for our specific expectations based on our claim history. As of  December 31, 2018 , our accrued liabilities for our losses related to these programs totaled approximately  $94 million .

40



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 Audited Consolidated Financial Statements for a discussion of these and other accounting policies.
Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Goodwill and Other Indefinite Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
For goodwill and other indefinite lived intangible assets, we conduct tests for impairment 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 also assign indefinite lived intangible assets to our reporting units. We define our six reporting units (in italics below) as the following:

Packaged Beverages
- DSD
- WD
Coffee Systems
- US
- Canada
Beverage Concentrates
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 ("Step 0").

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 a fair value of the respective reporting unit with its carrying value, including goodwill and considering any indefinite lived intangible asset impairment charges.

 
For our detailed impairment analysis, we used an income based approach to determine the fair value of our assets, as well as an overall consideration of market capitalization and our enterprise value. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. These assumptions could be negatively impacted by various risks discussed in "Risk Factors" in this Annual Report on Form 10-K.

Critical assumptions for quantitative analyses include revenue growth and profit performance, including the allocation of synergies, over the next ten year period, as well as an appropriate discount rate, long term growth rate and royalty rates, as applicable.

Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums. For 2018, such discount rates ranged from 8.5% to 9.5%.

Long term growth rates are based on the long-term inflation forecast, industry growth and the long-term economic growth potential. For 2018, the long term growth rates ranged from 0.9% to 2.4%.

Royalty rates are based on observable market participant information. For 2018, such royalty rate used in the impairment analysis of trade names ranged from 6.0% to 7.0%.
 
The carrying values of goodwill and indefinite lived intangible assets as of December 31, 2018, were $20,011 million and $22,310 million, respectively.

We have not identified any other impairments in goodwill or other indefinite lived intangible assets during 2018, 2017, 2016 or 2015.

For purposes of goodwill and other indefinite lived intangible assets acquired in the DPS Merger, we performed a Step 0 test, concluding no further analysis was required.

For the goodwill within the Coffee Systems segment, 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, 2018 would not change our conclusion.

For the trade names within the Coffee Systems segment, 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, 2018 would impact the amount of headroom over the carrying value of our trade names as follows (in millions):

 
 
 
 
Fair Value
 
Carrying Value
 
 
Headroom Percentage
 
Result
 
+0.50%
 
Result
 
+0.50%
 
 
0 - 25%
 
$

 
$

 
$

 
$

 
 
26 - 50%
 

 

 

 

 
 
In excess of 50%
 
4,600

 
4,360

 
2,479

 
2,479

 
 
 
 
$
4,600

 
$
4,360

 
$
2,479

 
$
2,479

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

41



Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
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.

Further 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 as of December 31, 2018, would have affected our income from operations by $34 million for the year ended December 31, 2018.
 
 
 
 
 
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: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount, or (3) 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.

We 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.
 
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.

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.
 
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.

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