UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to              
KDPA03.JPG
Commission file number 001-33829
Delaware
 
98-0517725
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number)
 
 
 
53 South Avenue, Burlington, Massachusetts
 
01803
(Address of principal executive offices)
 
(Zip code)
(802) 244-5621
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    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 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock
 
KDP
 
New York Stock Exchange
As of May 7, 2019 , there were 1,406,689,275 shares of the registrant's common stock, par value $0.01 per share, outstanding.
 



KEURIG DR PEPPER INC.
FORM 10-Q TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents


PART I - FINANCIAL INFORMATION
ITEM 1.
Financial Statements ( Unaudited )

KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the First Quarter of 2019 and 2018
( Unaudited )
 
First Quarter
(in millions, except per share data)
2019
 
2018
Net sales
$
2,504

 
$
948

Cost of sales
1,106

 
467

Gross profit
1,398

 
481

Selling, general and administrative expenses
911

 
300

Other operating (income) expense, net
(11
)
 
3

Income from operations
498

 
178

Interest expense
169

 
(2
)
Interest expense - related party

 
25

Loss on early extinguishment of debt
9

 
2

Other expense, net
5

 
13

Income before provision for income taxes
315

 
140

Provision for income taxes
85

 
51

Net income
230

 
89

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

 
1

Net income attributable to KDP
$
230

 
$
88

Earnings per common share:
 
 
 
Basic
$
0.16

 
$
0.11

Diluted
0.16

 
0.11

Weighted average common shares outstanding:
 
 
 
Basic
1,406.3

 
790.5

Diluted
1,417.7

 
790.5

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


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Table of Contents


KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the First Quarter of 2019 and 2018
( Unaudited )
 
First Quarter
(in millions)
2019
 
2018
Comprehensive income
$
323

 
$
64

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


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Table of Contents


KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2019 and December 31, 2018
( Unaudited )
 
March 31,
 
December 31,
(in millions, except share and per share data)
2019
 
2018
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
85

 
$
83

Restricted cash and restricted cash equivalents
44

 
46

Trade accounts receivable, net
1,016

 
1,150

Inventories
663

 
626

Prepaid expenses and other current assets
354

 
254

Total current assets
2,162

 
2,159

Property, plant and equipment, net
2,282

 
2,310

Investments in unconsolidated affiliates
172

 
186

Goodwill
20,077

 
20,011

Other intangible assets, net
23,988

 
23,967

Other non-current assets
584

 
259

Deferred tax assets
26

 
26

Total assets
$
49,291

 
$
48,918

Liabilities and Stockholders' Equity
Current liabilities:
 
 
 
Accounts payable
$
2,558

 
$
2,300

Accrued expenses
962

 
1,012

Structured payables
595

 
526

Short-term borrowings and current portion of long-term obligations
2,018

 
1,458

Other current liabilities
523

 
406

Total current liabilities
6,656

 
5,702

Long-term obligations
13,246

 
14,201

Deferred tax liabilities
5,940

 
5,923

Other non-current liabilities
775

 
559

Total liabilities
26,617

 
26,385

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued

 

Common stock, $0.01 par value, 2,000,000,000 shares authorized, 1,406,689,275 and 1,405,944,922 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
14

 
14

Additional paid-in capital
21,505

 
21,471

Retained earnings
1,192

 
1,178

Accumulated other comprehensive loss
(37
)
 
(130
)
Total stockholders' equity
22,674

 
22,533

Total liabilities and stockholders' equity
$
49,291

 
$
48,918

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

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Table of Contents


KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The First Quarter of 2019 and 2018
( Unaudited )
 
First Quarter
(in millions)
2019
 
2018
Operating activities:
 
 
 
Net income
$
230

 
$
89

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
85

 
32

Amortization expense
78

 
33

Provision for sales returns
9

 
11

Deferred income taxes
1

 
(14
)
Employee stock-based compensation expense
14

 
11

Loss on early extinguishment of debt
9

 
2

Unrealized (gain) loss on foreign currency
(17
)
 
8

Unrealized loss (gain) on derivatives
7

 
(29
)
Other, net

 
18

Changes in assets and liabilities:
 
 
 
Trade accounts receivable
126

 
97

Inventories
(36
)
 
(7
)
Income taxes receivable and payables, net
68

 
(4
)
Other current and non current assets
(102
)
 
(7
)
Accounts payable and accrued expenses
125

 
28

Other current and non current liabilities
(6
)
 
(1
)
Net change in operating assets and liabilities
175

 
106

Net cash provided by operating activities
591

 
267

Investing activities:
 
 
 
Issuance of related party note receivable
(7
)
 

Purchases of property, plant and equipment
(62
)
 
(20
)
Other, net
24

 
(6
)
Net cash used in investing activities
(45
)
 
(26
)
Financing activities:
 
 
 
Proceeds from term loan
2,000

 

Net issuance of Commercial Paper
594

 

Proceeds from structured payables
78

 

Payments on structured payables
(9
)
 

Payments on senior unsecured notes
(250
)
 

Repayment of term loan
(2,758
)
 
(200
)
Payments on finance leases
(10
)
 
(3
)
Proceeds from stock options exercised
8

 

Cash dividends paid
(211
)
 
(11
)
Other, net
2

 
(1
)
Net cash used in financing activities
(556
)
 
(215
)
Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from:
 
 
 
Operating, investing and financing activities
(10
)
 
26

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
10

 
1

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
139

 
95

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
139

 
$
122

See Note 13 for supplemental cash flow information.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents


KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The First Quarter of 2019 and 2018
( Unaudited )

 
Common Stock Issued
 
 Additional
Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders' Equity
(in millions, except per share data)
Shares
 
Amount
 
 
 
 
Balance as of January 1, 2019
1,405.9

 
$
14

 
$
21,471

 
$
1,178

 
$
(130
)
 
$
22,533

Adoption of new accounting standards

 

 

 
(5
)
 

 
(5
)
Net income attributable to KDP

 

 

 
230

 

 
230

Other comprehensive income

 

 

 

 
93

 
93

Dividends declared, $0.15 per share

 

 

 
(211
)
 

 
(211
)
Measurement period adjustment

 

 
11

 

 

 
11

Shares issued under employee stock-based compensation plans and other
0.8

 

 

 

 

 

Stock-based compensation and stock options exercised

 

 
23

 

 

 
23

Balance as of March 31, 2019
1,406.7

 
$
14

 
$
21,505

 
$
1,192

 
$
(37
)
 
$
22,674

 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2018
790.5

 
$
8

 
$
6,377

 
$
914

 
$
99

 
$
7,398

Adoption of new accounting standards

 

 

 
(4
)
 

 
(4
)
Net income attributable to KDP

 

 

 
88

 

 
88

Other comprehensive loss

 

 

 

 
(24
)
 
(24
)
Dividends declared

 

 

 
(11
)
 

 
(11
)
Adjustment of non-controlling interests to fair value

 

 

 
(13
)
 

 
(13
)
Balance as of March 31, 2018
790.5

 
$
8

 
$
6,377

 
$
974

 
$
75

 
$
7,434

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

5

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1 . General
ORGANIZATION
On January 29, 2018, Dr Pepper Snapple Group, Inc. (" DPS ") entered into an Agreement and Plan of Merger (the " Merger Agreement ") by and among DPS , Maple Parent Holdings Corp. (“ Maple ”) and Salt Merger Sub, Inc. (“ Merger Sub ”), whereby Merger Sub would be merged with and into Maple , with Maple surviving the merger as a wholly-owned subsidiary of DPS (the “ DPS Merger ”). The DPS Merger was consummated on July 9, 2018 (the " Merger Date "), at which time DPS changed its name to " Keurig Dr Pepper Inc. ".
References in this Quarterly Report on Form 10-Q to " KDP " or "the Company " refer to Keurig Dr Pepper Inc. and all entities included in the unaudited condensed consolidated financial statements.
This Quarterly Report on Form 10-Q refers to some of KDP 's owned or licensed trademarks, trade names and service marks, which are referred to as the Company's brands. All of the product names included herein are either KDP registered trademarks or those of the Company 's licensors.
BASIS OF PRESENTATION
For financial reporting and accounting purposes, Maple was the acquirer of DPS upon completion of the DPS Merger . The unaudited condensed consolidated financial statements as of March 31, 2019 and December 31, 2018 and for the first quarter of 2019 and 2018 reflect the results of operations and financial position of Maple for the periods presented. Amounts reported as of March 31, 2019 and December 31, 2018 , and for the first quarter of 2019 , include the results of operations and financial position of DPS , as the DPS Merger was completed on July 9, 2018.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (" U.S. GAAP ") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements . In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with KDP 's consolidated financial statements and accompanying notes, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 .
Except as otherwise specified, references to the " first quarter " indicate the Company 's quarterly periods ended March 31, 2019 and 2018 .
PRINCIPLES OF CONSOLIDATION
KDP consolidates all wholly owned subsidiaries. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes KDP 's proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors or similar governing body, participation in policy-making decisions and material intercompany transactions.
The Company is also required to consolidate entities that are variable interest entities (“ VIE s”) of which KDP is the primary beneficiary. Judgments are made in assessing whether KDP is the primary beneficiary, including determination of the activities that most significantly impact the VIE ’s economic performance.
KDP eliminates from its financial results all intercompany transactions between entities included in the unaudited condensed consolidated financial statements and the intercompany transactions with its equity method investees.
USE OF ESTIMATES
The process of preparing KDP 's unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. These estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates.

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Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

RECLASSIFICATIONS
The Company reclassified the following amounts from the unaudited condensed consolidated balance sheets as of December 31, 2018 in connection with the adoption of Accounting Standards Codification ("ASC") Topic 842, Leases ("ASC 842"):
(in millions)
 
Prior Presentation
 
Revised Presentation
 
December 31, 2018
Capital lease and financing obligations
 
Current portion of capital lease and financing obligations
 
Other current liabilities
 
$
26

Capital lease and financing obligations
 
Capital lease and financing obligations, less current
 
Other non-current liabilities
 
305


Refer to Recently Adopted Provisions of U.S. GAAP below for further information about the adoption of ASC 842. Refer to Note 3 for information about the Company's leases and Note 12 for disclosure of the components of other current liabilities and other non-current liabilities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-13,  Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments  ("ASU 2016-13"). The standard provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company is currently evaluating the impact of ASU 2016-13 on the Company's unaudited condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements ("ASU 2018-13"). The objective of the ASU is to improve the disclosures related to fair value measurement by removing, modifying, or adding disclosure requirements related to recurring and non-recurring fair value measurements. ASU 2018-13 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company is currently assessing the changes in disclosure requirements and does not believe there will be a material impact to KDP's unaudited condensed consolidated financial statements.
RECENTLY ADOPTED PROVISIONS OF U.S. GAAP
Leases
As of January 1, 2019, the Company adopted ASC 842. ASC 842 replaced the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures.
The Company elected to apply the optional transition method provided by ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which allows companies to adopt the standard on a modified retrospective basis and to apply the new leases standard as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, amounts reported in the unaudited condensed consolidated financial statements for all periods prior to January 1, 2019 have not been recast under ASC 842 and continue to be reported in accordance with ASC 840. The Company elected the package of practical expedients which allows the Company to carry forward its historical assessments of whether contracts contain leases, lease classification, and initial direct costs, for leases in existence prior to January 1, 2019.
The adoption of ASC 842 resulted in an increase to KDP's total assets of approximately $314 million , an increase to KDP's total liabilities of approximately $319 million , and an impact to KDP's retained earnings of approximately $5 million , as of January 1, 2019.
Refer to Note 3 for additional information .
Other Accounting Standards
As of January 1, 2019, the Company adopted ASU 2017-12, Derivativ es and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") on a prospective basis. The objective of the ASU is to improve the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance. The adoption of ASU 2017-12 did not have a material impact on the Company's unaudited condensed consolidated financial statements.

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Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

As of January 1, 2019, the Company early adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. The ASU was adopted on a prospective basis and did not have a material impact on the Company's unaudited condensed consolidated financial statements.
2 . Acquisitions and Investments in Unconsolidated Affiliates
ACQUISITION OF DR PEPPER SNAPPLE GROUP, INC.
Overview and Total Consideration Exchanged
As discussed in Note 1 , General , Maple merged with DPS on July 9, 2018. The DPS Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations. Maple was considered to be the financial and accounting acquirer, and DPS was considered the legal acquirer. Under the acquisition method of accounting, total consideration exchanged was $22,482 million .
Allocation of Consideration
The Company 's preliminary allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the DPS Merger is based on estimated fair values as of July 9, 2018. The following is a summary of the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the DPS Merger as of March 31, 2019 :
(in millions)
Initial Allocation of Consideration
 
Measurement Period Adjustments
 
March 31, 2019
Cash and cash equivalents
$
147

 
$

 
$
147

Investments in unconsolidated affiliates
90

 

 
90

Property, plant and equipment (1)
1,549

 
(43
)
 
1,506

Other intangible assets
20,404

 
(536
)
 
19,868

Long-term obligations
(4,049
)
 

 
(4,049
)
Finance leases
(214
)
 
9

 
(205
)
Acquired assets, net of assumed liabilities (2)
107

 
(25
)
 
82

Deferred tax liabilities, net of deferred tax assets (3)
(4,959
)
 
(18
)
 
(4,977
)
Goodwill
9,407

 
613

 
10,020

Total consideration exchanged
22,482

 

 
22,482

Fair value of stock and replacement equity awards not converted to cash
3,643

 

 
3,643

Acquisition of business
$
18,839

 
$

 
$
18,839

(1)
The Company preliminarily valued personal property using a combination of the market approach and the cost approach, which is based upon current replacement or reproduction cost of the asset as newly adjusted for any depreciation attributable to physical, functional and economic factors. The Company assigned personal property a useful life ranging from 1 year to 24 years . We preliminarily valued real property using the cost approach and land using the sales comparison approach. The Company assigned real property a useful life between 1 year and 41 years .
(2)
The Company used existing carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as the Company determined that they represented the fair value of those items as of the Merger Date . The Company preliminarily valued work-in-process ("WIP") and finished goods inventory using a net realizable value approach resulting in a step-up of $131 million which was recognized in the cost of goods sold for the third quarter of 2018 as the related inventory was sold during that period. Raw materials were carried at net book value.
(3)
Net deferred tax liabilities represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases. The Company used a preliminary consolidated tax rate to determine the net deferred tax liabilities. The Company will record measurement period adjustments as the Company applies the appropriate tax rate for each legal entity within DPS.

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Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

The DPS Merger preliminarily resulted in $10,020 million of goodwill as of March 31, 2019 . The preliminary goodwill to be recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, direct procurement savings on overlapping materials, purchasing scale on indirect spend categories and optimization of duplicate positions and processes. The Company may also recognize revenue synergies, driven by a strong portfolio of brands with exposure to higher growth segments and the ability to leverage our collective distribution strength. The goodwill created in the DPS Merger is not expected to be deductible for tax purposes.
The preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:
(in millions)
 
Fair Value
 
Estimated Life (in years)
Brands (1)
 
$
19,357

 
n/a
Contractual arrangements (2)
 
120

 
n/a
Customer relationships (3)
 
386

 
10-40
Favorable leases (4)
 
5

 
5-12
Total other intangible assets
 
$
19,868

 
 
(1)
The Company preliminarily valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.
(2)
The Company preliminarily valued contractual arrangements with bottlers and distributors utilizing the distributor method, a form of the income approach.
(3)
The Company identified two types of customer relationships, retail and food service. We preliminarily valued retail and food service customer relationships utilizing the distributor method, a form of the income approach.
(4)
The Company preliminarily valued favorable leases utilizing the income approach.
Pro Forma Information
Assuming DPS had been acquired as of December 31, 2016, and the results of DPS had been included in operations beginning on January 1, 2017, the following tables provide estimated unaudited pro forma results of operations for the first quarter of 2018 under U.S. GAAP.
The estimated pro forma net income includes the alignment of accounting policies, the effect of fair value adjustments related to the DPS Merger , the associated tax effects and the impact of the additional debt to finance the DPS Merger .
 
First Quarter
(Unaudited, in millions)
2018
Net sales
$
2,529

Net income
222

Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the DPS Merger been completed on the date indicated or the future operating results.
ACQUISITION OF BIG RED
Overview and Purchase Price
On July 9, 2018, KDP entered into an Agreement and Plan of Merger (the "Big Red Merger Agreement") with Big Red Group Holdings, LLC ("Big Red"), pursuant to which we agreed to acquire Big Red for an enterprise value of  $300 million , subject to certain adjustments outlined in the Big Red Merger Agreement (the " Big Red Acquisition "). On August 31, 2018 (the "Big Red Merger Date"), the Company completed the Big Red Acquisition .
As of March 31, 2019, the Company has recorded a preliminary allocation of purchase price to the net tangible and intangible assets acquired and liabilities assumed in the Big Red Acquisition based on estimated fair values as of the Big Red Merger Date. There have been no measurement period adjustments recorded during the first quarter of 2019 related to the Big Red Acquisition .
ACQUISITION OF CORE NUTRITION, LLC
Overview and Purchase Price
On September 27, 2018, KDP entered into a definitive agreement with Core Nutrition, LLC (" Core "), pursuant to which we agreed to acquire Core for merger consideration, which represented an enterprise value of $525 million (subject to customary post-closing working capital and other adjustments), comprised substantially of shares of common stock of KDP , subject to certain adjustments paid in cash (the " Core Acquisition "). On November 30, 2018 (the " Core Acquisition Date "), the Company completed the Core Acquisition .

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KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

Allocation of Purchase Price
The Company 's preliminary allocation of purchase price to the net tangible and intangible assets acquired and liabilities assumed in the Core Acquisition is based on estimated fair values as of the Core Acquisition Date . The allocation of purchase price, as set forth in the table below, reflects various preliminary fair value estimates and analyses, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary allocation of purchase price that are not yet finalized relate to the fair values of certain tangible assets, the valuation of intangible assets acquired, assumed liabilities and residual goodwill.
The following is a summary of the preliminary allocation of purchase price to the estimated fair values of assets acquired and liabilities assumed in the Core Acquisition as of March 31, 2019 :
(in millions)
Initial Allocation of Consideration
 
Measurement Period Adjustments
 
March 31, 2019
Cash and cash equivalents
$
10

 
$

 
$
10

Other intangible assets
273

 

 
273

Assumed liabilities, net of acquired assets (1)
(12
)
 
(1
)
 
(13
)
Goodwill
236

 
10

 
246

Total purchase price
507

 
9

 
516

Company's previous ownership interest
31

 

 
31

Less: Holdback placed in Escrow
27

 
(2
)
 
25

Acquisition of business
$
449

 
$
11

 
$
460

(1)
The Company preliminarily valued WIP and finished goods inventory using a net realizable value approach resulting in a step-up of $4 million , of which $1 million and $3 million was recognized in cost of goods sold in 2018 and 2019, respectively, due to the timing of the sale of the related inventory. Raw materials were carried at net book value.
The Core Acquisition preliminarily resulted in $246 million of goodwill. The preliminary goodwill to be recognized is attributable to operational and general and administrative cost synergies resulting from the warehouse and transportation integration, purchasing scale on various spend categories and optimization of duplicate positions and processes. The goodwill created in the Core Acquisition is expected to be deductible for tax purposes.
The preliminary allocation of purchase price to other intangible assets acquired is as follows:
(in millions)
 
Fair Value
 
Estimated Life (in years)
Brands (1)
 
$
254

 
n/a
Contractual arrangements (2)
 
19

 
10
Total other intangible assets
 
$
273

 
 
(1)
The Company preliminarily valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.
(2)
The Company preliminarily valued contractual arrangements utilizing the distributor method, a form of the income approach.

TRANSACTION EXPENSES
The following table provides information about the Company's transaction expenses incurred during the first quarter of 2019 and 2018 :
 
First Quarter
(in millions)
2019
 
2018
DPS Merger
$
2

 
$
36

Other transaction expenses
3

 

Total transaction expenses incurred
$
5

 
$
36

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

10

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The following table summarizes investments in unconsolidated affiliates as of March 31, 2019 and December 31, 2018 :
 
 
 
 
March 31,
 
December 31,
(in millions)
 
Ownership Interest
 
2019
 
2018
BA Sports Nutrition, LLC ("BA") (1)
 
15.5
%
 
$
56

 
$
62

Bedford Systems, LLC
 
30.0
%
 
71

 
79

Dyla LLC
 
12.6
%
 
15

 
15

Force Holdings LLC
 
33.3
%
 
5

 
6

Beverage startup companies
 
(various)

 
19

 
19

Other
 
(various)

 
6

 
5

Investments in unconsolidated affiliates
 
 
 
$
172

 
$
186

(1)
In 2018, BA announced that The Coca-Cola Company ("Coca-Cola") obtained a minority interest in BA and would obtain the Company's current distribution rights. As a result, KDP received a distribution from BA, which reduced the Company's investment. KDP continues to account for its interest in BA as an equity method investment at the ownership level held by the Company prior to the Coca-Cola announcement, as a revised ownership interest percentage has not been provided to the Company by BA.
3 . Leases
The Company leases certain facilities and machinery and equipment, including fleet. These leases expire at various dates through 2044. Some lease agreements contain standard renewal provisions that allow us to renew the lease at rates equivalent to fair market value at the end of the lease term. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.
Operating leases are included within other non-current assets, other current liabilities, and other non-current liabilities within our unaudited Condensed Consolidated Balance Sheets. Refer to Note 12 for further information. Finance leases are included within property, plant and equipment, net, other current liabilities, and other non-current liabilities. Leases with an initial term of 12 months or less are not recognized on the balance sheet.
Right of use assets and lease liabilities are recognized in the unaudited Condensed Consolidated Balance Sheets at the present value of future minimum lease payments over the lease term on the commencement date. As the rate implicit in the lease is generally not provided to the Company, KDP uses its incremental borrowing rate based on information available at the commencement date to determine the present value of future minimum lease payments. KDP's incremental borrowing rate is determined using a portfolio of secured borrowing rates commensurate with the term of the lease and is reassessed on a quarterly basis.
KDP has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.
The following table presents the components of lease cost:
 
First Quarter
(in millions)
2019
Operating lease cost
$
20

Finance lease cost
 
Amortization of right-of-use assets
10

Interest on lease liabilities
4

Variable lease cost (1)
6

Short-term lease cost
1

Total lease cost
$
41

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

11

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

The following table presents supplemental cash flow information about the Company's leases:
 
First Quarter
(in millions)
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
18

Operating cash flows from finance leases
4

Financing cash flows from finance leases
10

The following table presents information about the Company's weighted average discount rate and remaining lease term:
 
First Quarter
 
2019
Weighted average discount rate
 
Operating leases
4.6
%
Finance leases
5.4
%
Weighted average remaining lease term
 
Operating leases
8 years

Finance leases
12 years

Future minimum lease payments under non-cancellable leases as of March 31, 2019 were as follows:
(in millions)
Operating Leases
 
Finance Leases
Remainder of 2019
$
53

 
$
36

2020
65

 
44

2021
56

 
36

2022
46

 
35

2023
39

 
31

2024
37

 
29

Thereafter
134

 
163

Total future minimum lease payments
430

 
374

Less: imputed interest
(74
)
 
(97
)
Present value of minimum lease payments
$
356

 
$
277


Future minimum lease payments under non-cancellable leases as of December 31, 2018 under ASC 840 were as follows:
(in millions)
Operating Leases
 
Capital Leases
 
Financing Obligations
2019
$
58

 
$
35

 
$
10

2020
53

 
34

 
10

2021
44

 
33

 
10

2022
34

 
33

 
10

2023
25

 
30

 
10

Thereafter
98

 
189

 
62

Total future minimum lease payments
$
312

 
354

 
112

Less: imputed interest
 
 
(98
)
 
(37
)
Present value of minimum lease payments
 
 
$
256

 
$
75


12

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

LEASES THAT HAVE NOT YET COMMENCED
In February 2019, the Company entered into an agreement to relocate KDP's Texas headquarters to a new leased facility. The lease is expected to commence in 2021, with an initial lease term of 16 years and includes the option for KDP to renew for up to an additional ten years at an agreed-upon rate. The future minimum lease payments related to this lease are not yet known, as the cost is dependent on a number of factors, including the ultimate cost of construction. As of March 31, 2019 , the potential obligation for this lease is estimated to be approximately $200 million .
4 . Goodwill and Other Intangible Assets
GOODWILL
Changes in the carrying amount of goodwill by reportable segment are as follows:
 
Coffee Systems
 
Packaged Beverages
 
Beverage Concentrates
 
Latin America Beverages
 
Unallocated (1)
 
Total
Balance as of January 1, 2019
$
9,725

 
$
4,878

 
$
4,265

 
$
618

 
$
525

 
$
20,011

Foreign currency translation
24

 
14

 
6

 
8

 

 
52

Acquisitions (2)

 
19

 
(10
)
 

 
5

 
14

Balance as of March 31, 2019
$
9,749

 
$
4,911

 
$
4,261

 
$
626

 
$
530

 
$
20,077

(1)
Amounts recorded primarily for deferred tax liabilities in the preliminary purchase price allocations are recorded using a preliminary consolidated tax rate to determine the deferred tax liabilities. The Company will record measurement period adjustments as the Company applies the appropriate tax rate for each legal entity, which will enable the Company to allocate this goodwill to the applicable segment within the measurement period.
(2)
Amounts represent measurement period adjustments for the DPS Merger and the Core Acquisition. Refer to Note 2 for further information.
INTANGIBLE ASSETS OTHER THAN GOODWILL
The net carrying amounts of intangible assets other than goodwill with indefinite lives are as follows:
 
 
March 31, 2019
 
December 31, 2018
Brands
 
$
19,770

 
$
19,712

Trade names
 
2,479

 
2,479

Contractual arrangements
 
120

 
119

Distribution rights
 
2

 

Total
 
$
22,371

 
$
22,310

The net carrying amounts of intangible assets other than goodwill with definite lives are as follows:
 
March 31, 2019
 
December 31, 2018
(in millions)
 Gross Amount
 
Accumulated Amortization
 
Net Amount
 
 Gross Amount
 
Accumulated Amortization
 
Net Amount
Acquired technology
$
1,146

 
$
(200
)
 
$
946

 
$
1,146

 
$
(182
)
 
$
964

Customer relationships
631

 
(77
)
 
554

 
629

 
(67
)
 
562

Trade names
127

 
(43
)
 
84

 
127

 
(40
)
 
87

Favorable leases (1)

 

 

 
13

 
(3
)
 
10

Brands
9

 
(1
)
 
8

 
9

 

 
9

Contractual arrangements
26

 
(1
)
 
25

 
26

 
(1
)
 
25

Total
$
1,939

 
$
(322
)
 
$
1,617

 
$
1,950

 
$
(293
)
 
$
1,657

(1)
Amounts recorded as favorable lease intangible assets were reclassified to operating lease right-of-use assets in connection with the adoption of ASC 842 as of January 1, 2019. Refer to Note 3 for further information regarding the adoption of ASC 842.
Amortization expense for intangible assets with definite lives was as follows:
 
First Quarter
(in millions)
2019
 
2018
Amortization expense for intangible assets with definite lives
$
31

 
$
30


13

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

Amortization expense of these intangible assets over the remainder of 2019 and the next five years is expected to be as follows:
 
Remainder of 2019
 
For the Years Ending December 31,
(in millions)
 
2020
 
2021
 
2022
 
2023
 
2024
Expected amortization expense for intangible assets with definite lives
$
94

 
$
126

 
$
126

 
$
126

 
$
125

 
$
120

IMPAIRMENT TESTING
KDP conducts impairment tests on goodwill and all indefinite lived intangible assets annually, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. The Company did not identify any circumstances that indicated that the carrying amount of any goodwill or any indefinite lived intangible asset may not be recoverable as of March 31, 2019 .
5 . Restructuring and Integration Costs
The Company implements restructuring programs from time to time and incurs costs that are designed to improve operating effectiveness and lower costs. When the Company implements these programs, the Company incurs expenses, such as employee separations, lease terminations and other direct exit costs, that qualify as exit and disposal costs under U.S. GAAP.
The Company also incurs expenses that are an integral component of, and directly attributable to, its restructuring activities, which do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments, implementation costs and other incremental costs. These costs are recorded within SG&A expenses on the income statement and are held within unallocated corporate costs.
Restructuring and integration charges incurred during the first quarter of 2019 and 2018 are as follows:
 
First Quarter
(in millions)
2019
 
2018
Keurig 2.0 exit
$
1

 
$
5

Integration program
60

 

Other restructuring programs

 
1

Total restructuring and integration charges
$
61

 
$
6

Restructuring liabilities that qualify as exit and disposal costs under U.S. GAAP are included in accounts payable and accrued expenses on the unaudited condensed consolidated financial statements. Restructuring liabilities as of March 31, 2019 and December 31, 2018 along with charges to expense, cash payments and non-cash charges for the period were as follows:
(in millions)
Workforce Reduction Costs
 
Other (1)
 
Total
Balance as of December 31, 2018
$
28

 
$
1

 
$
29

Charges to expense
6

 

 
6

Cash payments
(24
)
 

 
(24
)
Non-cash adjustment items
(1
)
 
(1
)
 
(2
)
Balance as of March 31, 2019
$
9

 
$

 
$
9

(1)
Primarily reflects activities associated with the closure of certain facilities, excluding contract termination costs, which include any associated asset write-downs and accelerated depreciation.
RESTRUCTURING PROGRAMS
Integration Program
As part of the DPS Merger, the Company established a transformation management office to enable integration and maximize value capture. The Company developed a program to deliver $600 million in synergies over a three-year period through supply chain optimization, reduction of indirect spend through new economies of scale, elimination of duplicative support functions and advertising and promotion optimization. The Company expects to incur total cash expenditures of $750 million , comprised of both capital expenditures and expense, and expects to complete the program by 2021. The restructuring and integration program resulted in cumulative pre-tax charges of approximately $215 million , primarily consisting of professional fees related to the integration and transformation and costs associated with severance and employee terminations, through March 31, 2019 .

14

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

6 . Income Taxes
The effective tax rates for the first quarter of 2019 and 2018 were 27.0% and 36.4% , respectively. The decrease in our effective tax rate was primarily due to a reduction in the U.S. federal tax rate from 24.5% to 21% and exclusion of DPS Merger-related non-deductible transaction costs, partially offset by the elimination of the domestic manufacturing deduction.  The legislation commonly known as the Tax Cuts and Jobs Act was enacted on December 22, 2017 (“TCJA”). The TCJA reduced the U.S. federal statutory tax rate from 35% to 21% and eliminated the domestic manufacturing deduction. Guidance under the TCJA for non-calendar year filers resulted in a 24.5% federal statutory rate for companies with a September year-end for the period ended March 31, 2018. 
7 . Long-term Obligations and Borrowing Arrangements
The following table summarizes the Company 's long-term obligations:
(in millions)
March 31, 2019
 
December 31, 2018
Senior unsecured notes
$
11,778

 
$
12,019

Term loans
1,812

 
2,561

Subtotal
13,590

 
14,580

Less - current portion
(344
)
 
(379
)
Long-term obligations
$
13,246

 
$
14,201

The following table summarizes the Company 's short-term borrowings and current portion of long-term obligations:
 
Fair Value Hierarchy Level
 
March 31, 2019
 
December 31, 2018
(in millions)
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Commercial paper
2
 
$
1,674

 
$
1,674

 
$
1,079

 
$
1,079

Current portion of long-term obligations:
 
 
 
 
 
 
 
 
 
Senior unsecured notes
2
 
248

 
248

 
250

 
250

Term loans
2
 
96

 
96

 
129

 
129

Short-term borrowings and current portion of long-term obligations
 
 
$
2,018

 
$
2,018

 
$
1,458

 
$
1,458


15

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

SENIOR UNSECURED NOTES 
The Company 's senior unsecured notes (collectively, the " Notes ") consisted of the following:
(in millions)
 
 
 
 
 
Fair Value Hierarchy Level
 
March 31, 2019
 
December 31, 2018
Issuance
 
Maturity Date
 
Rate
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2019 Notes (1)
 
January 15, 2019
 
2.600%
 
2
 
$

 
$

 
$
250

 
$
250

2020 Notes
 
January 15, 2020
 
2.000%
 
2
 
250

 
248

 
250

 
245

2021 Merger Notes
 
May 25, 2021
 
3.551%
 
2
 
1,750

 
1,769

 
1,750

 
1,742

2021-A Notes
 
November 15, 2021
 
3.200%
 
2
 
250

 
251

 
250

 
244

2021-B Notes
 
November 15, 2021
 
2.530%
 
2
 
250

 
246

 
250

 
240

2022 Notes
 
November 15, 2022
 
2.700%
 
2
 
250

 
243

 
250

 
237

2023 Merger Notes
 
May 25, 2023
 
4.057%
 
2
 
2,000

 
2,058

 
2,000

 
1,988

2023 Notes
 
December 15, 2023
 
3.130%
 
2
 
500

 
496

 
500

 
474

2025 Merger Notes
 
May 25, 2025
 
4.417%
 
2
 
1,000

 
1,037

 
1,000

 
999

2025 Notes
 
November 15, 2025
 
3.400%
 
2
 
500

 
488

 
500

 
467

2026 Notes
 
September 15, 2026
 
2.550%
 
2
 
400

 
364

 
400

 
346

2027 Notes
 
June 15, 2027
 
3.430%
 
2
 
500

 
479

 
500

 
458

2028 Merger Notes
 
May 25, 2028
 
4.597%
 
2
 
2,000

 
2,082

 
2,000

 
1,981

2038 Notes
 
May 1, 2038
 
7.450%
 
2
 
125

 
160

 
125

 
151

2038 Merger Notes
 
May 25, 2038
 
4.985%
 
2
 
500

 
508

 
500

 
483

2045 Notes
 
November 15, 2045
 
4.500%
 
2
 
550

 
509

 
550

 
478

2046 Notes
 
December 15, 2046
 
4.420%
 
2
 
400

 
365

 
400

 
342

2048 Merger Notes
 
May 25, 2048
 
5.085%
 
2
 
750

 
763

 
750

 
716

Principal amount
 
 
 
 
 
 
 
$
11,975

 
$
12,066

 
$
12,225

 
$
11,841

Unamortized debt issuance costs and fair value adjustment for Notes assumed in the DPS Merger
 
 
 
(197
)
 
 
 
(206
)
 
 
Carrying amount
 
 
 
 
 
 
 
$
11,778

 
 
 
$
12,019

 
 
(1)
On January 15, 2019, the Company repaid the 2019 Notes at maturity, using Commercial Paper.
The fair value amounts of the Notes were based on current market rates available to the Company . The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all the Notes and related unamortized costs to be incurred at such date. The carrying amount includes the unamortized discounts, debt issuance costs and the fair value adjustment for the DPS Merger .
BORROWING ARRANGEMENTS
On February 8, 2019 , the Company terminated its term loan executed in conjunction with the DPS Merger ("KDP Term Loan") and entered into a new term loan agreement among the Company ("New KDP Term Loan"), the lenders party thereto (the "New Term Lenders"), and JP Morgan , as administrative agent (the "2019 New Term Loan Agreement"), pursuant to which the New Term Lenders provided $2 billion of the New KDP Term Loan to refinance the KDP Term Loan in order to achieve a more favorable interest rate. As a result of the extinguishment of the KDP Term Loan, the Company recorded approximately $3 million of loss on early extinguishment during the first quarter of 2019.
The interest rate applicable to the 2019 Term Loan Agreement ranges from a rate equal to LIBOR plus a margin of 0.75% to 1.25% or a base rate plus a margin of 0.00% to 0.25% , depending on the rating of certain indexed debt of KDP . Under the 2019 New Term Loan Agreement, KDP must repay the unpaid principal amount quarterly commencing on March 29, 2019 in an amount equal to 1.25% of the aggregate principal amount made on the effective date of the New KDP Term Loan, resulting in annual mandatory repayments of $100 million . The 2019 Term Loan Agreement matures on February 8, 2023 .

16

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

The Company 's revolving credit facilities ("KDP Revolver") and term loans, collectively the ("KDP Credit Agreements"), consisted of the following carrying values and estimated fair values that are not required to be measured at fair value in the unaudited Condensed Consolidated Balance Sheets:
(in millions)
 
 
 
Fair Value Hierarchy Level
 
March 31, 2019
 
December 31, 2018
Issuance
 
Maturity Date
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
KDP Term Loan (1)
 
February 2023
 
2
 
$

 
$

 
$
2,583

 
$
2,583

New KDP Term Loan (2)
 
February 2023
 
2
 
1,825

 
1,825

 

 

KDP Revolver
 
February 2023
 
2
 

 

 

 

Principal amount
 
 
 
 
 
$
1,825

 
$
1,825

 
$
2,583

 
$
2,583

Unamortized discounts and debt issuance costs
 
 
(13
)
 
 
 
(22
)
 
 
Carrying amount
 
 
 
 
 
$
1,812

 
 
 
$
2,561

 
 
(1)
During January 2019, the Company borrowed $583 million of Commercial Paper to prepay a portion of its outstanding obligations under the KDP Term Loan, all of which was a voluntary prepayment. As a result of these voluntary prepayments, the Company recorded approximately $5 million of loss on early extinguishment during the first quarter of 2019.
(2)
On February 28, 2019, the Company borrowed $150 million of Commercial Paper to prepay a portion of its outstanding obligations under the 2019 New Term Loan Agreement, all of which was a voluntary prepayment. As a result, the Company recorded approximately $1 million of loss on early extinguishment during the first quarter of 2019.
Revolving Credit Facilities
The following table provides amounts utilized and available under the KDP Revolver as of March 31, 2019 :
(in millions)
Amount Utilized
 
Balances Available
KDP Revolver
$

 
$
2,400

Letters of credit

 
200

As of March 31, 2019 , the Company was in compliance with all financial covenant requirements relating to the KDP Credit Agreements .
Commercial Paper Program
The following table provides information about the Company 's weighted average borrowings under its commercial paper program for the first quarter of 2019 and 2018 :
 
First Quarter
 
2019
 
2018
Weighted average commercial paper borrowings
$
1,748

 
$

Weighted average borrowing rates
2.90
%
 
%
Letter of Credit Facility
In addition to the portion of the KDP Revolver reserved for issuance of letters of credit, the Company has an incremental letter of credit facility. Under this facility, $100 million is available for the issuance of letters of credit, $48 million of which was utilized as of March 31, 2019 and $52 million of which remains available for use.
8 . Derivatives
KDP is exposed to market risks arising from adverse changes in interest rates, commodity prices, and foreign exchange (" FX ") rates.
KDP manages these risks through a variety of strategies, including the use of interest rate contracts, FX forward contracts, commodity forward and future contracts and supplier pricing agreements. KDP does not designate these contracts as hedges for accounting purposes, and KDP does not hold or issue derivative financial instruments for trading or speculative purposes.

17

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

INTEREST RATES 
The Company is exposed to interest rate risk related to its borrowing arrangements and obligations. The Company enters into interest rate swaps to provide predictability in the Company's overall cost structure, including both receive-fixed, pay-variable and receive-variable, pay-fixed swaps. A natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in interest expense in the unaudited Condensed Consolidated Statements of Income. These interest rate swap contracts have maturities between 10 months and 20 years as of March 31, 2019 .
FOREIGN EXCHANGE
The Company 's Canadian and Mexican businesses purchase certain inventory through transactions denominated and settled in U.S. dollars, a currency different from the functional currency of those businesses. The Company additionally has a subsidiary in Canada with intercompany notes denominated and settled in U.S. dollars, a currency different from the functional currency of the Canadian business. These inventory purchases and intercompany notes are subject to exposure from movements in exchange rates. During the first quarter of 2019 and 2018 , the Company held FX forward contracts to economically manage the exposures resulting from changes in these foreign currency exchange rates. The intent of these FX contracts is to provide predictability in the Company's overall cost structure. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same caption of the unaudited Condensed Consolidated Statements of Income as the associated risk. These FX contracts have maturities between 1 month and 6 years  as of March 31, 2019 .
COMMODITIES
KDP centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through various derivative contracts. The intent of these contracts is to provide a certain level of predictability in the Company 's overall cost structure. During the first quarter of 2019 and 2018 , the Company held forward, future, swap and option contracts that economically hedged certain of its risks. In these cases, a hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in earnings throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company 's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's income from operations. These commodity contracts have maturities between 1 month and 6 years as of March 31, 2019 .
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS
The following table presents the notional amounts of the Company's outstanding derivative instruments by type:
 
March 31,
 
December 31,
(in millions)
2019
 
2018
Interest rate contracts
 
 
 
Receive-fixed, pay-variable interest rate swaps
$
970

 
$
1,070

Receive-variable, pay-fixed interest rate swaps (1)
1,075

 
2,125

FX contracts
386

 
348

Commodity contracts
302

 
296

(1)
During the three months ended March 31, 2019 , the Company elected to terminate $900 million notional amount of receive-variable, pay-fixed interest rate swaps and received cash of $27 million .

18

Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

FAIR VALUE OF DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS
The following table summarizes the fair value hierarchy and the location of the fair value of the Company 's derivative instruments not designated as hedging instruments within the unaudited Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 :
(in millions)
Fair Value Hierarchy Level
 
Balance Sheet Location
 
March 31,
2019
 
December 31,
2018
Assets:
 
 
 
 
 
 
 
Interest rate contracts
2
 
Prepaid expenses and other current assets
 
$
4

 
$
2

FX contracts
2
 
Prepaid expenses and other current assets
 
2

 
4

Commodity contracts
2
 
Prepaid expenses and other current assets
 
14

 
3

Interest rate contracts
2
 
Other non-current assets
 
40

 
77

FX contracts
2
 
Other non-current assets
 
9

 
15

Commodity contracts
2
 
Other non-current assets
 
5

 
3

 
 
 
 
 

 


Liabilities:
 
 
 
 
 
 
 
Interest rate contracts
2
 
Other current liabilities
 
$
5

 
$
7

Commodity contracts
2
 
Other current liabilities
 
37

 
27

Interest rate contracts
2
 
Other non-current liabilities
 
3

 
6

Commodity contracts
2
 
Other non-current liabilities
 
9

 
10

The fair values of commodity contracts, interest rate contracts and FX forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the reporting date. Interest rate contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the Company 's contracts and credit risk of the counterparties. The fair value of FX forward contracts are valued using quoted forward FX prices at the reporting date. Therefore, the Company has categorized these contracts as Level 2.
IMPACT OF ECONOMIC HEDGES
The following table presents the impact of derivative instruments not designated as hedging instruments under U.S. GAAP to the unaudited Condensed Consolidated Statements of Income. Amounts include both realized and unrealized gains and losses.
(in millions)
 
Amount of (Gain) Loss
Recognized in Income
 
Location of (Gain) Loss
Recognized in Income
For the First Quarter of 2019
 
 
 
 
Commodity contracts
 
$
15

 
Cost of sales
Commodity contracts
 
(14
)
 
SG&A expenses
Interest rate contracts
 
2

 
Interest expense
FX contracts
 
2

 
Cost of sales
FX contracts
 
6

 
Other expense, net
Total
 
$
11

 
 
 
 
 
 
 
For the First Quarter of 2018
 
 
 
 
Commodity contracts
 
$
2

 
Cost of sales
Interest rate contracts
 
(24
)
 
Interest expense
FX contracts
 
(6
)
 
Other expense, net
Total
 
$
(28
)
 
 

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Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

The Company has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically, the Company has not experienced credit losses as a result of counterparty nonperformance. The Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines and monitors the market position of the programs upon execution of a hedging transaction and at least on a quarterly basis.
9 . Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities.
As a result of the DPS Merger , all historical per share data and number of shares and numbers of equity awards were retroactively adjusted. The following table presents the Company 's basic and diluted EPS and shares outstanding:
 
First Quarter
(in millions, except per share data)
2019
 
2018
Basic EPS:
 
 
 
Net income attributable to KDP
$
230

 
$
88

Weighted average common shares outstanding
1,406.3

 
790.5

Earnings per common share — basic
$
0.16

 
$
0.11

Diluted EPS:
 
 
 
Net income attributable to KDP
$
230

 
$
88

Impact of dilutive securities in Maple Parent Corporation

 
1

Total
$
230

 
$
87

Weighted average common shares outstanding
1,406.3

 
790.5

Effect of dilutive securities:
 
 
 
Stock options
0.8

 

RSUs
10.6

 

Weighted average common shares outstanding and common stock equivalents
1,417.7

 
790.5

Earnings per common share — diluted
$
0.16

 
$
0.11

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

 

10 . Stock-Based Compensation
Stock-based compensation expense is primarily recorded in SG&A expenses in the unaudited Condensed Consolidated Statements of Income. The components of stock-based compensation expense are presented below:
 
For the First Quarter
(in millions)
2019
 
2018
Total stock-based compensation expense
$
14

 
$
11

Income tax benefit recognized in the Statements of Income
(3
)
 
(3
)
Stock-based compensation expense, net of tax
$
11

 
$
8


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Table of Contents
KEURIG DR PEPPER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)

RESTRICTED STOCK UNITS
The table below summarizes RSU activity for the first quarter of 2019 :
 
RSUs
 
Weighted Average Grant Date Fair Value
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value
(in millions)
Outstanding as of December 31, 2018
18,625,898

 
$
15.68

 
3.54
 
$
478

Granted
4,834,604

 
26.05

 
 
 
 
Vested and released
(4,137
)
 
24.13

 
 
 

Forfeited
(839,706
)
 
18.48

 
 
 
 
Outstanding as of March 31, 2019
22,616,659