10-Q 1 kdp-10qx09302018.htm FORM 10-Q Document
 
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 September 30, 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
kdpa01.jpg
(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)
(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
As of November 6, 2018, there were 1,389,111,598 shares of the registrant's common stock, par value $0.01 per share, outstanding.
 



KEURIG DR PEPPER INC.
FORM 10-Q
INDEX
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

ii


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

KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Third Quarter and First Nine Months of 2018 and 2017
(Unaudited)
 
Third Quarter
 
First Nine Months
(in millions, except per share data)
2018
 
2017
 
2018
 
2017
Net sales
$
2,732

 
$
1,140

 
$
4,629

 
$
3,056

Cost of sales
1,371

 
585

 
2,305

 
1,571

Gross profit
1,361

 
555

 
2,324

 
1,485

Selling, general and administrative expenses
1,025

 
318

 
1,636

 
852

Other operating (income) expense, net
(8
)
 
(1
)
 
(2
)
 

Income from operations
344

 
238

 
690

 
633

Interest expense
172

 
28

 
221

 
76

Interest expense - related party

 
25

 
51

 
75

Loss on early extinguishment of debt
11

 
2

 
13

 
54

Other (income) expense, net
(33
)
 
20

 
(28
)
 
88

Income before provision for income taxes
194

 
163

 
433

 
340

Provision for income taxes
46

 
46

 
110

 
102

Net income
148

 
117

 
323

 
238

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

 
1

 
3

 
3

Net income attributable to KDP
$
148

 
$
116

 
$
320

 
$
235

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.15

 
$
0.33

 
$
0.30

Diluted
0.11

 
0.14

 
0.32

 
0.29

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
1,361.8

 
790.5

 
983.0

 
790.5

Diluted
1,373.6

 
790.5

 
994.1

 
790.5

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


1


KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Third Quarter and First Nine Months of 2018 and 2017
(Unaudited)

 
Third Quarter
 
First Nine Months
(in millions)
2018
 
2017
 
2018
 
2017
Comprehensive income
$
226

 
$
208

 
$
361

 
$
334

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


2


KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2018 and December 31, 2017
(Unaudited)
 
September 30,
 
December 31,
(in millions, except share and per share data)
2018
 
2017
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
94

 
$
90

Restricted cash and restricted cash equivalents
18

 
5

Trade accounts receivable, net
1,196

 
483

Inventories
720

 
384

Prepaid expenses and other current assets
357

 
94

Total current assets
2,385

 
1,056

Property, plant and equipment, net
2,345

 
790

Investments in unconsolidated subsidiaries
193

 
97

Goodwill
19,291

 
9,819

Other intangible assets, net
24,436

 
3,834

Other non-current assets
315

 
121

Deferred tax assets
93

 
27

Total assets
$
49,058

 
$
15,744

Liabilities and Stockholders' Equity
Current liabilities:
 
 
 
Accounts payable
$
2,229

 
$
1,580

Accrued expenses
1,231

 
201

Structured payables
432

 

Short-term borrowings and current portion of long-term obligations
1,765

 
219

Current portion of capital lease and financing obligations
25

 
6

Income taxes payable
11

 
3

Other current liabilities
274

 
9

Total current liabilities
5,967

 
2,018

Long-term obligations
14,275

 
3,064

Long-term obligations, related party

 
1,815

Capital lease and financing obligations, less current
305

 
97

Deferred tax liabilities
5,974

 
1,031

Other non-current liabilities
244

 
56

Total liabilities
26,765

 
8,081

Commitments and contingencies

 

Employee redeemable non-controlling interest and mezzanine equity awards

 
265

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 and 800,000,000 shares authorized, 1,389,090,915 and 790,478,141 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
14

 
8

Additional paid-in capital
21,020

 
6,377

Retained earnings
1,122

 
914

Accumulated other comprehensive income
137

 
99

Total stockholders' equity
22,293

 
7,398

Total liabilities and stockholders' equity
$
49,058

 
$
15,744

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

3


KEURIG DR PEPPER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The First Nine Months of 2018 and 2017
(Unaudited)
 
First Nine Months
(in millions)
2018
 
2017
Operating activities:
 
 
 
Net income
$
323

 
$
238

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
150

 
109

Amortization expense
144

 
85

Provision for sales returns
38

 
38

Deferred income taxes
(117
)
 
16

Deferred compensation
21

 
36

Loss on early extinguishment of debt
13

 
55

Gain on step acquisition of unconsolidated subsidiaries
(6
)
 

Unrealized gain or loss on foreign currency
7

 
11

Unrealized gain or loss on derivatives
(6
)
 
35

Other, net
33

 
41

Changes in assets and liabilities, net of effects of acquisition:
 
 
 
Trade accounts receivable
48

 
(9
)
Inventories
91

 
(39
)
Income taxes receivable and payables, net
34

 
(84
)
Other current and non current assets
(108
)
 
(13
)
Accounts payable and accrued expenses
391

 
796

Other current and non current liabilities
7

 
6

Net change in operating assets and liabilities
463

 
657

Net cash provided by operating activities
1,063

 
1,321

Investing activities:
 
 
 
Acquisitions of business
(19,124
)
 

Cash acquired in acquisitions
150

 

Issuance of related party note receivable
(6
)
 
(6
)
Investments in unconsolidated subsidiaries
(23
)
 
250

Proceeds from capital distributions from investments in unconsolidated subsidiaries
36

 

Purchases of property, plant and equipment
(104
)
 
(45
)
Other, net
1

 
2

Net cash (used in) provided by investing activities
(19,070
)
 
201

Financing activities:
 
 
 
Proceeds from issuance of common stock private placement
9,000

 

Proceeds from unsecured credit facility
1,900

 

Proceeds from senior unsecured notes
8,000

 

Proceeds from term loan
2,700

 
1,200

Net issuance of Commercial Paper
1,386

 

Proceeds from structured payables
432

 

Repayment of unsecured credit facility
(1,900
)
 

Net repayment on line of credit

 
(200
)
Repayment of term loan
(3,363
)
 
(2,144
)
Payments on capital leases
(20
)
 
(14
)
Deferred financing charges paid
(49
)
 
(5
)
Proceeds from stock options exercised
3

 

Cash contributions (distributions) from (to) redeemable NCI shareholders
19

 
(1
)
Cash dividends paid
(23
)
 
(46
)
Cross currency swap

 
(78
)
Other, net
(1
)
 

Net cash provided by (used in) financing activities
18,084

 
(1,288
)
Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from:
 
 
 
Operating, investing and financing activities
77

 
234

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
(50
)
 
18

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
95

 
97

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
122

 
$
349

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

4


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

 
Common Stock Issued
 
 Additional
Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total
Stockholders' Equity
(in millions, except per share data)
Shares
 
Amount
 
 
 
 
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

 

 

 
320

 

 
320

Other comprehensive income

 

 

 

 
38

 
38

Issuance of common stock
407.0

 
4

 
8,996

 

 

 
9,000

Acquisition of Dr Pepper Snapple Group, Inc.
182.5

 
2

 
3,640

 
 
 
 
 
3,642

Conversion of subsidiary shares
7.9

 

 
172

 

 

 
172

Capitalization of loans with related parties

 

 
1,815

 

 

 
1,815

Reclassification of historical Maple Parent Corporation employee redeemable non-controlling interest and mezzanine equity awards

 

 
9

 
123

 

 
132

Dividends declared

 

 

 
(231
)
 

 
(231
)
Shares issued under employee stock-based compensation plans and other
1.2

 

 

 

 

 

Stock-based compensation

 

 
11

 

 

 
11

Balance as of September 30, 2018
1,389.1

 
$
14

 
$
21,020

 
$
1,122

 
$
137

 
$
22,293





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

5

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


1. Background and Basis of Presentation
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.".
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 2 for additional information.
Prior to the DPS Merger, Maple was controlled by JAB Holding Company S.a.r.l ("JAB") following its February 19, 2016 formation of Maple and March 3, 2016 acquisition of Keurig Green Mountain, Inc. ("Keurig").
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 September 30, 2018 and December 31, 2017 and for the third quarter and first nine months of 2018 and 2017 reflect the results of operations and financial position of Maple for the periods presented and includes 84 days of the results of operations of DPS in 2018 subsequent to the DPS Merger, which 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 Maple's consolidated financial statements and accompanying notes, included in the Company's Form 8-K/A filed with the U.S. Securities and Exchange Commission ("SEC") on August 8, 2018.

Change in Year End

On July 9, 2018, upon the consummation of the DPS Merger, as a result of the DPS Merger being accounted for as a reverse merger with Maple as the accounting acquirer, the board of directors of KDP (the "Board") approved a change in KDP’s fiscal year end from the last Saturday in September to December 31, which was DPS’s fiscal year end prior to the consummation of the DPS Merger, and changed Maple’s fiscal year end from the last Saturday in September to the last Saturday in December to closely align Maple’s fiscal year with that of the Company’s.

6

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


The following presents information about KDP's 2017 fiscal calendar:
Fiscal first quarter 2017 (December 25, 2016 through March 25, 2017) contained 91 days;
Fiscal second quarter 2017 (March 26, 2017 through June 24, 2017) contained 91 days;
Fiscal third quarter 2017 (June 25, 2017 through September 30, 2017) contained 98 days; and
Fiscal fourth quarter 2017 (October 1, 2017 through December 31, 2017) contained 92 days.
This change did not materially impact comparability of the Company's financial results for fiscal 2017. Accordingly, the change to a calendar fiscal year was made on a prospective basis and operating results have not been adjusted. The Company filed a transition report with the SEC for this change in fiscal year for purposes of reporting in accordance with Rule 13a-10 of the Securities Exchange Act of 1934, as amended, on August 7, 2018, on a Form 10-QT.
Except as otherwise specified, references to the "third quarter" or "first nine months" indicate the Company's fiscal periods ended September 30, 2018 and September 30, 2017.
PRINCIPLES OF CONSOLIDATION
KDP consolidates all wholly owned subsidiaries. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes KDP's proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors or similar governing body, participation in policy-making decisions and material intercompany transactions.
The Company is also required to consolidate entities that are variable interest entities (“VIEs”) of which KDP is the primary beneficiary. Judgments are made in assessing whether KDP is the primary beneficiary, including determination of the activities that most significantly impact the VIE’s economic performance.
KDP eliminates from its financial results all intercompany transactions between entities included in the unaudited condensed consolidated financial statements and the intercompany transactions with its equity method investees.
RECLASSIFICATIONS
The Company made certain reclassifications in the prior year presentation as management believes this presentation enhances the comparability of the Company's financial statements with industry peers. Effective in the first quarter of 2018, the Company made the following reclassifications to certain prior year amounts to conform to the current year presentation:
The Company reclassified $58 million and $174 million for the third quarter and first nine months of 2017, respectively, of transportation and warehouse costs associated with the distribution of finished goods to our customers to selling, general and administrative ("SG&A") expenses, which were previously presented as a separate line within the same section of the unaudited Condensed Consolidated Statements of Income.
The Company reclassified $15 million and $45 million for the third quarter and first nine months of 2017, respectively, of restructuring costs to SG&A expenses, which were previously presented as separate lines within the same section of the unaudited Condensed Consolidated Statements of Income.
The Company reclassified $10 million and $21 million for the third quarter and first nine months of 2017, respectively, of gains and losses, net associated with foreign currency to other (income) expense, net, which were previously presented as a separate line within the same section of the unaudited Condensed Consolidated Statements of Income.
The Company reclassified $45 million as of December 31, 2017 of income taxes receivable to prepaids and other current assets, which were previously presented as a separate line within the unaudited Condensed Consolidated Balance Sheets.
The Company reclassified $3 million as of December 31, 2017 of deferred revenue to other current liabilities, which were previously presented as a separate line within the unaudited Condensed Consolidated Balance Sheets.

7

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


The Company reclassified unrealized and realized gains and losses associated with derivative instruments within the same financial statement caption that the risk the derivative instrument is meant to mitigate is recorded, as provided in the table below:
 
 
 
 
 
Third Quarter
 
First Nine Months
(in millions)
Prior Presentation
 
Revised Presentation
 
2017
 
2017
Commodity contracts
(Gain) loss on financial instruments, net
 
Cost of sales
 
$
(7
)
 
$
3

Interest rate contracts
(Gain) loss on financial instruments, net
 
Interest expense
 
(9
)
 
16

FX contracts
(Gain) loss on financial instruments, net
 
Other (income) expense, net
 
7

 

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.
SIGNIFICANT ACCOUNTING POLICIES
Structured Payables
The Company entered into an agreement with a supply chain payment processing intermediary to act as a virtual credit card sponsor, whereby the card sponsor will pay amounts on behalf of the Company and sell the amounts due from the Company to a participating financial institution. The card sponsor will then bill the Company the original payment amount, plus interest for a term not to exceed one year. The agreement permits the Company to utilize the third party and participating financial institutions to make a broad range of payments, including commercial payables to suppliers, business acquisitions, purchases of property, plant and equipment, and employee-related payments. Structured payables have equal priority with accounts payable and are treated as non-recourse obligations. The Company records interest for the period the structured payables obligation is outstanding and reflects the proceeds and payments related to these transactions as a financing activity on the unaudited Condensed Consolidated Statements of Cash Flows.
FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Based upon the transparency of inputs to the valuation of an asset or liability, a three-level hierarchy has been established for fair value measurements. The three-level hierarchy for disclosure of fair value measurements is as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Valuations with one or more unobservable significant inputs that reflect the reporting entity's own assumptions.
The fair value of senior unsecured notes and marketable securities as of September 30, 2018 and December 31, 2017 are based on quoted market prices for publicly traded securities.
The Company estimates fair values of financial instruments measured at fair value in the financial statements on a recurring basis to ensure they are calculated based on market rates to settle the instruments. These values represent the estimated amounts the Company would pay or receive to terminate agreements, taking into consideration current market rates and creditworthiness.
As of September 30, 2018 and December 31, 2017, the Company did not have any assets or liabilities measured on a recurring basis without observable market values that would require a high level of judgment to determine fair value (Level 3).

8

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


Transfers between levels are recognized at the end of each reporting period. There were no transfers of financial instruments between the three levels of fair value hierarchy during the first nine months of 2018 and 2017.
Refer to Notes 6, 7, 12 and 13 for additional information.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective in 2019
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02"). The ASU replaces 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.
ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The standard requires a modified retrospective approach, which includes several optional practical expedients. The Company intends to adopt the standard during the quarter ending March 31, 2019. The Company has assembled a cross functional project management team, selected a software provider and is in the midst of the implementation of the software. The Company anticipates the impact of ASU 2016-02 will be significant to its unaudited Condensed Consolidated Balance Sheet due to the amount of the Company's lease commitments.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). 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. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact of ASU 2017-12 on the Company's unaudited condensed consolidated financial statements.
Effective in 2020
In June 2016, the FASB issued 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.
In August 2018, the FASB issued 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. ASU 2018-15 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 evaluating the impact of ASU 2018-15 on its unaudited condensed consolidated financial statements.
RECENTLY ADOPTED PROVISIONS OF U.S. GAAP
As of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) ("Topic 606"). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.

9

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


As a result of the adoption of Topic 606, the Company recognizes revenue from contracts with customers when control is transferred, generally upon delivery to the customers facility. The Company adopted the standard using the modified retrospective method and recognized the cumulative effect of initially applying the standard, which was primarily driven by the acceleration of certain customer incentives, as a $4 million decrease to the opening balance of retained earnings. The Company expects that the impact to net income of the new standard will be immaterial on an ongoing annual basis. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The amount of revenue recognized by the Company is net of costs associated with customer marketing programs and incentives, as well as sales taxes and other similar taxes. Refer to Note 3 for information regarding the Company's adoption of Topic 606.
As of January 1, 2018, the Company adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"), which requires employers who offer defined benefit pension plans or other post-retirement benefit plans to report the service cost component within the same income statement caption as other compensation costs arising from services rendered by employees during the period. The ASU also requires the other components of net periodic benefit cost to be presented separately from the service cost component, in a caption outside of a subtotal of income from operations. Additionally, the ASU provides that only the service cost component is eligible for capitalization. The adoption of ASU 2017-07 had no impact to the Company's unaudited condensed consolidated financial statements for the third quarter and first nine months of 2017.
As of January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which makes several targeted improvements to U.S. GAAP. Among other things, ASU 2016-01 eliminates the cost method of accounting and investments in equity securities which were previously accounted for under the cost method must now be measured at fair value, with changes in fair value recognized in net income, under guidance in the newly added Topic 321, Investments - Equity Securities, to the Accounting Standards Codification. Equity instruments that do not have readily determinable fair values may be measured at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company also adopted ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which provides clarification on certain guidance issued under ASU 2016-01. The Company held one investment in equity securities which was accounted for under the cost method of accounting prior to January 1, 2018, which did not have readily determinable fair values. The adoption of these standards did not have a material impact on such investments or the Company's consolidated financial statements.

2. Acquisitions and Investments in Unconsolidated Subsidiaries
ACQUISITION OF DR PEPPER SNAPPLE GROUP, INC.
Overview and Total Consideration Exchanged
As discussed in Note 1, Background and Basis of Presentation, Maple merged with DPS on July 9, 2018. DPS is a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States ("U.S."), Canada and Mexico with a diverse portfolio of flavored (non-cola) carbonated soft drinks ("CSDs") and non-carbonated beverages ("NCBs"), including ready-to-drink teas, juices, juice drinks, water and mixers.
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:
(in millions)
 
 
Aggregate fair value of DPS common stock
 
$
3,611

$103.75 per share special cash dividend(1)
 
18,818

Fair value of replacement equity awards(2)
 
53

Total consideration exchanged
 
$
22,482

                                        
(1)
As a result of the DPS Merger, all DPS unvested stock option awards, RSUs and PSUs (the "Legacy Stock Awards") vested immediately as a result of the Change in Control (as defined in the terms of each individual award agreement). All Legacy Stock Awards, except for the stock option awards and certain RSUs not yet released to the employee, received the special cash dividend of $103.75 per share, subject to any withholding of taxes required by law. These amounts were included within the special cash dividend.
(2)
The fair value of replacement equity awards includes the Company issued replacement stock option awards for DPS stock option awards that were fully vested as of July 9, 2018 but not yet exercised by the employee, the DPS stock option awards that were fully vested as of July 9, 2018 and converted to cash by the employee and certain RSUs not yet released to the employee as a result of certain Internal Revenue Code requirements.

10

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


The total consideration exchanged in the DPS Merger was funded by the following sources of funds:
A $9,000 million equity investment from JAB.
The issuance by the Company of $8,000 million of senior unsecured notes under a private offering Rule 144A. Refer to Note 6 for additional information.
Proceeds of $2,700 million borrowed under the term loan agreement and proceeds of $1,900 million borrowed under the revolving credit facility. Refer to Note 6 for additional information.
Proceeds of $124 million from the Company's structured payables.
The remainder of the total consideration exchanged in the DPS Merger was funded by cash on hand.
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 the Merger Date. During the measurement period, the Company will continue to obtain information to assist in determining the fair value of net assets acquired, which may differ materially from these preliminary estimates. Measurement period adjustments, if applicable, will be applied in the reporting period in which the adjustment amounts are determined. 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 September 30, 2018:
(in millions)
 
Fair Value
Cash and cash equivalents
 
$
147

Investments in unconsolidated subsidiaries(1)
 
90

Property, plant and equipment(2)
 
1,549

Other intangible assets
 
20,404

Long-term obligations(3)
 
(4,049
)
Capital lease and financing obligations
 
(214
)
Acquired assets, net of assumed liabilities(4)
 
107

Deferred tax liabilities, net of deferred tax assets(5)
 
(4,959
)
Goodwill
 
9,407

Total consideration exchanged
 
22,482

Fair value of replacement equity awards not converted to cash(6)
 
3,643

Acquisition of business
 
$
18,839

                                       
(1)
The Company preliminarily valued investments in unconsolidated subsidiaries using a market approach, specifically the guideline public company method.
(2)
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.
(3)
The fair value amounts of long-term obligations (current and long-term) were based on current market rates available to the Company.
(4)
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.
(5)
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.
(6)
A portion of DPS' vested options were treated as replacement equity awards for purposes of valuation but were converted to cash as of the Merger Date. As a result, in order to determine the cash paid for the DPS Merger, the Company reduced the fair value of the related replacement equity awards originally presented in the total consideration exchanged table above by $21 million.

11

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


The DPS Merger preliminarily resulted in $9,407 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, 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)
 
$
19,893

 
n/a
Contractual arrangements(2)
 
120

 
n/a
Customer relationships(3)
 
386

 
10-40
Favorable leases, net(4)
 
5

 
5-12
Total other intangible assets
 
$
20,404

 
 
                                        
(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 third quarter and first nine months of 2018 and 2017 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.
 
Third Quarter
 
First Nine Months
(in millions)
2018
 
2017
 
2018
 
2017
Net sales
$
2,856

 
$
2,776

 
$
8,207

 
$
7,975

Net income
287

 
253

 
838

 
364

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.
Actual Results of DPS
For the periods subsequent to the Merger Date that are included in the third quarter and first nine months of 2018, DPS had net sales of $1,679 million and net income of $51 million.
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 a cash purchase price of $300 million, subject to certain adjustments outlined in the Big Red Merger Agreement (the "Big Red Merger"). Big Red is a brand owner with a portfolio of CSDs and NCBs.
On August 31, 2018 (the "Big Red Merger Date"), the Company funded the Big Red Merger with proceeds from structured payables. In order to complete the Big Red Merger, the Company paid $282 million, net of the Company's previous ownership interest, in exchange for the remaining ownership interests and seller transaction costs. Additionally, $15 million was held back and placed in escrow.
As a result of the Big Red Merger, our existing 14.36% equity interest in Big Red, which was previously earned based on the Company's distribution of Big Red's products, was remeasured to fair value of $22 million.

12

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


Allocation of Consideration Exchanged
The Company's preliminary allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the Big Red Merger is based on estimated fair values as of the Big Red Merger Date. During the measurement period, the Company will continue to obtain information to assist in determining the fair value of net assets acquired, which may differ materially from these preliminary estimates. Measurement period adjustments, if applicable, will be applied in the reporting period in which the adjustment amounts are determined.
The following is a summary of the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed in the Big Red Merger as of September 30, 2018:
(in millions)
 
Fair Value
Cash and cash equivalents
 
$
3

Other intangible assets
 
240

Assumed liabilities, net of acquired assets(1)
 
(28
)
Goodwill
 
89

Total consideration exchanged
 
304

Company's previous ownership interest
 
22

Less: Holdback placed in Escrow
 
15

Acquisition of business
 
$
267

                                       
(1)
The Company preliminarily valued WIP and finished goods inventory using a net realizable value approach resulting in a step-up of $2 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.
The Big Red Merger preliminarily resulted in $89 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 Big Red 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)
 
$
220

 
n/a
Brands(1)
 
9

 
5
Customer relationships(2)
 
4

 
8-40
Contractual arrangements(3)
 
7

 
12
Total other intangible assets
 
$
240

 
 
                                        
(1)
The Company preliminarily valued the brand portfolio utilizing the multi-period excess earnings method, a form of the income approach.
(2)
The Company have identified two types of customer relationships, retail and industrial. We preliminarily valued retail and industrial customer relationships utilizing the distributor method, a form of the income approach.
(3)
The Company preliminarily valued contractual arrangements with bottlers and distributors utilizing the distributor method, a form of the income approach.
Pro Forma Information and Actual Results of Big Red
The Company has not presented estimated unaudited pro forma results of operations for the Big Red Merger or the actual results of Big Red because it is not material to the Company's unaudited condensed consolidated financial statements for the third quarter and first nine months of 2018.
PROPOSED ACQUISITION OF CORE NUTRITION, LLC
On September 27, 2018, KDP entered into a definitive agreement to purchase Core Nutrition, LLC ("Core") for merger consideration, which represents 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 number of shares of KDP common stock to be issued will be based on the final merger consideration and the volume weighted average of the closing prices of KDP common stock for the five consecutive trading days ending on, and including, the second trading day prior to the closing. Prior to the proposed acquisition of Core, the Company owned 5.1% of Core's common units. The proposed acquisition is expected to close by the end of 2018.

13

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


TRANSACTION EXPENSES
The following table provides information about the Company's transaction expenses incurred during the third quarter and first nine months of 2018 and 2017:
 
 
Third Quarter
 
First Nine Months
(in millions)
 
2018
 
2017
 
2018
 
2017
DPS Merger
 
$
93

 
$

 
$
167

 
$

Big Red Merger
 
2

 

 
2

 

Core Merger
 
1

 

 
1

 

Total transaction expenses incurred
 
$
96

 
$

 
$
170

 
$


Transaction expenses consisted of professional fees for advisory and consulting services and other incremental costs related to the acquisition.
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The following table summarizes the equity method investments held by the Company as of September 30, 2018 and December 31, 2017:
 
 
 
 
September 30,
 
December 31,
(in millions)
 
Ownership Interest
 
2018
 
2017
BA Sports Nutrition, LLC ("BODYARMOR")(1)(2)
 
15.5
%
 
$
61

 
$

Bedford Systems, LLC ("Bedford")(3)
 
30.0
%
 
84

 
95

Core(1)
 
5.1
%
 
16

 

Force Holdings LLC
 
33.3
%
 
6

 

Lifefuels, Inc.
 
26.7
%
 
20

 

Other
 
(various)

 
6

 
2

Investments in unconsolidated subsidiaries
 
 
 
$
193

 
$
97

                                        
(1)
The investments in Core and BODYARMOR were acquired as part of the DPS Merger on July 9, 2018. Refer to the purchase price allocation above.
(2)
On August 14, 2018, it was announced that The Coca-Cola Company ("Coca-Cola") took a minority interest in BODYARMOR and would obtain the Company's current distribution rights. On August 19, 2018, the Company received a distribution from BODYARMOR of approximately $35 million This distribution reduced the Company's investment by approximately $11 million and resulted in a gain of approximately $24 million, which was recorded to Other non-operating (income) expense, net in the unaudited Condensed Consolidated Statements of Income. The Company continues to account for its interest in BODYARMOR as an equity method investment at the ownership level prior to the Coca-Cola announcement as an updated ownership interest percentage has not yet been provided to the Company.
(3)
The investment in Bedford represents a joint venture formed with Anheuser-Busch InBev ("ABI") on March 3, 2017 to develop and launch an in-home alcoholic beverage system. Under the terms of the transaction agreement, the Company contributed its existing Kold assets and liabilities along with all outstanding shares of MDS Holdings p.l.c. (Bevyz) with a net book value of $357 million to Bedford in exchange for a 30% interest. ABI contributed $250 million to the investment, which was immediately distributed to Maple, in exchange for a 70% interest.
3. Revenue Recognition

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

The adoption of Topic 606 resulted in an immaterial impact to the individual financial statement line items of the Company's unaudited Condensed Consolidated Statements of Income for the third quarter and first nine months of 2018.


14

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


The following table disaggregates the Company's revenue by portfolio for the third quarter and first nine months of 2018 and 2017:
(in millions)
Beverage Concentrates
 
Packaged Beverages
 
Latin America Beverages
 
Coffee Systems
 
Total
For the third quarter of 2018:
 
 
 
 
 
 
 
 
 
CSD(1)
$
311

 
$
505

 
$
88

 
$

 
$
904

NCB(1)
2

 
649

 
35

 

 
686

Pods(2)

 

 

 
831

 
831

Appliances

 

 

 
171

 
171

Other
4

 
84

 
1

 
51

 
140

Net sales
$
317

 
$
1,238

 
$
124

 
$
1,053

 
$
2,732

 
 
 
 
 
 
 
 
 
 
For the first nine months of 2018:
 
 
 
 
 
 
 
 
 
CSD(1)
$
311

 
$
505

 
$
88

 
$

 
$
904

NCB(1)
2

 
649

 
35

 

 
686

Pods(2)

 

 

 
2,387

 
2,387

Appliances

 

 

 
403

 
403

Other
4

 
84

 
1

 
160

 
249

Net sales
$
317

 
$
1,238

 
$
124

 
$
2,950

 
$
4,629

 
 
 
 
 
 
 
 
 
 
For the third quarter of 2017(3):
 
 
 
 
 
 
 
 
 
CSD(1)
$

 
$

 
$

 
$

 
$

NCB(1)

 

 

 

 

Pods(2)

 

 

 
922

 
922

Appliances

 

 

 
165

 
165

Other

 

 

 
53

 
53

Net sales
$

 
$

 
$

 
$
1,140

 
$
1,140

 
 
 
 
 
 
 
 
 
 
For the first nine months of 2017(3):
 
 
 
 
 
 
 
 
 
CSD(1)
$

 
$

 
$

 
$

 
$

NCB(1)

 

 

 

 

Pods(2)

 

 

 
2,496

 
2,496

Appliances

 

 

 
407

 
407

Other

 

 

 
153

 
153

Net sales
$

 
$

 
$

 
$
3,056

 
$
3,056

__________________
(1)    Represents net sales of owned and allied brands within our portfolio.
(2)
Represents net sales from owned brands, partner brands and private label owners. Net sales for partner brands and private label owners are contractual and long term in nature.
(3)
Prior period amounts were not adjusted for the adoption of revenue recognition under ASC 606.


15

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


4.
Goodwill and Other Intangible Assets
GOODWILL
Changes in the carrying amount of goodwill by reportable segment are as follows:
 
Beverage Concentrates
 
Packaged Beverages
 
Latin America Beverages
 
Coffee Systems
 
Unallocated(2)
 
Total
Balance as of December 31, 2017
$

 
$

 
$

 
$
9,819

 
$

 
$
9,819

Foreign currency translation
1

 

 
7

 
(32
)
 

 
(24
)
Acquisitions(1)
970

 
3,452

 
350

 

 
4,724

 
9,496

Balance as of September 30, 2018
$
971

 
$
3,452

 
$
357

 
$
9,787

 
$
4,724

 
$
19,291

___________________________
(1)
Acquisition activity during the first nine months of 2018 represents the goodwill recorded as a result of the DPS Merger and the Big Red Merger. Refer to Note 2 for additional information.
(2)
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 within DPS, which will enable the Company to allocate this goodwill to the applicable segment within the measurement period.
INTANGIBLE ASSETS OTHER THAN GOODWILL
The net carrying amounts of intangible assets other than goodwill with indefinite lives are as follows:
 
 
September 30, 2018
 
December 31, 2017
Brands(1)
 
$
20,163

 
$

Contractual arrangements(2)
 
120

 

Trade Names
 
2,479

 
2,479

Total
 
$
22,762

 
$
2,479

___________________________
(1)
The Company recorded $19,893 million and $220 million of indefinite-lived brand assets as a result of the DPS Merger and the Big Red Merger, respectively. Refer to Note 2 for additional information. The remaining change during the period was due to foreign currency translation.
(2)
The Company recorded $120 million of indefinite-lived contractual arrangements with certain bottlers and distributors as a result of the DPS Merger. Refer to Note 2 for additional information.

The net carrying amounts of intangible assets other than goodwill with definite lives are as follows:
 
September 30, 2018
 
December 31, 2017
(in millions)
 Gross Amount
 
Accumulated Amortization
 
Net Amount
 
 Gross Amount
 
Accumulated Amortization
 
Net Amount
Acquired technology
$
1,146

 
$
(164
)
 
$
982

 
$
1,146

 
$
(109
)
 
$
1,037

Customer relationships(1)(2)
632

 
(59
)
 
573

 
247

 
(41
)
 
206

Trade names
128

 
(36
)
 
92

 
129

 
(24
)
 
105

Favorable leases, net(1)
13

 
(2
)
 
11

 
8

 
(2
)
 
6

Brands(2)
9

 

 
9

 

 

 

Contractual arrangements(2)
7

 

 
7

 

 

 

Other

 

 

 
1

 

 
1

Total
$
1,935

 
$
(261
)
 
$
1,674

 
$
1,531

 
$
(176
)
 
$
1,355

___________________________
(1)
As a result of the DPS Merger, the Company recorded definite-lived customer relationships of $386 million and definite-lived net favorable leases of $5 million. Refer to Note 2 for additional information.
(2)
As a result of the Big Red Merger, the Company recorded definite-lived brands of $9 million, definite-lived customer relationships of $4 million and definite-lived contractual arrangements of $7 million. Refer to Note 2 for additional information.

16

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


Amortization expense for intangible assets with definite lives was as follows:
 
Third Quarter
 
First Nine Months
(in millions)
2018
 
2017
 
2018
 
2017
Amortization expense for intangible assets with definite lives
$
31

 
$
24

 
$
90

 
$
72

Amortization expense of these intangible assets over the remainder of 2018 and the next four years is expected to be as follows:
 
Remainder of 2018
 
For the Years Ending December 31,
(in millions)
 
2019
 
2020
 
2021
 
2022
Expected amortization expense for intangible assets with definite lives
$
32

 
$
130

 
$
130

 
$
130

 
$
126

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 September 30, 2018.
5. Income Taxes
The legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017. The TCJA reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018, but provides a blended tax rate for companies with a non-calendar tax year-end(1), repealed the domestic manufacturing deduction after their 2017 tax year(3), and made changes to the international tax rules.
The effective tax rates for the third quarter of 2018 and 2017 were 23.7% and 28.2%, respectively. The effective tax rates for the first nine months of 2018 and 2017 were 25.4% and 30.0%, respectively. The following is a reconciliation of the provision for income taxes computed at the U.S. federal statutory tax rate to the provision for income taxes reported in the unaudited Condensed Consolidated Statements of Income:
 
Third Quarter
 
First Nine Months
 
2018
 
2017
 
2018
 
2017
(in millions)
Dollar
 
Percent
 
Dollar
 
Percent
 
Dollar
 
Percent
 
Dollar
 
Percent
Statutory federal income tax(1)
$
48

 
24.5
 %
 
$
57

 
35.0
 %
 
$
106

 
24.5
 %
 
$
119

 
35.0
 %
State income taxes, net
15

 
7.7
 %
 
4

 
2.5
 %
 
26

 
6.0
 %
 
10

 
2.9
 %
Deferred tax revaluation(2)
(41
)
 
(21.1
)%
 
(6
)
 
(3.7
)%
 
(41
)
 
(9.5
)%
 
(6
)
 
(1.8
)%
U.S. federal domestic manufacturing benefit(3)
(5
)
 
(2.6
)%
 
(8
)
 
(4.9
)%
 
(12
)
 
(2.8
)%
 
(13
)
 
(3.8
)%
Impact of non-U.S. operations
4

 
2.1
 %
 
11

 
6.7
 %
 
8

 
1.8
 %
 
4

 
1.2
 %
Tax reform(4)
3

 
1.5
 %
 

 
 %
 
(4
)
 
(0.9
)%
 

 
 %
U.S. taxation of foreign earnings(5)
5

 
2.6
 %
 
(29
)
 
(17.8
)%
 
5

 
1.2
 %
 
(28
)
 
(8.2
)%
Valuation allowance(5)
15

 
7.7
 %
 
20

 
12.3
 %
 
15

 
3.5
 %
 
20

 
5.9
 %
Transaction costs
3

 
1.5
 %
 

 
 %
 
13

 
3.0
 %
 

 
 %
Other
(1
)
 
(0.2
)%
 
(3
)
 
(1.9
)%
 
(6
)
 
(1.4
)%
 
(4
)
 
(1.2
)%
 Total income tax provision
$
46

 
23.7
 %
 
$
46

 
28.2
 %
 
$
110

 
25.4
 %
 
$
102

 
30.0
 %
____________________________
For the third quarter and first nine months of 2018, unless otherwise noted:
(1)
The TCJA reduced the U.S. federal statutory tax rate from 35% to 21%. Guidance under the TCJA for non-calendar year tax filers resulted in a 24.5% federal statutory rate for companies with a September tax year-end.
(2)    As a result of the DPS Merger, Maple's deferred taxes were revalued to reflect the impact of DPS's state apportionment factors.
(3)
The TCJA repealed the domestic manufacturing deduction. Guidance under the TCJA for non-calendar year filers resulted in the domestic manufacturing deduction being claimed through September 2018. The period ended September 2018 is the final tax year that the Company can claim the benefit.
(4)
Net deferred tax assets were revalued from the 24.5% federal tax rate to 21%. Additionally, for the first nine months of 2018, the Company reduced its liability for the one-time transition tax on earnings of certain foreign subsidiaries.
(5)
In 2017, foreign dividends were paid that generated excess foreign tax credits and a corresponding deferred tax asset, which resulted in an income tax benefit; however, a valuation allowance was applied to approximately 50% of the deferred tax asset related to the excess foreign tax credits. In 2018, the Company recorded a $17 million valuation allowance against the remaining deferred tax asset related to the excess foreign tax credits as a result of the DPS Merger.

17

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


On December 22, 2017, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the impact of the TCJA, in effect allowing an entity to use a methodology similar to the measurement period in a business combination for tax impacts effective in the fourth quarter of 2017. Pursuant to the provisions of SAB 118, as of September 30, 2018, the Company has not completed its accounting for the tax effects of the TCJA. The Company recorded a reasonable estimate of the impact from the TCJA, but is still analyzing the TCJA and refining our calculations. Additionally, future guidance from the Internal Revenue Service, SEC, or the FASB could result in changes to our accounting for the tax effects of the TCJA.
6. Long-term Obligations and Borrowing Arrangements
The following table summarizes the Company's long-term obligations:
(in millions)
September 30, 2018
 
December 31, 2017
Senior unsecured notes
$
12,011

 
$

Revolving credit facilities

 

Term loans
2,643

 
3,283

Term loans - related party

 
1,815

Subtotal
14,654

 
5,098

Less - current portion
(379
)
 
(219
)
Long-term obligations
$
14,275

 
$
4,879


The following table summarizes the Company's short-term borrowings and current portion of long-term obligations:
 
Fair Value Hierarchy Level
 
September 30, 2018
 
December 31, 2017
(in millions)
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Commercial paper
1
 
$
1,386

 
$
1,386

 
$

 
$

Current portion of long-term obligations:
 
 
 
 
 
 
 
 
 
Senior unsecured notes
2
 
250

 
250

 

 

Term loans
2
 
129

 
129

 
219

 
219

Short-term borrowings and current portion of long-term obligations
 
 
$
1,765

 
$
1,765

 
$
219

 
$
219


18

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 carrying values and estimated fair values that are not required to be measured at fair value in the unaudited Condensed Consolidated Balance Sheets are as follows:
(in millions)
 
 
 
 
 
Fair Value Hierarchy Level
 
September 30, 2018
 
December 31, 2017
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(1)
 
January 15, 2020
 
2.000%
 
2
 
250

 
245

 

 

2021-A Notes(1)
 
November 15, 2021
 
3.200%
 
2
 
250

 
245

 

 

2021-B Notes(1)
 
November 15, 2021
 
2.530%
 
2
 
250

 
240

 

 

2022 Notes(1)
 
November 15, 2022
 
2.700%
 
2
 
250

 
236

 

 

2023 Notes(1)
 
December 15, 2023
 
3.130%
 
2
 
500

 
477

 

 

2025 Notes(1)
 
November 15, 2025
 
3.400%
 
2
 
500

 
470

 

 

2026 Notes(1)
 
September 15, 2026
 
2.550%
 
2
 
400

 
350

 

 

2027 Notes(1)
 
June 15, 2027
 
3.430%
 
2
 
500

 
462

 

 

2038 Notes(1)
 
May 1, 2038
 
7.450%
 
2
 
125

 
157

 

 

2045 Notes(1)
 
November 15, 2045
 
4.500%
 
2
 
550

 
511

 

 

2046 Notes(1)
 
December 15, 2046
 
4.420%
 
2
 
400

 
366

 

 

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

 
1,744

 

 

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

 
1,992

 

 

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

 
1,003

 

 

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

 
2,013

 

 

2038 Merger Notes(2)
 
May 25, 2038
 
4.985%
 
2
 
500

 
506

 

 

2048 Merger Notes(2)
 
May 25, 2048
 
5.085%
 
2
 
750

 
763

 

 

Principal amount
 
 
 
 
 
 
 
$
12,225

 
$
12,030

 
$

 
$

Unamortized debt issuance costs and fair value adjustment for the DPS Merger
 
 
 
(214
)
 
 
 

 
 
Carrying amount
 
 
 
 
 
 
 
$
12,011

 
 
 
$

 
 
____________________________
(1)
As a result of the DPS Merger, the Company assumed the liabilities of DPS existing senior unsecured notes.
(2)
On May 25, 2018, the Company issued $8,000 million of senior unsecured notes, consisting of six different tranches (the "DPS Merger Notes") in a private offering under Rule 144A under the Securities Act of 1933, as amended. The DPS Merger Notes were issued at par and had debt issuance costs related to the issuance of approximately $46 million.
The fair value amounts of long term debt 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 debt 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
The Company's revolving credit facilities and term loans 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 are as follows:
(in millions)
 
 
 
Fair Value Hierarchy Level
 
September 30, 2018
 
December 31, 2017
Issuance
 
Maturity Date
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
KDP Term Loan
 
February 2023
 
2
 
$
2,666

 
$
2,666

 
$

 
$

KDP Revolver
 
February 2023
 
2
 

 

 

 

Term Loan A
 
 
 
2
 

 

 
3,329

 
3,329

Principal amount
 
 
 
 
 
$
2,666

 
$
2,666

 
$
3,329

 
$
3,329

Unamortized discounts and debt issuance costs
 
 
(23
)
 
 
 
(46
)
 
 
Carrying amount
 
 
 
 
 
$
2,643

 
 
 
$
3,283

 
 

19

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


Commercial Paper Program
As a result of the DPS Merger, the Company assumed a commercial paper program which was initially executed by DPS on December 10, 2010. On July 9, 2018, the Company amended its commercial paper program, under which the Company may issue unsecured commercial paper notes (the "Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of $2,400 million. The maturities of the Commercial Paper will vary, but may not exceed 397 days from the date of issuance. The Company's intent is to classify the Commercial Paper on a short term basis, as maturities are not expected to exceed 90 days. The Company issues Commercial Paper as needed for general corporate purposes. Outstanding Commercial Paper ranks equally with all of the Company's existing and future unsecured borrowings. Under this program, the Company had weighted average Commercial Paper borrowings of $1,395 million for the third quarter of 2018 since the Company assumed the commercial paper program, with maturities of 90 days or less, and no outstanding Commercial Paper for the third quarter and first nine months of 2017, respectively. These Commercial Paper borrowings had a weighted average interest rate of 2.37% for the third quarter of 2018. The Company had $1,386 million of outstanding Commercial Paper as of September 30, 2018, and none outstanding as of December 31, 2017.
KDP Revolving Credit Facilities and Term Loan

 On February 28, 2018, in connection with the DPS Merger, the Company entered into the following:
A new term loan agreement among the Company, the lenders party thereto (the "Term Lenders"), the other financial institutions party thereto and JP Morgan Chase Bank, N/A. ("JP Morgan"), as administrative agent (the "KDP Term Loan Agreement"), pursuant to which the Term Lenders have committed to provide $2,700 million of a senior unsecured term loan facility (the "KDP Term Loan") for the purposes of funding the DPS Merger and fees and expenses related to the DPS Merger; and
A new credit agreement among the Company, the lenders party thereto (the "Revolving Lenders"), the other financial institutions party thereto and JP Morgan, as administrative agent (the "KDP Credit Agreement” and, together with the KDP Term Loan Agreement, the “KDP Credit Agreements”), pursuant to which the Revolving Lenders have committed to provide $2,400 million of a revolving credit facility (the "KDP Revolver"), for the purpose of funding (i) the DPS Merger, (ii) fees and expenses related to the DPS Merger, (iii) repayment of the Company's previous revolving credit facility (as discussed below) and (iv) general corporate needs.
The interest rate applicable to any borrowings under the KDP Credit Agreements ranges from a rate equal to LIBOR plus a margin of 0.875% to 1.500% or a base rate plus a margin of 0.00% to 0.50%, depending on the rating of certain indexed debt of KDP.
Under the KDP Credit Agreements, KDP will pay to the Revolving Lenders an unused commitment fee calculated at a rate per annum equal to an amount between 0.07% and 0.20%, depending on the rating of certain index debt of KDP. Under the KDP Term Loan, KDP must repay the unpaid principal amount of the KDP Term Loan quarterly commencing on September 30, 2018 in an amount equal to 1.25% of the aggregate principal amount of the loans made at the Effective Time. The KDP Credit Agreements will both mature on February 28, 2023.
The following table provides amounts utilized and available under the revolving credit facilities as of September 30, 2018:
(in millions)
Amount Utilized
 
Balances Available
KDP Revolver(1)
$