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EXCEL - IDEA: XBRL DOCUMENT - Keurig Dr Pepper Inc.Financial_Report.xls
EX-32.1 - CERTIFICATION OF OUR CEO PURSUANT TO SECTION 906 - Keurig Dr Pepper Inc.dps-ex321_2014930.htm
EX-31.1 - CERTIFICATION OF OUR CEO PURSUANT TO SECTION 302 - Keurig Dr Pepper Inc.dps-ex311_2014930.htm
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EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Keurig Dr Pepper Inc.dps-ex121_93014.htm
EX-31.2 - CERTIFICATION OF OUR CFO PURSUANT TO SECTION 302 - Keurig Dr Pepper Inc.dps-ex312_2014930.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2014
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
Delaware
 
98-0517725
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
identification number)
 
 
 
5301 Legacy Drive, Plano, Texas
 
75024
(Address of principal executive offices)
 
(Zip code)
(972) 673-7000
(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     R  No     o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes     R   No     o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer R
 
Accelerated Filer o
 
Non-Accelerated Filer  o
 
Smaller Reporting Company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
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    R
As of October 21, 2014, there were 194,409,479 shares of the registrant's common stock, par value $0.01 per share, outstanding.
 



DR PEPPER SNAPPLE GROUP, INC.
FORM 10-Q
INDEX
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


ii


DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2014 and 2013
(Unaudited, in millions, except per share data)

PART I - FINANCIAL INFORMATION
ITEM 1.
Financial Statements (Unaudited)
 
For the
 
For the
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
1,583

 
$
1,543

 
$
4,612

 
$
4,534

Cost of sales
658

 
650

 
1,877

 
1,916

Gross profit
925

 
893

 
2,735

 
2,618

Selling, general and administrative expenses
581

 
563

 
1,727

 
1,745

Depreciation and amortization
28

 
28

 
86

 
86

Other operating (income) expense, net

 
2

 
(2
)
 
5

Income from operations
316

 
300

 
924

 
782

Interest expense
27

 
29

 
80

 
94

Interest income

 

 
(1
)
 
(1
)
Other expense, net
4

 
428

 
2

 
384

Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries
285

 
(157
)
 
843

 
305

Provision (benefit) for income taxes
97

 
(364
)
 
291

 
(162
)
Income before equity in earnings of unconsolidated subsidiaries
188

 
207

 
552

 
467

Equity in earnings of unconsolidated subsidiaries, net of tax

 

 
1

 
1

Net income
$
188

 
$
207

 
$
553

 
$
468

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.97

 
$
1.02

 
$
2.81

 
$
2.29

Diluted
0.96

 
1.01

 
2.79

 
2.28

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
194.8

 
203.3

 
196.4

 
204.0

Diluted
196.2

 
204.7

 
197.8

 
205.5

Cash dividends declared per common share
$
0.41

 
$
0.38

 
$
1.23

 
$
1.14

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


1


DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2014 and 2013
(Unaudited, in millions)

 
For the
 
For the
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Comprehensive income
$
174

 
$
208

 
$
542

 
$
475

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


2


DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2014 and December 31, 2013
(Unaudited, in millions, except share and per share data)
 
September 30,
 
December 31,
 
2014
 
2013
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
266

 
$
153

Accounts receivable:
 
 
 
Trade, net
546

 
564

Other
63

 
58

Inventories
191

 
200

Deferred tax assets
57

 
66

Prepaid expenses and other current assets
118

 
78

Total current assets
1,241

 
1,119

Property, plant and equipment, net
1,108

 
1,173

Investments in unconsolidated subsidiaries
15

 
15

Goodwill
2,987

 
2,988

Other intangible assets, net
2,688

 
2,694

Other non-current assets
145

 
127

Non-current deferred tax assets
77

 
85

Total assets
$
8,261

 
$
8,201

Liabilities and Stockholders' Equity
Current liabilities:
 
 
 
Accounts payable
$
319

 
$
271

Deferred revenue
64

 
65

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

 
66

Income taxes payable
25

 
33

Other current liabilities
614

 
595

Total current liabilities
1,024

 
1,030

Long-term obligations
2,539

 
2,508

Non-current deferred tax liabilities
784

 
755

Non-current deferred revenue
1,268

 
1,318

Other non-current liabilities
283

 
313

Total liabilities
5,898

 
5,924

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, 800,000,000 shares authorized, 194,473,910 and 197,979,971 shares issued and outstanding for 2014 and 2013, respectively
2

 
2

Additional paid-in capital
758

 
970

Retained earnings
1,702

 
1,393

Accumulated other comprehensive loss
(99
)
 
(88
)
Total stockholders' equity
2,363

 
2,277

Total liabilities and stockholders' equity
$
8,261

 
$
8,201

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


3


DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2014 and 2013
(Unaudited, in millions)
 
For the
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
553

 
$
468

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
148

 
146

Amortization expense
26

 
28

Amortization of deferred revenue
(48
)
 
(49
)
Employee stock-based compensation expense
35

 
28

Deferred income taxes
33

 
147

Other, net
(20
)
 
16

Changes in assets and liabilities, net of effects of acquisition:
 
 
 
Trade accounts receivable
15

 
21

Other accounts receivable
(6
)
 
(6
)
Inventories
8

 
1

Other current and non-current assets
(49
)
 
436

Other current and non-current liabilities
24

 
(601
)
Trade accounts payable
49

 
(1
)
Income taxes payable
1

 
(18
)
Net cash provided by operating activities
769

 
616

Investing activities:
 
 
 
Acquisition of business

 
(10
)
Purchase of property, plant and equipment
(103
)
 
(111
)
Purchase of intangible assets
(1
)
 
(5
)
Proceeds from disposals of property, plant and equipment
7

 
1

Other, net
(3
)
 
(3
)
Net cash used in investing activities
(100
)
 
(128
)
Financing activities:
 
 
 
Repayment of senior unsecured notes

 
(250
)
Repayment of commercial paper
(65
)
 

Repurchase of shares of common stock
(276
)
 
(243
)
Cash paid for shares not yet received

 
(20
)
Dividends paid
(237
)
 
(225
)
Tax withholdings related to net share settlements of certain stock awards
(16
)
 
(13
)
Proceeds from stock options exercised
32

 
13

Excess tax benefit on stock-based compensation
9

 
6

Net cash used in financing activities
(553
)
 
(732
)
Cash and cash equivalents — net change from:
 
 
 
Operating, investing and financing activities
116

 
(244
)
Effect of exchange rate changes on cash and cash equivalents
(3
)
 
(3
)
Cash and cash equivalents at beginning of year
153

 
366

Cash and cash equivalents at end of period
$
266

 
$
119

See Note 15 for supplemental cash flow information.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2014
(Unaudited, in millions, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Common Stock
 
Additional
 
 
 
Other
 
 
 
Issued
 
Paid-In
 
Retained
 
Comprehensive
 
Total
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Equity
Balance as of January 1, 2014
198.0

 
$
2

 
$
970

 
$
1,393

 
$
(88
)
 
$
2,277

Shares issued under employee stock-based compensation plans and other
1.5

 

 

 

 

 

Net income

 

 

 
553

 

 
553

Other comprehensive income

 

 

 

 
(11
)
 
(11
)
Dividends declared, $1.23 per share

 

 
3

 
(244
)
 

 
(241
)
Stock options exercised and stock-based compensation, net of tax of ($9)

 

 
61

 

 

 
61

Common stock repurchases
(5.0
)
 

 
(276
)
 

 

 
(276
)
Balance as of September 30, 2014
194.5

 
$
2

 
$
758

 
$
1,702

 
$
(99
)
 
$
2,363

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


5

DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
General
References in this Quarterly Report on Form 10-Q to "DPS" or "the Company" refer to Dr Pepper Snapple Group, Inc. and all entities included in the unaudited condensed consolidated financial statements. Cadbury plc and Cadbury Schweppes plc are hereafter collectively referred to as "Cadbury" unless otherwise indicated. Kraft Foods Inc. acquired Cadbury on February 2, 2010 and on October 1, 2012, Kraft Foods Inc. spun-off its North American grocery business to its shareholders and changed its name to Mondelēz International, Inc. ("Mondelēz").
This Quarterly Report on Form 10-Q refers to some of DPS' 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 DPS' registered trademarks or those of the Company's licensors.
BASIS OF PRESENTATION
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. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
PRINCIPLES OF CONSOLIDATION
DPS 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 DPS' 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, 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 DPS is the primary beneficiary. Judgments are made in assessing whether the Company is the primary beneficiary, including determination of the activities that most significantly impact the VIE’s economic performance. During the three months ended September 30, 2014, the Company provided 100% financing to a VIE as part of a short term leasing structure that is set to expire no later than January 2015, for which DPS is the primary beneficiary. As a result, DPS has consolidated that entity. The Company’s financing of the VIE, which totaled $21 million as of September 30, 2014, included a transfer of cash and assignment of the rights to deposits previously made with a manufacturer in the prior year. The Company's financing of the VIE, which eliminates in consolidation, was used by the VIE to purchase certain property, plant and equipment. The assets and liabilities of the VIE were not significant to the Company’s consolidated financial statements.
The Company eliminates from its financial results all intercompany transactions between entities included in the consolidated financial statements and the intercompany transactions with its equity method investees.

6

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


USE OF ESTIMATES
The process of preparing DPS' 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:
goodwill and other indefinite-lived intangible assets;
customer incentives and marketing programs;
revenue recognition;
pension and postretirement benefits;
multi-employer pension plan withdrawal liability;
risk management programs; and
income taxes.
These critical accounting estimates are discussed in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2013.
RECLASSIFICATIONS
Changes have been made to the December 31, 2013 presentation of other non-current liabilities disclosed in Note 7 to conform to the current period's presentation. These changes had no impact to total other non-current liabilities as of December 31, 2013.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) ("ASU 2014-08"). The amendments in ASU 2014-08 provide guidance for the recognition and disclosure of discontinued operations. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company does not anticipate a material impact to the Company's financial position, results of operations or cash flows as a result of this change.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). 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. ASU 2014-09 provides alternative methods of initial adoption and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is not permitted. The Company is currently evaluating the impact that this standard will have on the consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), to provide guidance on management's responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and to provide related disclosure requirements. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company will not be impacted by this standard.

7

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


RECENTLY ADOPTED PROVISIONS OF U.S. GAAP
In accordance with U.S. GAAP, the following provisions, which had no material impact on the Company's financial position, results of operations or cash flows, were effective as of January 1, 2014:
the requirement to provide disclosures related to obligations resulting from joint and several liability arrangements from which the total amount of the obligation is fixed at the reporting date; and
the requirement related to the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists.
2.
Inventories
Inventories as of September 30, 2014 and December 31, 2013 consisted of the following (in millions):
 
September 30,
 
December 31,
 
2014
 
2013
Raw materials
$
64

 
$
86

Spare parts
18

 
22

Work in process
5

 
4

Finished goods
140

 
122

Inventories at first in first out cost
227

 
234

Reduction to last in first out ("LIFO") cost
(36
)
 
(34
)
Inventories
$
191

 
$
200


Approximately $147 million and $154 million of the Company's inventory was accounted for under the LIFO method of accounting as of September 30, 2014 and December 31, 2013, respectively. The reduction to LIFO cost reflects the excess of the current cost of LIFO inventories as of September 30, 2014 and December 31, 2013, over the amount at which these inventories were valued on the unaudited Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2014, there was no LIFO inventory liquidation. For the three and nine months ended September 30, 2013, a LIFO inventory liquidation increased the Company's gross profit by $7 million and $24 million, respectively.

8

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


3.
Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2014 and the year ended December 31, 2013, by reporting unit, are as follows (in millions):
 
Beverage Concentrates
 
WD Reporting Unit(1)
 
DSD Reporting Unit(1)
 
Latin America Beverages
 
Total
Balance as of January 1, 2013
 
 
 
 
 
 
 
 
 
Goodwill
$
1,732

 
$
1,220

 
$
180

 
$
31

 
$
3,163

Accumulated impairment losses

 

 
(180
)
 

 
(180
)
 
1,732

 
1,220

 

 
31

 
2,983

Acquisition activity(2)

 

 
5

 

 
5

Balance as of December 31, 2013
 
 
 
 
 
 
 
 
 
Goodwill
1,732

 
1,220

 
185

 
31

 
3,168

Accumulated impairment losses

 

 
(180
)
 

 
(180
)
 
1,732

 
1,220

 
5

 
31

 
2,988

Foreign currency impact

 

 

 
(1
)
 
(1
)
Balance as of September 30, 2014
 
 
 
 
 
 
 
 
 
Goodwill
1,732

 
1,220

 
185

 
30

 
3,167

Accumulated impairment losses

 

 
(180
)
 

 
(180
)
 
$
1,732

 
$
1,220

 
$
5

 
$
30

 
$
2,987

____________________________
(1)
The Packaged Beverages segment is comprised of two reporting units, the Direct Store Delivery ("DSD") system and the Warehouse Direct ("WD") system.
(2)
The acquisition activity represents the goodwill associated with the purchase of DP/7UP Bottling Company of the West in 2013.

9

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


The net carrying amounts of intangible assets other than goodwill as of September 30, 2014 and December 31, 2013 are as follows (in millions):
 
September 30, 2014
 
December 31, 2013
 
Gross
 
Accumulated
 
Net
 
Gross
 
Accumulated
 
Net
 
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
Brands(1)
$
2,649

 
$

 
$
2,649

 
$
2,652

 
$

 
$
2,652

Distribution rights
24

 

 
24

 
24

 

 
24

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Brands
29

 
(27
)
 
2

 
29

 
(27
)
 
2

Distribution rights
13

 
(4
)
 
9

 
12

 
(3
)
 
9

Customer relationships
76

 
(72
)
 
4

 
76

 
(69
)
 
7

Bottler agreements
19

 
(19
)
 

 
19

 
(19
)
 

Total
$
2,810

 
$
(122
)
 
$
2,688

 
$
2,812

 
$
(118
)
 
$
2,694

____________________________
(1)
For the nine months ended September 30, 2014, brands with indefinite lives decreased due to $3 million change in foreign currency translation.
As of September 30, 2014, the weighted average useful life of intangible assets with finite lives was 10 years for distribution rights, brands, customer relationships and in total. Amortization expense for intangible assets was $2 million and $4 million for the three and nine months ended September 30, 2014, respectively, and $1 million and $4 million for the three and nine months ended September 30, 2013, respectively.
Amortization expense of these intangible assets over the remainder of 2014 and the next four years is expected to be the following (in millions):
Year
Aggregate Amortization Expense
October 1, 2014 through December 31, 2014
$
1

2015
6

2016
3

2017
1

2018
1

The Company 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. DPS 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, 2014.

10

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


4.
Prepaid Expenses and Other Current Assets and Other Current Liabilities
The table below details the components of prepaid expenses and other current assets and other current liabilities as of September 30, 2014 and December 31, 2013 (in millions):
 
September 30,
 
December 31,
 
2014
 
2013
Prepaid expenses and other current assets:
 
 
 
Customer incentive programs
$
41

 
$
24

Derivative instruments
16

 
21

Current assets held for sale
10



Other
51

 
33

Total prepaid expenses and other current assets
$
118

 
$
78

Other current liabilities:
 
 
 
Customer rebates and incentives
$
219

 
$
214

Accrued compensation
105

 
107

Insurance liability
47

 
47

Interest accrual and interest rate swap liability
40

 
26

Dividends payable
80

 
75

Other
123

 
126

Total other current liabilities
$
614

 
$
595

5.
Debt
The following table summarizes the Company's long-term obligations as of September 30, 2014 and December 31, 2013 (in millions):
 
September 30,
 
December 31,
 
2014
 
2013
Senior unsecured notes(1)
$
2,482

 
$
2,453

Capital lease obligations(2)
59

 
56

Subtotal
2,541

 
2,509

Less — current portion
(2
)
 
(1
)
Long-term obligations
$
2,539

 
$
2,508

____________________________
(1)
The carrying amount includes the unamortized net discount on debt issuances and adjustments of $11 million and $18 million as of September 30, 2014 and December 31, 2013, respectively, related to the change in the fair value of interest rate swaps designated as fair value hedges. See Note 6 for further information regarding derivatives.
(2)
Capital lease obligations, primarily related to manufacturing facilities, totaled $59 million and $56 million as of September 30, 2014 and December 31, 2013, respectively.

11

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


The following table summarizes the Company's short-term borrowings and current portion of long-term obligations as of September 30, 2014 and December 31, 2013 (in millions):
 
September 30,
 
December 31,
 
2014
 
2013
Commercial paper
$

 
$
65

Current portion of long-term obligations
2

 
1

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

 
$
66

SENIOR UNSECURED NOTES 
The Company's senior unsecured notes consisted of the following (in millions):
 
 
 
 
 
 
Principal Amount
 
Carrying Amount
 
 
 
 
 
 
September 30,
 
September 30,
 
December 31,
Issuance
 
Maturity Date
 
Rate
 
2014
 
2014
 
2013
2016 Notes
 
January 15, 2016
 
2.90%
 
$
500

 
$
500

 
$
500

2018 Notes
 
May 1, 2018
 
6.82%
 
724

 
724

 
724

2019 Notes
 
January 15, 2019
 
2.60%
 
250

 
249

 
248

2020 Notes
 
January 15, 2020
 
2.00%
 
250

 
243

 
241

2021 Notes
 
November 15, 2021
 
3.20%
 
250

 
246

 
241

2022 Notes
 
November 15, 2022
 
2.70%
 
250

 
256

 
247

2038 Notes
 
May 1, 2038
 
7.45%
 
250

 
264

 
252

 
 
 
 
 
 
$
2,474

 
$
2,482

 
$
2,453

COMMERCIAL PAPER PROGRAM
On December 10, 2010, the Company entered into a 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 $500 million. The program is supported by a $500 million revolving line of credit (the "Revolver"), which is discussed below. Outstanding Commercial Paper reduces the amount of borrowing capacity available under the Revolver and outstanding amounts under the Revolver reduce the Commercial Paper availability. As of September 30, 2014, the Company had no outstanding Commercial Paper with maturities of 90 days or less. As of December 31, 2013, the Company had outstanding Commercial Paper of $65 million with maturities of 90 days or less with a weighted average interest rate of 0.26%.
UNSECURED CREDIT AGREEMENT
The following table provides amounts utilized and available under the Revolver and each sublimit arrangement type as of September 30, 2014 (in millions):
 
Amount Utilized
 
Balances Available
Revolver
$

 
$
499

Letters of credit
1

 
74

Swingline advances

 
50

An unused commitment fee is payable quarterly to the lenders on the unused portion of the commitments of the Revolver equal to 0.08% to 0.20% per annum, depending upon the Company's debt ratings. There were no significant unused commitment fees incurred during the three and nine months ended September 30, 2014 and 2013
As of September 30, 2014, the Company was in compliance with all financial covenant requirements relating to its unsecured credit agreement.

12

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


SHELF REGISTRATION STATEMENT
On February 7, 2013, the Company's Board of Directors (the "Board") authorized the Company to issue up to $1,500 million of securities from time to time. Subsequently, the Company filed a "well-known seasoned issuer" shelf registration statement with the Securities and Exchange Commission, effective May 23, 2013, which registered an indeterminable amount of securities for future sales. As of September 30, 2014, the Company had not issued any securities under this shelf registration statement.
LETTERS OF CREDIT FACILITIES
In addition to the portion of the Revolver reserved for issuance of letters of credit, the Company has incremental letters of credit facilities. Under these facilities, $140 million is available for the issuance of letters of credit, $63 million of which was utilized as of September 30, 2014 and $77 million of which remains available for use.
6. Derivatives
DPS is exposed to market risks arising from adverse changes in:
interest rates;
foreign exchange rates; and
commodity prices affecting the cost of raw materials and fuels.
The Company manages these risks through a variety of strategies, including the use of interest rate contracts, foreign exchange forward contracts, commodity forward and future contracts and supplier pricing agreements. DPS does not hold or issue derivative financial instruments for trading or speculative purposes.
The Company formally designates and accounts for certain interest rate contracts and foreign exchange forward contracts that meet established accounting criteria under U.S. GAAP as either fair value or cash flow hedges. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is recorded, net of applicable taxes, in Accumulated Other Comprehensive Loss ("AOCL"), a component of Stockholders' Equity in the unaudited Condensed Consolidated Balance Sheets. When net income is affected by the variability of the underlying transaction, the applicable offsetting amount of the gain or loss from the derivative instrument deferred in AOCL is reclassified to net income and is reported as a component of the unaudited Condensed Consolidated Statements of Income. For derivative instruments that are designated and qualify as fair value hedges, the effective change in the fair value of the instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized immediately in current-period earnings. For derivatives that are not designated or are de-designated as a hedging instrument, the gain or loss on the instrument is recognized in earnings in the period of change.
Certain interest rate contracts qualify for the "shortcut" method of accounting for hedges under U.S. GAAP. Under the shortcut method, the hedges are assumed to be perfectly effective and no ineffectiveness is recorded in earnings. For all other designated hedges, the Company assesses whether the derivative instrument is effective in offsetting the changes in fair value or variability of cash flows at the inception of the derivative contract. DPS measures hedge ineffectiveness on a quarterly basis throughout the designated period. Changes in the fair value of the derivative instrument that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period are recorded in earnings each period.
If a fair value or cash flow hedge were to cease to qualify for hedge accounting, or were terminated, the derivatives would continue to be carried on the balance sheet at fair value until settled and hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCL would be reclassified to earnings at that time.
INTEREST RATES 
Fair Value Hedges
The Company is exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates and manages these risks through the use of receive-fixed, pay-variable interest rate swaps.

13

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


In December 2010, the Company entered into an interest rate swap having a notional amount of $100 million and maturing in May 2038 in order to effectively convert a portion of the 2038 Notes from fixed-rate debt to floating-rate debt and designated it as a fair value hedge. The assessment of hedge effectiveness is made by comparing the cumulative change in the fair value of the hedged item attributable to changes in the benchmark interest rate with the cumulative changes in the fair value of the interest rate swap, with any ineffectiveness recorded in earnings as interest expense during the period incurred. As of September 30, 2014 and December 31, 2013, the impact of the fair value hedge on the 2038 Notes increased the carrying value by $14 million and $2 million, respectively.
In November 2011, the Company entered into four interest rate swaps having an aggregate notional amount of $250 million and durations ranging from seven to ten years in order to convert fixed-rate, long-term debt to floating rate debt. These swaps were entered into upon the issuance of the 2019 and 2021 Notes, and were accounted for as fair value hedges and qualified for the shortcut method of accounting under U.S. GAAP. As of September 30, 2014 and December 31, 2013, the impact of the fair value hedge on the 2019 and 2021 Notes decreased the carrying value by $5 million and $11 million, respectively.
In November 2012, the Company entered into five interest rate swaps having an aggregate notional amount of $120 million and maturing in January 2020 in order to effectively convert fixed-rate, long-term debt to floating rate debt. These swaps were entered into upon the issuance of the 2020 Notes, and were accounted for as fair value hedges and qualified for the shortcut method of accounting under U.S. GAAP. As of September 30, 2014 and December 31, 2013, the impact of the fair value hedge on the 2020 Notes decreased the carrying value by $5 million and $7 million, respectively.
In December 2013, the Company entered into four interest rate swaps having an aggregate notional amount of $250 million and maturing in November 2022 in order to effectively convert all of the 2022 Notes from fixed-rate debt to floating-rate debt and designated them as fair value hedges. The assessment of hedge effectiveness is made by comparing the cumulative change in the fair value of the hedged item attributable to changes in the benchmark interest rate with the cumulative changes in the fair value of the interest rate swap, with any ineffectiveness recorded in earnings as interest expense during the period incurred. As of September 30, 2014 and December 31, 2013, the impact of the fair value hedges on the 2022 Notes increased the carrying value by $7 million and decreased the carrying value by $2 million, respectively.
FOREIGN EXCHANGE
Cash Flow Hedges
The Company's Canadian business purchases its inventory through transactions denominated and settled in U.S. dollars, a currency different from the functional currency of the Canadian business. These inventory purchases are subject to exposure from movements in exchange rates. During the three and nine months ended September 30, 2014 and 2013, the Company utilized foreign exchange forward contracts designated as cash flow hedges to manage the exposures resulting from changes in these foreign currency exchange rates. The intent of these foreign exchange contracts is to provide predictability in the Company's overall cost structure. These foreign exchange contracts, carried at fair value, have maturities between one and three months as of September 30, 2014. The Company had outstanding foreign exchange forward contracts with notional amounts of $11 million and $45 million as of September 30, 2014 and December 31, 2013, respectively.
COMMODITIES
Economic Hedges
DPS centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through forward and future contracts. The intent of these contracts is to provide a certain level of predictability in the Company's overall cost structure. During the three and nine months ended September 30, 2014 and 2013, the Company held forward and future contracts that economically hedged certain of its risks. In these cases, 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 net income 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 operating profit ("SOP"). The total notional values of derivatives related to economic hedges of this type were $159 million and $179 million as of September 30, 2014 and December 31, 2013, respectively.

14

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


FAIR VALUE OF DERIVATIVE INSTRUMENTS
The following table summarizes the location of the fair value of the Company's derivative instruments within the unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (in millions):
 
Balance Sheet Location
 
September 30,
2014
 
December 31,
2013
Assets:
 
 
 
 
 
Derivative instruments designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Interest rate contracts(1)
Prepaid expenses and other current assets
 
$
14

 
$
17

Foreign exchange forward contracts
Prepaid expenses and other current assets
 
1

 
3

Interest rate contracts
Other non-current assets
 
11

 

Derivative instruments not designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Commodity contracts
Prepaid expenses and other current assets
 
1

 
1

Commodity contracts
Other non-current assets
 
1

 

Total assets
 
 
$
28

 
$
21

Liabilities:
 
 
 
 
 
Derivative instruments designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Interest rate contracts
Other non-current liabilities
 
$
14

 
$
34

Derivative instruments not designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Commodity contracts
Other current liabilities
 
3

 
13

Commodity contracts
Other non-current liabilities
 
1

 

Total liabilities
 
 
$
18

 
$
47

____________________________
(1)
Interest rate contracts as of September 30, 2014 did not include any offsetting amounts. Interest rate contracts as of December 31, 2013 include gross and offsetting amounts of $19 million and $2 million, respectively. These contracts are subject to a netting provision included within the counterparty agreements whereby the Company pays interest either quarterly or semi-annually and receives interest payments semi-annually. These payables and receivables are netted as appropriate.

15

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


IMPACT OF CASH FLOW HEDGES
The following table presents the impact of derivative instruments designated as cash flow hedging instruments under U.S. GAAP to the unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (in millions):
 
Amount of Gain (Loss) Recognized in Comprehensive Income
 
Amount of Gain (Loss) Reclassified from AOCL into Income
 
Location of Gain (Loss) Reclassified from AOCL into Income
For the three months ended September 30, 2014:
 
 
 
 
 
Interest rate contracts (1) (2)

$

 
$
(2
)
 
Interest expense
Foreign exchange forward contracts

 

 
Cost of sales
Total
$

 
$
(2
)
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2014:
 
 
 
 
 
Interest rate contracts (1) (2)
$

 
$
(6
)
 
Interest expense
Foreign exchange forward contracts
(1
)
 
1

 
Cost of sales
Total
$
(1
)
 
$
(5
)
 
 
 
 
 
 
 
 
For the three months ended September 30, 2013:
 
 
 
 
 
Interest rate contracts (1) (2)

$

 
$
(2
)
 
Interest expense
Foreign exchange forward contracts
(2
)
 
(1
)
 
Cost of sales
Total
$
(2
)
 
$
(3
)
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2013:
 
 
 
 
 
Interest rate contracts (1) (2)
$

 
$
(6
)
 
Interest expense
Foreign exchange forward contracts
2

 
(1
)
 
Cost of sales
Total
$
2

 
$
(7
)
 
 
__________________________
(1) During the fourth quarter of 2011, the Company unwound forward starting swaps associated with the 2019 and 2021 Notes with an aggregate notional amount of $250 million. Upon termination, the Company paid $25 million to the counterparties, which will be amortized to interest expense over the term of the issued debt.
(2) During the fourth quarter of 2012, the Company unwound forward starting swaps associated with the 2020 and 2022 Notes with an aggregate notional amount of $300 million. Upon termination, the Company paid $49 million to the counterparties, which will be amortized to interest expense over the term of the issued debt.
There was no hedge ineffectiveness recognized in earnings for the three and nine months ended September 30, 2014 and 2013 with respect to derivative instruments designated as cash flow hedges. During the next 12 months, the Company expects to reclassify net losses of $7 million from AOCL into net income.

16

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


IMPACT OF FAIR VALUE HEDGES
The following table presents the impact of derivative instruments designated as fair value hedging instruments under U.S. GAAP to the unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013 (in millions):
 
 
Amount of Gain
 
Location of Gain
 
 
Recognized in Income
 
Recognized in Income
For the three months ended September 30, 2014:
 
 
 
 
Interest rate contracts
 
$
4

 
Interest expense
Total
 
$
4

 
 
 
 
 
 
 
For the nine months ended September 30, 2014:
 
 
 
 
Interest rate contracts
 
$
12

 
Interest expense
Total
 
$
12

 
 
 
 
 
 
 
For the three months ended September 30, 2013:
 
 
 
 
Interest rate contracts
 
$
2

 
Interest expense
Total
 
$
2

 
 
 
 
 
 
 
For the nine months ended September 30, 2013:
 
 
 
 
Interest rate contracts
 
$
7

 
Interest expense
Total
 
$
7

 
 
For the nine months ended September 30, 2014, a $1 million benefit due to hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges. There was no hedge ineffectiveness recognized in earnings for the three months ended September 30, 2014. For the nine months ended September 30, 2013, $2 million of hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges. There was no hedge ineffectiveness recognized in earnings with respect to derivative instruments designated as fair value hedges for the three months ended September 30, 2013



17

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


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 for the three and nine months ended September 30, 2014 and 2013 (in millions):
 
 
Amount of Gain (Loss)
 
Location of Gain (Loss)
 
 
Recognized in Income
 
Recognized in Income
For the three months ended September 30, 2014:
 
 
 
 
Commodity contracts(1)
 
$
(3
)
 
Cost of sales
Commodity contracts(1)
 
(6
)
 
SG&A expenses
Total
 
$
(9
)
 
 
 
 
 
 
 
For the nine months ended September 30, 2014:
 
 
 
 
Commodity contracts(1)
 
$
6

 
Cost of sales
Commodity contracts(1)
 
(4
)
 
SG&A expenses
Total
 
$
2

 
 
 
 
 
 
 
For the three months ended September 30, 2013:
 
 
 
 
Commodity contracts(1)
 
$
(2
)
 
Cost of sales
Commodity contracts(1)
 

 
SG&A expenses
Total
 
$
(2
)
 
 
 
 
 
 
 
For the nine months ended September 30, 2013:
 
 
 
 
Commodity contracts(1)
 
$
(17
)
 
Cost of sales
Commodity contracts(1)
 

 
SG&A expenses
Total
 
$
(17
)
 
 
____________________________
(1)
Commodity contracts include both realized and unrealized gains and losses.
Refer to Note 11 for additional information on the valuation of derivative instruments. 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, DPS 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 at least on a quarterly basis.

18

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


7. Other Non-Current Assets and Other Non-Current Liabilities
The table below details the components of other non-current assets and other non-current liabilities as of September 30, 2014 and December 31, 2013 (in millions):
 
September 30,
 
December 31,
 
2014
 
2013
Other non-current assets:
 
 
 
Deferred financing costs, net
$
10

 
$
11

Customer incentive programs
59

 
59

Marketable securities - trading
24

 
21

Derivative instruments
12

 

Assets held for sale

 
1

Other
40

 
35

Total other non-current assets
$
145

 
$
127

Other non-current liabilities:
 
 
 
Long-term payables due to Mondelēz
$
38

 
$
47

Long-term pension and post-retirement liability
24

 
26

Multi-employer pension plan withdrawal liability
57

 
56

Insurance liability
88

 
89

Derivative instruments
15

 
34

Deferred compensation liability
24

 
21

Other
37

 
40

Total other non-current liabilities
$
283

 
$
313

8. Income Taxes
The effective tax rates for the three months ended September 30, 2014 and 2013 were 34.0% and 231.8%, respectively. The primary reason for the change in the tax rates was the conclusion of an Internal Revenue Service ("IRS") audit in the prior year. Due to the completion of the IRS audit for the Company's 2006-2008 federal income tax returns, DPS recognized an income tax benefit of $463 million primarily related to decreasing its liability for unrecognized tax benefits. This impact changed the Company's effective tax rate by 195.5% for the three months ended September 30, 2013.
The effective tax rates for the nine months ended September 30, 2014 and 2013 were 34.5% and (53.1)%, respectively. In addition to the completion of the IRS audit described above, the effective tax rate for the nine months ended September 30, 2013 included the impact of a Canadian law change which reduced amounts amortized for income tax purposes. The conclusion of the IRS audit and the Canadian tax law change impacted the Company’s effective tax rate by 89.1% for the nine months ended September 30, 2013.
Additionally, for the three months and nine months ended September 30, 2014, the current year provision for income taxes included an income tax benefit of $4 million due to the resolution of a tax audit in a foreign jurisdiction.
Refer to Note 9 for additional information on the indemnity expense impact related to the conclusion of the IRS audit and the Canadian tax law change.


19

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


9 . Other Expense, Net
The table below details the components of other expense, net for the three and nine months ended September 30, 2014 and 2013 is as follows (in millions):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Indemnity expense from Mondelēz
$

 
$
430

 
$

 
$
387

Other expense (income)
4

 
(2
)
 
2

 
(3
)
Other expense, net
$
4

 
$
428

 
$
2

 
$
384

The Company has historically recorded indemnification income from Mondelēz under the Tax Sharing and Indemnification Agreement as other expense, net in the unaudited Condensed Consolidated Statements of Income. During the three months ended September 30, 2013, the IRS concluded an audit which included separation-related items and, as a result, the Company recognized $430 million of other expense, net, as DPS no longer anticipates collecting amounts from Mondelēz. For the nine months ended September 30, 2013, this amount was partially offset by a $38 million non-cash reduction of the Company's long-term liability to Mondelēz as a result of a bill enacted by the Canadian government which reduced amounts amortized for income tax purposes. Refer to Note 8 for additional information on the conclusion of the IRS audit.
10. Employee Benefit Plans
The following table sets forth the components of net periodic benefit costs for the Company's pension plans for the three and nine months ended September 30, 2014 and 2013 (in millions):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
1

 
$
1

 
$
2

 
$
2

Interest cost
3

 
3

 
10

 
9

Expected return on assets
(4
)
 
(3
)
 
(11
)
 
(11
)
Recognition of actuarial loss
1

 
1

 
2

 
4

Settlement loss

 
1

 

 
3

Net periodic benefit costs
$
1

 
$
3

 
$
3

 
$
7

The Company contributed $1 million to its pension plans during the nine months ended September 30, 2014. There were no contributions made to its pension plans during the three months ended September 30, 2014.
11. Fair Value
Under U.S. GAAP, 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. U.S. GAAP provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. 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.

20

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


RECURRING FAIR VALUE MEASUREMENTS
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 (in millions):
 
Fair Value Measurements at September 30, 2014
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Level 1
 
Level 2
 
Level 3
Commodity contracts
$

 
$
2

 
$

Interest rate contracts

 
25

 

Foreign exchange forward contracts

 
1

 

Marketable securities - trading
24

 

 

Total assets
$
24

 
$
28

 
$

 
 
 
 
 
 
Commodity contracts
$

 
$
4

 
$

Interest rate contracts

 
14

 

Total liabilities
$

 
$
18

 
$

 
Fair Value Measurements at December 31, 2013
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Level 1
 
Level 2
 
Level 3
Commodity contracts
$

 
$
1

 
$

Interest rate contracts

 
17

 

Foreign exchange forward contracts

 
3

 

Marketable securities - trading
21

 

 

Total assets
$
21

 
$
21

 
$

 
 
 
 
 
 
Commodity contracts
$

 
$
13

 
$

Interest rate contracts

 
34

 

Total liabilities
$

 
$
47

 
$

The fair values of marketable securities are determined using quoted market prices from daily exchange traded markets based on the closing price as of the balance sheet date and are classified as Level 1. The fair values of commodity forward and future contracts, interest rate swap contracts and foreign currency 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 forward and future contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the balance sheet date. Interest rate swap 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 foreign currency forward contracts are valued using quoted forward foreign exchange prices at the reporting date. Therefore, the Company has categorized these contracts as Level 2.
As of September 30, 2014 and December 31, 2013, 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).

21

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


There were no transfers of financial instruments between the three levels of fair value hierarchy during the three and nine months ended September 30, 2014 and 2013.
ESTIMATED FAIR VALUE OF LONG-TERM OBLIGATIONS
The estimated fair values of long-term obligations as of September 30, 2014 and December 31, 2013 are as follows (in millions):
 
September 30, 2014
 
December 31, 2013
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt – 2016 Notes
$
500

 
$
514

 
$
500

 
$
519

Long-term debt – 2018 Notes
724

 
843

 
724

 
856

Long-term debt – 2019 Notes(1)
249

 
254

 
248

 
252

Long-term debt – 2020 Notes(1)
243

 
243

 
241

 
236

Long-term debt – 2021 Notes(1)
246

 
254

 
241

 
241

Long-term debt – 2022 Notes(1)
256

 
240

 
247

 
226

Long-term debt – 2038 Notes(1)
264

 
352

 
252

 
317

____________________________
(1)
The carrying amount includes the unamortized discounts on the issuance of debt and adjustments related to the change in the fair value of interest rate swaps designated as fair value hedges on the 2019, 2020, 2021, 2022 and 2038 Notes. Refer to Note 6 for additional information regarding derivatives. 

Capital leases have been excluded from the calculation of fair value for both 2014 and 2013.
The fair value amounts of long term debt as of September 30, 2014 and December 31, 2013 were based on current market rates available to the Company (Level 2 inputs). 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 at such date.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The fair value amounts for cash and cash equivalents, accounts receivable, net, commercial paper, accounts payable and other current liabilities approximate carrying amounts due to the short maturities of these instruments.
12. Stock-Based Compensation
The Company's Omnibus Stock Incentive Plans of 2008 and 2009 (collectively, the "DPS Stock Plans") provide for various long-term incentive awards, including stock options, restricted stock units ("RSUs") and performance share units ("PSUs").
Stock-based compensation expense is recorded in SG&A expenses in the unaudited Condensed Consolidated Statements of Income. The components of stock-based compensation expense for the three and nine months ended September 30, 2014 and 2013 are presented below (in millions):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Total stock-based compensation expense
$
13

 
$
9

 
$
35

 
$
28

Income tax benefit recognized in the income statement
(4
)
 
(3
)
 
(12
)
 
(9
)
Stock-based compensation expense, net of tax
$
9

 
$
6

 
$
23

 
$
19


22

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


STOCK OPTIONS
The table below summarizes stock option activity for the nine months ended September 30, 2014:
 
Stock Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of January 1, 2014
2,031,833

 
$
37.59

 
7.65
 
$
23

Granted
667,139

 
51.68

 
 
 
 
Exercised
(919,264
)
 
34.79

 
 
 
17

Forfeited or expired

 

 
 
 
 
Outstanding as of September 30, 2014
1,779,708

 
44.31

 
8.24
 
36

Exercisable as of September 30, 2014
523,136

 
38.17

 
7.06
 
14

As of September 30, 2014, there was $6 million of unrecognized compensation cost related to unvested stock options granted under the DPS Stock Plans that is expected to be recognized over a weighted average period of 1.09 years.
RESTRICTED STOCK UNITS    
The table below summarizes RSU activity for the nine months ended September 30, 2014. The fair value of restricted stock units is determined based on the number of units granted and the grant date price of the Company's common stock.
 
RSUs
 
Weighted Average Grant Date Fair Value
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of January 1, 2014
2,139,143

 
$
39.15

 
1.12
 
$
104

Granted
588,144

 
51.74

 
 
 
 
Vested and released
(727,923
)
 
36.51

 
 
 
38

Forfeited
(55,483
)
 
43.40

 
 
 
 
Outstanding as of September 30, 2014
1,943,881

 
43.83

 
1.31
 
125

As of September 30, 2014, there was $42 million of unrecognized compensation cost related to unvested RSUs granted under the DPS Stock Plans that is expected to be recognized over a weighted average period of 1.31 years.
During the nine months ended September 30, 2014, 727,923 shares subject to previously granted RSUs vested. A majority of these vested RSUs were net share settled. The Company withheld 238,784 shares based upon the Company's closing stock price on the vesting date to settle the employees' minimum statutory obligation for the applicable income and other employment taxes. Subsequently, the Company remitted the required funds to the appropriate taxing authorities.
Total payments for the employees' tax obligations to the relevant taxing authorities were $14 million for the nine months ended September 30, 2014 and are reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows. The payments were used for tax withholdings related to the net share settlements of RSUs and dividend equivalent units. The payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.

23

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


PERFORMANCE SHARE UNITS
The table below summarizes PSU activity for the nine months ended September 30, 2014. The fair value of performance share units is determined based on the number of units granted and the grant date price of the Company's common stock.
 
PSUs
 
Weighted Average Grant Date Fair Value
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of January 1, 2014
422,866

 
$
39.88

 
1.26
 
$
21

Granted
154,157

 
51.88

 
 
 
 
Vested and released
(104,165
)
 
36.42

 
 
 
5

Forfeited
(23,014
)
 
36.42

 
 
 
 
Outstanding as of September 30, 2014
449,844

 
44.97

 
1.32
 
29

As of September 30, 2014, there was $13 million of unrecognized compensation cost related to unvested PSUs granted under the DPS Stock Plans that is expected to be recognized over a weighted average period of 1.33 years.
During the nine months ended September 30, 2014, 104,165 shares subject to previously granted PSUs vested. A majority of these vested PSUs were net share settled. The Company withheld 30,944 shares based upon the Company's closing stock price on the vesting date to settle the employees' minimum statutory obligation for the applicable income and other employment taxes. Subsequently, the Company remitted the required funds to the appropriate taxing authorities.
Total payments for the employees' tax obligations to the relevant taxing authorities were $2 million for the nine months ended September 30, 2014 and are reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows. The payments were used for tax withholdings related to the net share settlements of PSUs and dividend equivalent units. The payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.
13. 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. The following table presents the basic and diluted EPS and the Company's basic and diluted shares outstanding for the three and nine months ended September 30, 2014 and 2013 (in millions, except per share data):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Basic EPS:
 
 
 
 
 
 
 
Net income
$
188

 
$
207

 
$
553

 
$
468

Weighted average common shares outstanding
194.8

 
203.3

 
196.4

 
204.0

Earnings per common share — basic
$
0.97

 
$
1.02

 
$
2.81

 
$
2.29

Diluted EPS:
 
 
 
 
 
 
 
Net income
$
188

 
$
207

 
$
553

 
$
468

Weighted average common shares outstanding
194.8

 
203.3

 
196.4

 
204.0

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, RSUs, PSUs and dividend equivalent units
1.4

 
1.4

 
1.4

 
1.5

Weighted average common shares outstanding and common stock equivalents
196.2

 
204.7

 
19