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EX-32.2 - CERTIFICATION OF OUR CFO PURSUANT TO SECTION 906 - Keurig Dr Pepper Inc.dps-ex322_20150331.htm
EX-31.2 - CERTIFICATION OF OUR CFO PURSUANT TO SECTION 302 - Keurig Dr Pepper Inc.dps-ex312_20150331.htm
EX-31.1 - CERTIFICATION OF OUR CEO PURSUANT TO SECTION 302 - Keurig Dr Pepper Inc.dps-ex311_20150331.htm
EX-32.1 - CERTIFICATION OF OUR CEO PURSUANT TO SECTION 906 - Keurig Dr Pepper Inc.dps-ex321_20150331.htm
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Keurig Dr Pepper Inc.dps-ex121_20150331.htm
EXCEL - IDEA: XBRL DOCUMENT - Keurig Dr Pepper Inc.Financial_Report.xls

 
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 March 31, 2015
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 April 20, 2015, there were 191,730,699 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 Months Ended March 31, 2015 and 2014
(Unaudited, in millions, except per share data)

PART I - FINANCIAL INFORMATION
ITEM 1.
Financial Statements (Unaudited)
 
For the
 
Three Months Ended
 
March 31,
 
2015
 
2014
Net sales
$
1,451

 
$
1,398

Cost of sales
602

 
554

Gross profit
849

 
844

Selling, general and administrative expenses
552

 
554

Depreciation and amortization
27

 
29

Other operating expense, net

 
1

Income from operations
270

 
260

Interest expense
27

 
26

Interest income

 
(1
)
Other income, net
(1
)
 
(1
)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
244

 
236

Provision for income taxes
87

 
81

Income before equity in earnings of unconsolidated subsidiaries
157

 
155

Equity in earnings of unconsolidated subsidiaries, net of tax

 

Net income
$
157

 
$
155

Earnings per common share:
 
 
 
Basic
$
0.82

 
$
0.78

Diluted
0.81

 
0.78

Weighted average common shares outstanding:
 
 
 
Basic
193.0

 
197.9

Diluted
194.6

 
199.5

Cash dividends declared per common share
$
0.48

 
$
0.41

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 Months Ended March 31, 2015 and 2014
(Unaudited, in millions)

 
For the
 
Three Months Ended
 
March 31,
 
2015
 
2014
Comprehensive income
$
132

 
$
152

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 March 31, 2015 and December 31, 2014
(Unaudited, in millions, except share and per share data)
 
March 31,
 
December 31,
 
2015
 
2014
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
93

 
$
237

Accounts receivable:
 
 
 
Trade, net
572

 
556

Other
65

 
61

Inventories
228

 
204

Deferred tax assets
73

 
67

Prepaid expenses and other current assets
163

 
86

Total current assets
1,194

 
1,211

Property, plant and equipment, net
1,115

 
1,141

Investments in unconsolidated subsidiaries
13

 
14

Goodwill
2,990

 
2,990

Other intangible assets, net
2,680

 
2,684

Other non-current assets
193

 
159

Non-current deferred tax assets
67

 
74

Total assets
$
8,252

 
$
8,273

Liabilities and Stockholders' Equity
Current liabilities:
 
 
 
Accounts payable
$
350

 
$
289

Deferred revenue
64

 
64

Short-term borrowings and current portion of long-term obligations
504

 
3

Income taxes payable
50

 
10

Other current liabilities
587

 
672

Total current liabilities
1,555

 
1,038

Long-term obligations
2,113

 
2,588

Non-current deferred tax liabilities
828

 
801

Non-current deferred revenue
1,232

 
1,250

Other non-current liabilities
303

 
302

Total liabilities
6,031

 
5,979

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, 192,342,028 and 192,957,696 shares issued and outstanding for 2015 and 2014, respectively
2

 
2

Additional paid-in capital
546

 
658

Retained earnings
1,835

 
1,771

Accumulated other comprehensive loss
(162
)
 
(137
)
Total stockholders' equity
2,221

 
2,294

Total liabilities and stockholders' equity
$
8,252

 
$
8,273

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 Three Months Ended March 31, 2015 and 2014
(Unaudited, in millions)
 
For the
 
Three Months Ended
 
March 31,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
157

 
$
155

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
48

 
50

Amortization expense
8

 
10

Amortization of deferred revenue
(16
)
 
(16
)
Employee stock-based compensation expense
9

 
11

Deferred income taxes
15

 
14

Other, net
(17
)
 
(19
)
Changes in assets and liabilities, net of effects of acquisition:
 
 
 
Trade accounts receivable
(19
)
 
6

Other accounts receivable
(4
)
 
(5
)
Inventories
(26
)
 
(26
)
Other current and non-current assets
(81
)
 
(66
)
Other current and non-current liabilities
(99
)
 
(55
)
Trade accounts payable
67

 
32

Income taxes payable
59

 
38

Net cash provided by operating activities
101

 
129

Investing activities:
 
 
 
Purchase of property, plant and equipment
(20
)
 
(37
)
Purchase of cost method investment
(15
)
 

Proceeds from disposals of property, plant and equipment
1

 

Other, net
(6
)
 
(1
)
Net cash used in investing activities
(40
)
 
(38
)
Financing activities:
 
 
 
Net issuance of commercial paper

 
85

Repurchase of shares of common stock
(135
)
 
(60
)
Cash paid for shares not yet received

 
(90
)
Dividends paid
(79
)
 
(75
)
Tax withholdings related to net share settlements of certain stock awards
(26
)
 
(15
)
Proceeds from stock options exercised
19

 
24

Excess tax benefit on stock-based compensation
19

 
8

Net cash used in financing activities
(202
)
 
(123
)
Cash and cash equivalents — net change from:
 
 
 
Operating, investing and financing activities
(141
)
 
(32
)
Effect of exchange rate changes on cash and cash equivalents
(3
)
 
(1
)
Cash and cash equivalents at beginning of period
237

 
153

Cash and cash equivalents at end of period
$
93

 
$
120

See Note 14 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 Three Months Ended March 31, 2015
(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, 2015
193.0

 
$
2

 
$
658

 
$
1,771

 
$
(137
)
 
$
2,294

Shares issued under employee stock-based compensation plans and other
1.0

 

 

 

 

 

Net income

 

 

 
157

 

 
157

Other comprehensive income

 

 

 

 
(25
)
 
(25
)
Dividends declared, $0.48 per share

 

 
1

 
(93
)
 

 
(92
)
Stock options exercised and stock-based compensation, net of tax of ($19)

 

 
22

 

 

 
22

Common stock repurchases
(1.7
)
 

 
(135
)
 

 

 
(135
)
Balance as of March 31, 2015
192.3

 
$
2

 
$
546

 
$
1,835

 
$
(162
)
 
$
2,221

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.
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, 2014.
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 year ended December 31, 2014, the Company provided 100% financing to a VIE as part of a short term leasing structure 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 March 31, 2015 and December 31, 2014, included a transfer of cash and assignment of the rights to deposits previously made with a manufacturer in prior years. 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;
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, 2014.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, in order to simplify the presentation of debt issuance costs ("ASU 2015-03"). The ASU requires debt issuance costs to be presented on the balance sheet as a direct deduction from the related debt liability rather than an asset. ASU 2015-03 is effective for public companies for annual periods beginning after December 15, 2015, and interim periods thereafter, with early adoption permitted. The guidance also requires retrospective application to all prior periods presented. The Company will early adopt as of December 31, 2015 and does not anticipate a significant impact to the Company's financial position as a result of this change.

7

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


2.
Inventories
Inventories consisted of the following:
 
March 31,
 
December 31,
(in millions)
2015
 
2014
Raw materials
$
94

 
$
92

Spare parts
18

 
18

Work in process
5

 
5

Finished goods
147

 
126

Inventories at first in first out cost
264

 
241

Reduction to last in first out ("LIFO") cost
(36
)
 
(37
)
Inventories
$
228

 
$
204


Approximately $165 million and $151 million of the Company's inventory was accounted for under the LIFO method of accounting as of March 31, 2015 and December 31, 2014, respectively. The reduction to LIFO cost reflects the excess of the current cost of LIFO inventories as of March 31, 2015 and December 31, 2014, over the amount at which these inventories were valued on the unaudited Condensed Consolidated Balance Sheets. For the three months ended March 31, 2015 and 2014, there was no LIFO inventory liquidation.

8

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


3.
Goodwill and Other Intangible Assets
GOODWILL
Changes in the carrying amount of goodwill 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, 2014
 
 
 
 
 
 
 
 
 
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

 

 

 
(3
)
 
(3
)
Acquisition activity(2)

 
2

 
3

 

 
5

Balance as of December 31, 2014
 
 
 
 
 
 
 
 
 
Goodwill
1,732

 
1,222

 
188

 
28

 
3,170

Accumulated impairment losses

 

 
(180
)
 

 
(180
)
 
1,732

 
1,222

 
8

 
28

 
2,990

Foreign currency impact

 

 

 
(1
)
 
(1
)
Acquisition activity(2)

 

 
1

 

 
1

Balance as of March 31, 2015
 
 
 
 
 
 
 
 
 
Goodwill
1,732

 
1,222

 
189

 
27

 
3,170

Accumulated impairment losses

 

 
(180
)
 

 
(180
)
 
$
1,732

 
$
1,222

 
$
9

 
$
27

 
$
2,990

____________________________
(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 Davis Beverage Group, Inc. and Davis Bottling Co, Inc. in 2014.


9

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


INTANGIBLE ASSETS OTHER THAN GOODWILL
The net carrying amounts of intangible assets other than goodwill are as follows:
 
March 31, 2015
 
December 31, 2014
 
Gross
 
Accumulated
 
Net
 
Gross
 
Accumulated
 
Net
(in millions)
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
Brands(1)
$
2,640

 
$

 
$
2,640

 
$
2,643

 
$

 
$
2,643

Distribution rights
27

 

 
27

 
27

 

 
27

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Brands
29

 
(28
)
 
1

 
29

 
(28
)
 
1

Distribution rights
13

 
(5
)
 
8

 
13

 
(4
)
 
9

Customer relationships
76

 
(72
)
 
4

 
76

 
(72
)
 
4

Bottler agreements
19

 
(19
)
 

 
19

 
(19
)
 

Total
$
2,804

 
$
(124
)
 
$
2,680

 
$
2,807

 
$
(123
)
 
$
2,684

____________________________
(1)
For the three months ended March 31, 2015, brands with indefinite lives decreased due to a $3 million change in foreign currency translation.
As of March 31, 2015, the weighted average useful life of intangible assets with finite lives was 11 years in total, consisting of 11 years for distribution rights and 10 years for brands and customer relationships. Amortization expense for intangible assets was $1 million for the three months ended March 31, 2015 and 2014.
Amortization expense of these intangible assets over the remainder of 2015 and the next four years is expected to be the following (in millions):
Year
Aggregate Amortization Expense
April 1, 2015 through December 31, 2015
$
4

2016
3

2017
1

2018
1

2019
1

IMPAIRMENT TESTING
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 March 31, 2015.

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:
 
March 31,
 
December 31,
(in millions)
2015
 
2014
Prepaid expenses and other current assets:
 
 
 
Customer incentive programs
$
74

 
$
18

Derivative instruments
9

 
11

Current assets held for sale
12


12

Other
68

 
45

Total prepaid expenses and other current assets
$
163

 
$
86

Other current liabilities:
 
 
 
Customer rebates and incentives
$
194

 
$
248

Accrued compensation
75

 
127

Insurance liability
47

 
46

Interest accrual
40

 
26

Dividends payable
93

 
79

Derivative instruments
33

 
18

Other
105

 
128

Total other current liabilities
$
587

 
$
672

5.
Debt
The following table summarizes the Company's long-term obligations:
 
March 31,
 
December 31,
(in millions)
2015
 
2014
Senior unsecured notes(1)
$
2,520

 
$
2,505

Capital lease obligations
97

 
86

Subtotal
2,617

 
2,591

Less — current portion
(504
)
 
(3
)
Long-term obligations
$
2,113

 
$
2,588

____________________________
(1)
The carrying amount includes the unamortized net discount on debt issuances and adjustments of $49 million and $34 million as of March 31, 2015 and December 31, 2014, 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.


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:
 
March 31,
 
December 31,
(in millions)
2015
 
2014
Commercial paper
$

 
$

Current portion of long-term obligations:
 
 
 
Senior unsecured notes
500

 

Capital lease obligations
4

 
3

Short-term borrowings and current portion of long-term obligations
$
504

 
$
3

SENIOR UNSECURED NOTES 
The Company's senior unsecured notes consisted of the following:
(in millions)
 
 
 
 
 
Principal Amount
 
Carrying Amount
 
 
 
 
 
 
March 31,
 
March 31,
 
December 31,
Issuance
 
Maturity Date
 
Rate
 
2015
 
2015
 
2014
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

 
251

 
250

2020 Notes
 
January 15, 2020
 
2.00%
 
250

 
247

 
245

2021 Notes
 
November 15, 2021
 
3.20%
 
250

 
252

 
249

2022 Notes
 
November 15, 2022
 
2.70%
 
250

 
267

 
265

2038 Notes
 
May 1, 2038
 
7.45%
 
250

 
279

 
272

 
 
 
 
 
 
$
2,474

 
$
2,520

 
$
2,505

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"). 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 March 31, 2015 and December 31, 2014, the Company had no outstanding Commercial Paper.
UNSECURED CREDIT AGREEMENT
The following table provides amounts utilized and available under the Revolver and each sublimit arrangement type as of March 31, 2015:
(in millions)
Amount Utilized
 
Balances Available
Revolver
$

 
$
499

Letters of credit
1

 
74

Swingline advances

 
50

As of March 31, 2015, 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 ("SEC"), effective May 23, 2013, which registered an indeterminable amount of securities for future sales. As of March 31, 2015, 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 March 31, 2015 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, which are recorded in cost of sales and selling, general and administrative ("SG&A") expenses, respectively.
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.

13

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


INTEREST RATES 
Cash Flow Hedges
During the fourth quarter of 2014, in order to hedge the variability in cash flows from interest rate changes associated with the Company's planned issuances of long-term debt, the Company entered into a forward starting swap agreement with an aggregate notional value of $125 million in order to fix the rate for a portion of a future 30 year unsecured debt issuance before the due date of the 2016 Notes. In January and March of 2015, the Company entered into three forward starting swap agreements to fix the rate for an additional portion of the expected future issuance with an aggregate notional value of $100 million. The forward starting swaps are expected to be unwound at the issuance of the debt.
The effective portion of changes in the fair value of the derivative that is designated as a cash flow hedge is being recorded in AOCL and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Ineffectiveness, if any, related to the Company's changes in estimates about the debt issuance related to the forward starting swap would be recognized directly in earnings as a component of interest expense during the period incurred. During the three months ended March 31, 2015, the Company realized no ineffectiveness as a result of this hedging relationship.
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.
HEDGE OF 2038 NOTES
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. In February 2015, the swap agreement was modified and transferred to another counterparty through a novation transaction. As a result, the Company de-designated the original hedging relationship. Under the original hedging relationship, the $25 million recorded as an increase to debt due to the changes in fair market value of the debt will be amortized into earnings over the remaining term of the 2038 Notes.
In February 2015, the Company then designated the new interest rate swap contract as a fair value hedge with 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. The Company uses regression analysis to assess the prospective and retrospective effectiveness of the hedge relationships and any ineffectiveness is recognized in interest expense during the period incurred.
As of March 31, 2015 and December 31, 2014, the impact of these fair value hedges on the 2038 Notes increased the carrying value by $29 million and $23 million, respectively.
HEDGE OF 2019 AND 2021 NOTES
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 March 31, 2015 and December 31, 2014, the impact of the fair value hedge on the 2019 and 2021 Notes increased the carrying value by $4 million and decreased the carrying value by $1 million, respectively.
HEDGE OF 2020 NOTES
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 March 31, 2015 and December 31, 2014, the impact of the fair value hedge on the 2020 Notes decreased the carrying value by $2 million and $4 million, respectively.

14

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


HEDGE OF 2022 NOTES
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 March 31, 2015 and December 31, 2014, the impact of the fair value hedges on the 2022 Notes increased the carrying value by $18 million and $16 million, respectively.
FOREIGN EXCHANGE
Cash Flow Hedges
The Company's Canadian business purchases its inventory through transactions denominated and settled in United States ("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 months ended March 31, 2015 and 2014, 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 nine months as of March 31, 2015. The Company had outstanding foreign exchange forward contracts with notional amounts of $7 million and $10 million as of March 31, 2015 and December 31, 2014, 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 months ended March 31, 2015 and 2014, 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 $185 million and $160 million as of March 31, 2015 and December 31, 2014, respectively.

15

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:
(in millions)
Balance Sheet Location
 
March 31,
2015
 
December 31,
2014
Assets:
 
 
 
 
 
Derivative instruments designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Interest rate contracts
Prepaid expenses and other current assets
 
$
8

 
$
11

Foreign exchange forward contracts
Prepaid expenses and other current assets
 
1

 

Interest rate contracts
Other non-current assets
 
44

 
29

Total assets
 
 
$
53

 
$
40

Liabilities:
 
 
 
 
 
Derivative instruments designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Interest rate contracts
Other current liabilities
 
$
13

 
$

Interest rate contracts
Other non-current liabilities
 
2

 
9

Derivative instruments not designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Commodity contracts
Other current liabilities
 
20

 
18

Commodity contracts
Other non-current liabilities
 
7

 
8

Total liabilities
 
 
$
42

 
$
35


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:
 
Amount of Gain (Loss) Recognized in
 
Amount of Gain (Loss) Reclassified from AOCL into Income
 
Location of Gain (Loss) Reclassified from AOCL into Income
(in millions)
Other Comprehensive Income ("OCI")
 
 
For the three months ended March 31, 2015:
 
 
 
 
 
Interest rate contracts
$
(11
)
 
$
(2
)
 
Interest expense
Total
$
(11
)
 
$
(2
)
 
 
 
 
 
 
 
 
For the three months ended March 31, 2014:
 
 
 
 
 
Interest rate contracts
$

 
$
(2
)
 
Interest expense
Foreign exchange forward contracts
1

 
1

 
Cost of sales
Total
$
1

 
$
(1
)
 
 
There was no hedge ineffectiveness recognized in earnings for the three months ended March 31, 2015 and 2014 with respect to derivative instruments designated as cash flow hedges. During the next 12 months, the Company expects to reclassify pre-tax 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:
 
 
Amount of Gain
 
Location of Gain
(in millions)
 
Recognized in Income
 
Recognized in Income
For the three months ended March 31, 2015:
 
 
 
 
Interest rate contracts(1)
 
$
4

 
Interest expense
Total
 
$
4

 
 
 
 
 
 
 
For the three months ended March 31, 2014:
 
 
 
 
Interest rate contracts
 
$
4

 
Interest expense
Total
 
$
4

 
 
____________________________
(1)    Interest expense for the three months ended March 31, 2015 includes amortization of the forward starting swap associated with the 2038 Notes, which was de-designated in February 2015.
For the three months ended March 31, 2015 and 2014, a $1 million benefit due to hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges.
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:
 
 
Amount of Gain (Loss)
 
Location of Gain (Loss)
(in millions)
 
Recognized in Income
 
Recognized in Income
For the three months ended March 31, 2015:
 
 
 
 
Commodity contracts(1)
 
$
1

 
Cost of sales
Commodity contracts(1)
 
(6
)
 
SG&A expenses
Total
 
$
(5
)
 
 
 
 
 
 
 
For the three months ended March 31, 2014:
 
 
 
 
Commodity contracts(1)
 
$
11

 
Cost of sales
Total
 
$
11

 
 
____________________________
(1)
Commodity contracts include both realized and unrealized gains and losses.
Refer to Note 10 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 upon execution of a hedging transaction and at least on a quarterly basis.

17

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:
 
March 31,
 
December 31,
(in millions)
2015
 
2014
Other non-current assets:
 
 
 
Deferred financing costs, net
$
8

 
$
9

Customer incentive programs
55

 
55

Marketable securities - trading
31

 
25

Derivative instruments
44

 
29

Cost method investments(1)
15

 

Other
40

 
41

Total other non-current assets
$
193

 
$
159

Other non-current liabilities:
 
 
 
Long-term payables due to Mondelēz International, Inc.
$
34

 
$
37

Long-term pension and post-retirement liability
43

 
44

Multi-employer pension plan withdrawal liability
57

 
57

Insurance liability
95

 
90

Derivative instruments
9

 
17

Deferred compensation liability
31

 
25

Other
34

 
32

Total other non-current liabilities
$
303

 
$
302

____________________________
(1)
During the quarter ended March 31, 2015, the Company acquired a minor interest in an allied brand for $15 million. This investment is accounted for as a cost-method investment, as the Company owns a minor interest and does not have the ability to exercise significant influence over operating and financial policies of the entity. This cost method investment does not have a readily determinable fair value as the entity is not publicly traded.
8. Income Taxes
The effective tax rates for the three months ended March 31, 2015 and 2014 were 35.7% and 34.3%, respectively. The prior year provision for income taxes included an income tax benefit of $2 million from revaluing our U.S. deferred liabilities due to the favorable impact of a New York State law change.

18

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


9. Employee Benefit Plans
The following table sets forth the components of net periodic benefit costs for the Company's pension plans:
 
For the Three Months Ended March 31,
(in millions)
2015
 
2014
Service cost
$
1

 
$
1

Interest cost
2

 
3

Expected return on assets
(2
)
 
(4
)
Recognition of actuarial loss
1

 
1

Net periodic benefit costs
$
2

 
$
1

The Company did not make any contributions to its pension plans during the three months ended March 31, 2015. The Company contributed $1 million to its pension plans during the three months ended March 31, 2014.
10. 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.
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:
 
Fair Value Measurements at March 31, 2015
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
(in millions)
Level 1
 
Level 2
 
Level 3
Interest rate contracts
$

 
$
52

 
$

Foreign exchange forward contracts

 
1

 

Marketable securities - trading
31

 

 

Total assets
$
31

 
$
53

 
$

 
 
 
 
 
 
Commodity contracts
$

 
$
27

 
$

Interest rate contracts

 
15

 

Total liabilities
$

 
$
42

 
$


19

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


 
Fair Value Measurements at December 31, 2014
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
(in millions)
Level 1
 
Level 2
 
Level 3
Interest rate contracts
$

 
$
40

 
$

Marketable securities - trading
25

 

 

Total assets
$
25

 
$
40

 
$

 
 
 
 
 
 
Commodity contracts
$

 
$
26

 
$

Interest rate contracts

 
9

 

Total liabilities
$

 
$
35

 
$

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 London Interbank Offered Rate 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 March 31, 2015 and December 31, 2014, 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).
There were no transfers of financial instruments between the three levels of fair value hierarchy during the three months ended March 31, 2015 and 2014.
ESTIMATED FAIR VALUE OF LONG-TERM OBLIGATIONS
The estimated fair values of long-term obligations are as follows:
 
March 31, 2015
 
December 31, 2014
(in millions)
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt – 2016 Notes
$
500

 
$
508

 
$
500

 
$
510

Long-term debt – 2018 Notes
724

 
835

 
724

 
835

Long-term debt – 2019 Notes(1)
251

 
257

 
250

 
253

Long-term debt – 2020 Notes(1)
247

 
249

 
245

 
244

Long-term debt – 2021 Notes(1)
252

 
261

 
249

 
255

Long-term debt – 2022 Notes(1)
267

 
246

 
265

 
244

Long-term debt – 2038 Notes(1)
279

 
367

 
272

 
363

____________________________
(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 lease obligations have been excluded from the calculation of fair value for both 2015 and 2014.

20

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


The fair value amounts of long term debt as of March 31, 2015 and December 31, 2014 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.
11. Stock-Based Compensation
The Company's Omnibus Stock Incentive Plan of 2009 ( "DPS Stock Plan") provides 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 are presented below:
 
For the Three Months Ended March 31,
(in millions)
2015
 
2014
Total stock-based compensation expense
$
9

 
$
11

Income tax benefit recognized in the income statement
(3
)
 
(4
)
Stock-based compensation expense, net of tax
$
6

 
$
7

STOCK OPTIONS
The table below summarizes stock option activity for the three months ended March 31, 2015:
 
Stock Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of January 1, 2015
1,529,235

 
$
45.27

 
8.20
 
$
40

Granted
427,698

 
79.20

 
 
 
 
Exercised
(452,609
)
 
42.93

 
 
 
16

Forfeited or expired

 

 
 
 
 
Outstanding as of March 31, 2015
1,504,324

 
55.62

 
8.61
 
35

Exercisable as of March 31, 2015
432,798

 
42.46

 
7.50
 
16

As of March 31, 2015, there was $7 million of unrecognized compensation cost related to unvested stock options granted under the DPS Stock Plan that is expected to be recognized over a weighted average period of 1.49 years.

21

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


RESTRICTED STOCK UNITS    
The table below summarizes RSU activity for the three months ended March 31, 2015. The fair value of RSUs 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, 2015
1,925,934

 
$
43.85

 
1.08
 
$
138

Granted
377,517

 
79.19

 
 
 
 
Vested and released
(719,355
)
 
37.81

 
 
 
57

Forfeited
(5,897
)
 
47.22

 
 
 
 
Outstanding as of March 31, 2015
1,578,199

 
55.04

 
1.75
 
124

As of March 31, 2015, there was $57 million of unrecognized compensation cost related to unvested RSUs granted under the DPS Stock Plan that is expected to be recognized over a weighted average period of 1.71 years.
During the three months ended March 31, 2015, 719,355 shares subject to previously granted RSUs vested. A majority of these vested RSUs were net share settled. The Company withheld 243,173 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 $21 million and $13 million for the three months ended March 31, 2015 and 2014, respectively, 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 ("DEUs"). 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.
PERFORMANCE SHARE UNITS
The table below summarizes PSU activity for the three months ended March 31, 2015. The fair value of PSUs 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, 2015
444,281

 
$
44.97

 
1.07
 
$
32

Granted
186,922

 
66.12

 
 
 
 
Vested and released
(188,675
)
 
37.80

 
 
 
15

Forfeited

 

 
 
 
 
Outstanding as of March 31, 2015
442,528

 
56.96

 
1.63
 
35

As of March 31, 2015, there was $21 million of unrecognized compensation cost related to unvested PSUs granted under the DPS Stock Plan that is expected to be recognized over a weighted average period of 1.62 years.
During the three months ended March 31, 2015, 188,675 shares subject to previously granted PSUs vested. A majority of these vested PSUs were net share settled. The Company withheld 62,208 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.

22

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


Total payments for the employees' tax obligations to the relevant taxing authorities were $5 million and $2 million for the three months ended March 31, 2015 and 2014, respectively, 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 DEUs. 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.
12. 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 Months Ended March 31,
(in millions, except per share data)
2015
 
2014
Basic EPS:
 
 
 
Net income
$
157

 
$
155

Weighted average common shares outstanding
193.0

 
197.9

Earnings per common share — basic
$
0.82

 
$
0.78

Diluted EPS:
 
 
 
Net income
$
157

 
$
155

Weighted average common shares outstanding
193.0

 
197.9

Effect of dilutive securities:
 
 
 
Stock options, RSUs, PSUs and dividend equivalent units
1.6

 
1.6

Weighted average common shares outstanding and common stock equivalents
194.6

 
199.5

Earnings per common share — diluted
$
0.81

 
$
0.78

Stock options, RSUs, PSUs and DEUs totaling 0.3 million and 0.8 million shares were excluded from the diluted weighted average shares outstanding for the three months ended March 31, 2015 and 2014, respectively, as they were not dilutive.
Under the terms of our RSU and PSU agreements, unvested RSU and PSU awards contain forfeitable rights to dividends and DEUs. Because the dividend equivalent units are forfeitable, they are defined as non-participating securities. As of March 31, 2015, there were 70,126 DEUs, which will vest at the time that the underlying RSU or PSU vests.
During 2009, 2010 and 2011, the Board authorized a total aggregate share repurchase plan of $3 billion. In February 2015, the Board authorized an additional $1 billion of share repurchases. The Company repurchased and retired 1.7 million shares of common stock valued at approximately $135 million and 1.2 million shares of common stock valued at approximately $60 million for the three months ended March 31, 2015 and 2014, respectively. These amounts were recorded as a reduction of equity, primarily additional paid-in capital in the unaudited Condensed Consolidated Statement of Equity. As of March 31, 2015, $1,037 million remains available for share repurchases under the Board's authorization.

23

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


13. Accumulated Other Comprehensive Loss
The following table provides a summary of changes in the balances of each component of AOCL, net of taxes:
 (in millions)
Foreign Currency Translation
 
Change in Pension Liability
 
Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance as of January 1, 2014
$
(17
)
 
$
(33
)
 
$
(38
)
 
$
(88
)
OCI before reclassifications
(44
)
 
(19
)
 
(2
)
 
(65
)
Amounts reclassified from AOCL

 
12

 
4

 
16

Net current year OCI
(44
)
 
(7
)
 
2

 
(49
)
Balance as of December 31, 2014
(61
)
 
(40
)
 
(36
)
 
(137
)
OCI before reclassifications
(21
)
 

 
(6
)
 
(27
)
Amounts reclassified from AOCL

 
1

 
1

 
2

Net current year OCI
(21
)
 
1

 
(5
)
 
(25
)
Balance as of March 31, 2015
$
(82
)
 
$
(39
)
 
$
(41
)
 
$
(162
)
The following table presents the amount of loss reclassified from AOCL into the unaudited Condensed Consolidated Statements of Income:
 
 
 
For the Three Months Ended March 31,
 (in millions)
Location of Loss Reclassified from AOCL into Income
 
2015
 
2014
Loss on cash flow hedges:
 
 
 
 
 
Interest rate contracts
Interest expense
 
$
(2
)
 
$
(2
)
Foreign exchange forward contracts
Cost of sales
 

 
1

Total
 
 
(2
)
 
(1
)
Income tax expense
 
 
(1
)
 
(1
)
Total
 
 
$
(1
)
 
$

 
 
 
 
 
 
Defined benefit pension and postretirement plan items:
 
 
 
 
 
Amortization of prior service costs
SG&A expenses
 
$

 
$

Amortization of actuarial losses, net
SG&A expenses
 
(1
)
 
(1
)
Settlement loss
SG&A expenses
 

 

Total
 
 
(1
)
 
(1
)
Income tax expense
 
 

 

Total
 
 
$
(1
)
 
$
(1
)
Total reclassifications
 
 
$
(2
)
 
$
(1
)

24

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


14. Supplemental Cash Flow Information
The following table details supplemental cash flow disclosures of non-cash investing and financing activities: 
 
For the Three Months Ended March 31,
 (in millions)
2015
 
2014
Supplemental cash flow disclosures of non-cash investing and financing activities:
 
 
 
Dividends declared but not yet paid
$
93

 
$
81

Capital expenditures included in accounts payable and other current liabilities
7

 
11

Capital lease additions
12

 

Supplemental cash flow disclosures:
 
 
 
Interest paid
$
12

 
$
13

Income taxes paid
11

 
33

15. Commitments and Contingencies
LEGAL MATTERS
The Company is occasionally subject to litigation or other legal proceedings. The Company does not believe that the outcome of these, or any other, pending legal matters, individually or collectively, will have a material adverse effect on the results of operations, financial condition or liquidity of the Company.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company operates many manufacturing, bottling and distribution facilities. In these and other aspects of the Company's business, it is subject to a variety of federal, state and local environmental, health and safety laws and regulations. The Company maintains environmental, health and safety policies and a quality, environmental, health and safety program designed to ensure compliance with applicable laws and regulations. However, the nature of the Company's business exposes it to the risk of claims with respect to environmental, health and safety matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims.
The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as the Superfund law, as well as similar state laws, generally impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. In October 2008, DPS was notified by the Environmental Protection Agency that it is a potentially responsible party for study and cleanup costs at a Superfund site in New Jersey. Investigation and remediation costs are yet to be determined, therefore no reasonable estimate exists on which to base a loss accrual. Through March 31, 2015, the Company has paid approximately $750,000 since the notification for DPS' allocation of costs related to the study for this site.
16. Segments
As of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014, the Company's operating structure consisted of the following three operating segments:
The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands.
The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third party brands, through both DSD and WD.
The Latin America Beverages segment reflects sales in the Mexico, Caribbean, and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.
Segment results are based on management reports. Net sales and SOP are the significant financial measures used to assess the operating performance of the Company's operating segments.

25

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


Information about the Company's operations by operating segment is as follows:
 
For the Three Months Ended
 
March 31,
(in millions)
2015
 
2014
Segment Results – Net sales
 
 
 
Beverage Concentrates
$
285

 
$
281

Packaged Beverages
1,053

 
1,006

Latin America Beverages
113

 
111

Net sales
$
1,451

 
$
1,398

 
For the Three Months Ended March 31,
 (in millions)
2015
 
2014
Segment Results – SOP
 
 
 
Beverage Concentrates
$
183

 
$
174

Packaged Beverages
141

 
131

Latin America Beverages
17

 
13

Total SOP
341

 
318

Unallocated corporate costs
71

 
57

Other operating expense, net

 
1

Income from operations
270

 
260

Interest expense, net
27

 
25

Other income, net
(1
)
 
(1
)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
$
244

 
$
236

The Company presents segment information in accordance with U.S. GAAP, which establishes reporting and disclosure standards for an enterprise's operating segments. Operating segments are defined as components of an enterprise that are businesses, for which separate financial information is available and for which the financial information is regularly reviewed by the Company's leadership team.
17. Guarantor and Non-Guarantor Financial Information
The Company's 2016, 2018, 2019, 2020, 2021, 2022 and 2038 Notes (collectively, the "Notes") are fully and unconditionally guaranteed by substantially all of the Company's existing and future direct and indirect domestic subsidiaries (except two immaterial subsidiaries associated with charitable purposes) (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by the Company and jointly and severally guarantee, subject to the release provisions described below, the Company's obligations under the Notes. None of the Company's subsidiaries organized outside of the U.S. or immaterial subsidiaries used for charitable purposes (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of other indebtedness of the Company, the Company's exercise of its legal defeasance option with respect to the Notes and the discharge of the Company's obligations under the applicable indenture.
The following schedules present the financial information for Dr Pepper Snapple Group, Inc. (the "Parent"), Guarantors and Non-Guarantors. The consolidating schedules are provided in accordance with the reporting requirements of Rule 3-10 under SEC Regulation S-X for guarantor subsidiaries.

26

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


 
Condensed Consolidating Statements of Income
 
For the Three Months Ended March 31, 2015
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Net sales
$