Attached files

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EX-31.2 - CERTIFICATION OF OUR CFO PURSUANT TO SECTION 302 - Keurig Dr Pepper Inc.dps-ex312_20160930.htm
EX-32.2 - CERTIFICATION OF OUR CFO PURSUANT TO SECTION 906 - Keurig Dr Pepper Inc.dps-ex322_20160930.htm
EX-32.1 - CERTIFICATION OF OUR CEO PURSUANT TO SECTION 906 - Keurig Dr Pepper Inc.dps-ex321_20160930.htm
EX-31.1 - CERTIFICATION OF OUR CEO PURSUANT TO SECTION 302 - Keurig Dr Pepper Inc.dps-ex311_20160930.htm
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Keurig Dr Pepper Inc.dps-ex121_20160930.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to     
dpsgigroupinca10.jpg           
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     x  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     x  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 x
 
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     x

As of October 24, 2016, there were 183,715,145 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


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

DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2016 and 2015
(Unaudited)
 
For the
 
For the
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in millions, except per share data)
2016
 
2015
 
2016
 
2015
Net sales
$
1,680

 
$
1,630

 
$
4,862

 
$
4,736

Cost of sales
683

 
673

 
1,955

 
1,949

Gross profit
997

 
957

 
2,907

 
2,787

Selling, general and administrative expenses
603

 
592

 
1,739

 
1,730

Depreciation and amortization
24

 
26

 
74

 
79

Other operating (income) expense, net
(3
)
 
2

 
(4
)
 
2

Income from operations
373

 
337

 
1,098

 
976

Interest expense
33

 
28

 
99

 
83

Interest income
(1
)
 

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

 
(25
)
 
1

Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
343

 
308

 
1,026

 
893

Provision for income taxes
102

 
106

 
343

 
314

Income before equity in earnings of unconsolidated subsidiaries
241

 
202

 
683

 
579

Equity in earnings of unconsolidated subsidiaries, net of tax
(1
)
 

 
(1
)
 

Net income
$
240

 
$
202

 
$
682

 
$
579

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.30

 
$
1.06

 
$
3.66

 
$
3.02

Diluted
1.29

 
1.05

 
3.64

 
3.00

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
184.8

 
190.4

 
186.1

 
191.6

Diluted
185.7

 
191.5

 
187.1

 
192.8

Cash dividends declared per common share
$
0.53

 
$
0.48

 
$
1.59

 
$
1.44

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, 2016 and 2015
(Unaudited)

 
For the
 
For the
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in millions)
2016
 
2015
 
2016
 
2015
Comprehensive income
$
229

 
$
161

 
$
664

 
$
526

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, 2016 and December 31, 2015
(Unaudited)
 
September 30,
 
December 31,
(in millions, except share and per share data)
2016
 
2015
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
620

 
$
911

Accounts receivable:
 
 
 
Trade, net
581

 
570

Other
59

 
58

Inventories
226

 
209

Prepaid expenses and other current assets
116

 
69

Total current assets
1,602

 
1,817

Property, plant and equipment, net
1,124

 
1,156

Investments in unconsolidated subsidiaries
24

 
31

Goodwill
2,994

 
2,988

Other intangible assets, net
2,657

 
2,663

Other non-current assets
210

 
150

Non-current deferred tax assets
62

 
64

Total assets
$
8,673

 
$
8,869

Liabilities and Stockholders' Equity
Current liabilities:
 
 
 
Accounts payable
$
311

 
$
277

Deferred revenue
64

 
64

Short-term borrowings and current portion of long-term obligations
368

 
507

Income taxes payable
52

 
27

Other current liabilities
688

 
708

Total current liabilities
1,483

 
1,583

Long-term obligations
2,956

 
2,875

Non-current deferred tax liabilities
781

 
787

Non-current deferred revenue
1,134

 
1,181

Other non-current liabilities
190

 
260

Total liabilities
6,544

 
6,686

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, 183,789,060 and 187,841,509 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
2

 
2

Additional paid-in capital
94

 
211

Retained earnings
2,246

 
2,165

Accumulated other comprehensive loss
(213
)
 
(195
)
Total stockholders' equity
2,129

 
2,183

Total liabilities and stockholders' equity
$
8,673

 
$
8,869

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, 2016 and 2015
(Unaudited
 
For the
 
Nine Months Ended
 
September 30,
(in millions)
2016
 
2015
Operating activities:
 
 
 
Net income
$
682

 
$
579

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
142

 
143

Amortization expense
24

 
25

Amortization of deferred revenue
(48
)
 
(48
)
Employee stock-based compensation expense
33

 
33

Deferred income taxes

 
27

Gain on step acquisition of unconsolidated subsidiaries
(5
)
 

Gain on extinguishment of multi-employer plan withdrawal liability
(21
)
 

Unrealized (gain) loss on derivatives
(41
)
 
5

Other, net
(17
)
 
(12
)
Changes in assets and liabilities, net of effects of acquisition:
 
 
 
Trade accounts receivable
(14
)
 
(25
)
Other accounts receivable
(5
)
 
3

Inventories
(19
)
 
(2
)
Other current and non-current assets
(61
)
 
(33
)
Other current and non-current liabilities
(48
)
 
(35
)
Trade accounts payable
35

 
25

Income taxes payable
46

 
38

Net cash provided by operating activities
683

 
723

Investing activities:
 
 
 
Acquisition of business
(15
)
 

Cash acquired in step acquisition of unconsolidated subsidiaries
17

 

Purchase of property, plant and equipment
(110
)
 
(71
)
Purchase of intangible assets
(1
)
 
(1
)
Investment in unconsolidated subsidiaries
(6
)
 
(20
)
Purchase of cost method investment
(1
)
 
(15
)
Proceeds from disposals of property, plant and equipment
4

 
12

Other, net
(7
)
 

Net cash used in investing activities
(119
)
 
(95
)
Financing activities:
 
 
 
Proceeds from issuance of senior unsecured notes
400

 

Repayment of senior unsecured notes
(500
)
 

Repurchase of shares of common stock
(460
)
 
(404
)
Dividends paid
(288
)
 
(264
)
Tax withholdings related to net share settlements of certain stock awards
(31
)
 
(27
)
Proceeds from stock options exercised
14

 
28

Excess tax benefit on stock-based compensation
22

 
22

Deferred financing charges paid
(3
)
 

Capital lease payments
(6
)
 
(3
)
Other, net
(2
)
 

Net cash used in financing activities
(854
)
 
(648
)
Cash and cash equivalents — net change from:
 
 
 
Operating, investing and financing activities
(290
)
 
(20
)
Effect of exchange rate changes on cash and cash equivalents
(1
)
 
(10
)
Cash and cash equivalents at beginning of period
911

 
237

Cash and cash equivalents at end of period
$
620

 
$
207

See Note 13 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, 2016
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Common Stock
 
Additional
 
 
 
Other
 
 
 
Issued
 
Paid-In
 
Retained
 
Comprehensive
 
Total
(in millions, except per share data)
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Equity
Balance as of January 1, 2016
187.9

 
$
2

 
$
211

 
$
2,165

 
$
(195
)
 
$
2,183

Shares issued under employee stock-based compensation plans and other
0.9

 

 

 

 

 

Net income

 

 

 
682

 

 
682

Other comprehensive loss

 

 

 

 
(18
)
 
(18
)
Dividends declared, $1.59 per share

 

 
3

 
(298
)
 

 
(295
)
Stock options exercised and stock-based compensation, net of tax of ($22)

 

 
37

 

 

 
37

Common stock repurchases
(5.0
)
 

 
(157
)
 
(303
)
 

 
(460
)
Balance as of September 30, 2016
183.8

 
$
2

 
$
94

 
$
2,246

 
$
(213
)
 
$
2,129

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, 2015 ("Annual Report").
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.
The Company eliminates from its financial results all intercompany transactions between entities included in the unaudited condensed consolidated financial statements and the intercompany transactions with its equity method investees.
USE OF ESTIMATES
The process of preparing 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.
The following critical accounting estimates are discussed in greater detail in our Annual Report:
goodwill and other indefinite-lived intangible assets;
revenue recognition;
pension benefits;
risk management programs; and
income taxes.

6

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


RECLASSIFICATIONS
Capital lease payments have been reclassified from other, net to the capital lease payments caption within the financing activities section in the unaudited Condensed Consolidated Statements of Cash Flows for the prior period to conform to the current period's presentation, with no impact to total cash provided by (used in) operating, investing or financing activities. This reclassification within the unaudited Condensed Consolidated Statements of Cash Flows also resulted in corresponding changes to the prior period presentation in Note 16.
Unrealized gains and losses on derivatives have been reclassified from other, net to the unrealized (gain) loss on derivatives caption within the operating activities section in the unaudited Condensed Consolidated Statements of Cash Flows for the prior period to conform to the current period's presentation, with no impact to total cash provided by (used in) operating, investing or financing activities.
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.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations for the new model. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance related to identifying performance obligations and licensing for the new model. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which improves guidance on assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. These updates are effective concurrently with Topic 606 (ASU 2014-09).
The Company is currently evaluating the impact that the above standards will have on the consolidated financial statements and does not plan to early adopt these ASUs.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for public companies for interim and annual periods beginning after December 15, 2017. This guidance is not expected to have a significant impact on the Company's financial condition, results of operations or presentation of our financial statements. The Company will adopt this standard as of January 1, 2018.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). The ASU replaces the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The standard requires a modified retrospective approach, which includes several optional practical expedients. The Company is currently evaluating the impact that ASU 2016-02 will have on the consolidated financial statements.

7

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


In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting ("ASU 2016-09") as part of the FASB simplification initiative. The new standard provides for changes to accounting for stock compensation including 1) excess tax benefits and tax deficiencies related to share based payment awards will be recognized as income tax expense in the reporting period in which they occur; 2) excess tax benefits will be classified as an operating activity in the statement of cash flow; 3) the option to elect to estimate forfeitures or account for them when they occur; and 4) an increase in the tax withholding requirements threshold to qualify for equity classification. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, and early adoption is permitted. The adoption of ASU 2016-09 is expected to impact the recording of income taxes in the Company's financial position and results of operations, as well as the operating and financing cash flows on the Consolidated Statements of Cash Flows. The magnitude of such impacts are dependent upon the Company’s future grants of stock-based compensation, the Company’s future stock price in relation to the fair value of awards on grant date and the exercise behavior of the Company’s option holders. The Company will adopt this standard as of January 1, 2017.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The standard provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company is currently evaluating the impact that ASU 2016-13 will have on the consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ("ASU 2016-15"). The standard provides guidance on eight specific cash flow issues, with the objective of reducing diversity in practice. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-15 will have on the consolidated financial statements.
RECENTLY ADOPTED PROVISIONS OF U.S. GAAP
As of January 1, 2016, the Company adopted ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, on a prospective basis with no impact to the unaudited condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05"). The ASU clarifies that a change in counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not require de-designation of that hedging relationship, provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for public companies for annual, and interim periods within those annual periods, beginning after December 15, 2016, and early adoption is permitted. ASU 2016-05 may be adopted on either a prospective basis or a modified retrospective basis. The Company has adopted ASU 2016-05 as of March 31, 2016, on a prospective basis, with no impact to the unaudited condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting ("ASU 2016-07"). The ASU eliminates the requirement to retroactively adopt the equity method of accounting when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has adopted ASU 2016-07 as of March 31, 2016, on a prospective basis, with no impact to the unaudited condensed consolidated financial statements.

8

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


2. Investments in Unconsolidated Subsidiaries

BA SPORTS NUTRITION, LLC

On March 24, 2016, the Company acquired an additional 3.8% interest in BA Sports Nutrition, LLC for $6 million, which increased the total ownership interest in the equity method investment to 15.5%. The carrying value of the aggregate investment was $24 million as of September 30, 2016.
INDUSTRIA EMBOTELLADORA DE BEBIDAS MEXICANAS AND EMBOTELLADORA MEXICANA DE AGUA, S.A. DE C.V.
On September 13, 2016, Industria Embotelladora de Bebidas Mexicanas ("IEBM") and Embotelladora Mexicana de Agua, S.A. de C.V. ("EMA"), previously 50:50 joint ventures between a subsidiary of the Company and Acqua Minerale San Benedetto S.P.A. ("San Benedetto"), became wholly-owned subsidiaries of the Company as a result of the Company's agreement to purchase all of the outstanding shares of IEBM and EMA owned by San Benedetto.
The Company paid approximately $15 million in cash for all of the outstanding shares of IEBM and EMA owned by San Benedetto. The Company's equity interest in IEBM and EMA of $10 million was remeasured to fair value, which resulted in a non-taxable gain of $5 million which was recognized in the third quarter of 2016 and included in other operating (income) expense, net.
The acquisition was accounted for as a step-acquisition within a business combination, and the identifiable assets acquired and liabilities assumed were recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values was recorded as goodwill.
The following table summarizes the preliminary allocation of fair value of the assets acquired and liabilities assumed by major class for the step-acquisition when the Company gained control:
(in millions)
 
Fair Value
 
Useful Life
Property, plant & equipment
 
$
2

 
1 - 5 years
Brands: indefinite-lived
 
1

 
Goodwill
 
8

 
Cash
 
17

 
All other assets, net of liabilities assumed
 
2

 
Total
 
$
30

 
 
In connection with this step-acquisition, the Company recorded goodwill of $8 million, which is not deductible for tax purposes, to the Company's Latin America Beverages reporting unit.

Beginning in September 2016, IEBM's and EMA's results of operations were fully consolidated in the Company's Condensed Consolidated Statements of Income. Prior to September 2016, the Company's 50 percent share of IEBM's and EMA's results of operations was reported in equity in earnings of unconsolidated subsidiaries, net of tax, in the Company's Condensed Consolidated Statements of Income. The Company has not presented pro forma results of operations or amounts of revenue and earnings since the acquisition date because the acquisition is not material to the Company's Condensed Consolidated Financial Statements.

9

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


3.
Inventories
Inventories consisted of the following:
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Raw materials
$
72

 
$
101

Spare parts
20

 
18

Work in process
5

 
4

Finished goods
161

 
123

Inventories at first in first out cost
258

 
246

Reduction to last-in, first-out ("LIFO") cost
(32
)
 
(37
)
Inventories
$
226

 
$
209


Approximately $171 million and $154 million of the Company's inventory was accounted for under the LIFO method of accounting as of September 30, 2016 and December 31, 2015, respectively. The reduction to LIFO cost reflects the excess of the current cost of LIFO inventories as of September 30, 2016 and December 31, 2015, 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, 2016, LIFO inventory liquidation increased the Company's gross profit by $3 million and $5 million, respectively. For the three months ended September 30, 2015, there was no LIFO inventory liquidation. For the nine months ended September 30, 2015, LIFO inventory liquidation increased the Company's gross profit by $1 million.
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:
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Prepaid expenses and other current assets:
 
 
 
Customer incentive programs
$
44

 
$
21

Derivative instruments
9

 
9

Other
63

 
39

Total prepaid expenses and other current assets
$
116

 
$
69

Other current liabilities:
 
 
 
Customer rebates and incentives
$
288

 
$
283

Accrued compensation
111

 
133

Insurance liability
37

 
42

Interest accrual
47

 
30

Dividends payable
97

 
90

Derivative instruments
5

 
29

Other
103

 
101

Total other current liabilities
$
688

 
$
708


10

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


5.
Debt
The following table summarizes the Company's long-term obligations:
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Senior unsecured notes(1)
$
3,178

 
$
3,246

Capital lease obligations
146

 
136

Subtotal
3,324

 
3,382

Less - current portion
(368
)
 
(507
)
Long-term obligations
$
2,956

 
$
2,875

____________________________
(1)
The carrying amount includes the unamortized net discount on debt issuances and adjustments related to the change in the fair value of interest rate swaps designated as fair value hedges of $74 million and $40 million as of September 30, 2016 and December 31, 2015, respectively. See Note 6 for further information regarding derivatives.
The following table summarizes the Company's short-term borrowings and current portion of long-term obligations:
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Commercial paper
$

 
$

Current portion of long-term obligations:
 
 
 
Senior unsecured notes
360

 
500

Capital lease obligations
8

 
7

Short-term borrowings and current portion of long-term obligations
$
368

 
$
507


11

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


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
 
2016
 
2016
 
2015
2016 Notes(1)
 
January 15, 2016
 
2.90%
 
$

 
$

 
$
500

2018 Notes
 
May 1, 2018
 
6.82%
 
724

 
724

 
723

2019 Notes
 
January 15, 2019
 
2.60%
 
250

 
250

 
250

2020 Notes
 
January 15, 2020
 
2.00%
 
250

 
249

 
246

2021 Notes
 
November 15, 2021
 
3.20%
 
250

 
255

 
250

2022 Notes
 
November 15, 2022
 
2.70%
 
250

 
273

 
265

2025 Notes
 
November 15, 2025
 
3.40%
 
500

 
495

 
494

2026 Notes(2)
 
September 15, 2026
 
2.55%
 
400

 
396

 

2038 Notes
 
May 1, 2038
 
7.45%
 
250

 
289

 
271

2045 Notes
 
November 15, 2045
 
4.50%
 
250

 
247

 
247

 
 
 
 
 
 
$
3,124

 
$
3,178

 
$
3,246

____________________________
(1)
On January 15, 2016, the Company used a portion of the net proceeds from the November 2015 issuance of the 2025 and 2045 Notes for repayment of the aggregate principal amount of the 2016 Notes of $500 million at maturity.
(2)
On September 16, 2016, the Company completed the issuance of $400 million aggregate principal amount of 2.55% Senior Notes due 2026 (the "2026 Notes"). The discount associated with these notes was approximately $1 million. Debt issuance costs related to the issuance of these notes were approximately $3 million. The Company intends to use the net proceeds to redeem $360 million of the 2018 Notes and to pay the related redemption premium, accrued interest, and associated fees and expenses. See Note 17 for further information regarding the partial redemption of the 2018 Notes.
UNSECURED CREDIT AGREEMENT
The following table provides amounts utilized and available under our $500 million revolving line of credit (the "Revolver") and each sublimit arrangement type as of September 30, 2016:
(in millions)
Amount Utilized
 
Balances Available
Revolver
$

 
$
499

Letters of credit
1

 
74

Swingline advances

 
50

As of September 30, 2016, the Company was in compliance with all financial covenant requirements relating to its unsecured credit agreement.
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, $120 million is available for the issuance of letters of credit, $60 million of which was utilized as of September 30, 2016 and $60 million of which remains available for use.

12

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


SHELF REGISTRATION STATEMENT
On August 10, 2016, the Company's Board of Directors ("the Board") authorized the Company to issue up to $2,000 million of securities from time to time. Subsequently, the Company filed a "well-known seasoned issuer" shelf registration statement with the SEC, effective September 2, 2016, which registered an indeterminate amount of securities for future sales. As of September 30, 2016, the Company had issued $400 million of 2026 Notes under this shelf registration statement and $1,600 million of securities remained authorized to be issued.
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 
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. Any ineffectiveness is recorded as interest during the period incurred. The following table presents information regarding these interest rate swaps and the associated hedging relationships:
 
 
 
 
 
 
 
 
Impact to the carrying value
($ in millions)
 
 
 
 
 
Method of
 
 
 
of long-term debt(2)
 
 
Hedging
 
Number of
 
measuring
 
Notional
 
September 30,
 
December 31,
Period entered
 
relationship
 
instruments
 
effectiveness
 
value
 
2016
 
2015
November 2011
 
2019 Notes
 
2
 
Short cut method
 
$
100

 
$
1

 
$
1

November 2011
 
2021 Notes
 
2
 
Short cut method
 
150

 
6

 
1

November 2012
 
2020 Notes
 
5
 
Short cut method
 
120

 
1

 
(2
)
December 2013
 
2022 Notes
 
4
 
Cumulative dollar offset(1)
 
250

 
25

 
17

February 2015
 
2038 Notes
 
1
 
Regression
 
100

 
41

 
23

 
 
 
 
 
 
 
 
 
 
$
74

 
$
40

____________________________
(1)
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.
(2)
The impact to the carrying value includes the fair value of the hedges, basis adjustments and cumulative ineffectiveness related to the 2022 and 2038 Notes, and amortization of the interest rate swap associated with the 2038 Notes, which was de-designated in February 2015.
FOREIGN EXCHANGE
Cash Flow Hedges
The Company's Canadian and Mexican businesses purchase inventory through transactions denominated and settled in United States ("U.S.") dollars, a currency different from the functional currency of the those businesses. These inventory purchases are subject to exposure from movements in exchange rates. During the three and nine months ended September 30, 2016 and 2015, 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 seven months as of September 30, 2016. The Company had outstanding foreign exchange forward contracts with notional amounts of $18 million and $7 million as of September 30, 2016 and December 31, 2015, 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, 2016 and 2015, 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 $255 million and $159 million as of September 30, 2016 and December 31, 2015, 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:
(in millions)
Balance Sheet Location
 
September 30,
2016
 
December 31,
2015
Assets:
 
 
 
 
 
Derivative instruments designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Interest rate contracts
Prepaid expenses and other current assets
 
$
5

 
$
9

Interest rate contracts
Other non-current assets
 
68

 
33

Derivative instruments not designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Commodity contracts
Prepaid expenses and other current assets
 
4

 

Commodity contracts
Other non-current assets
 
10

 

Total assets
 
 
$
87

 
$
42

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

 
$
1

Foreign exchange forward contracts
Other current liabilities
 

 

Interest rate contracts
Other non-current liabilities
 

 
1

Derivative instruments not designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Commodity contracts
Other current liabilities
 
5

 
28

Commodity contracts
Other non-current liabilities
 

 
3

Total liabilities
 
 
$
5

 
$
33


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:
 
Amount of Loss Recognized in
 
Amount of (Loss) Gain Reclassified from AOCL into Income
 
Location of (Loss) Gain Reclassified from AOCL into Income
(in millions)
Other Comprehensive (Loss) Income ("OCI")
 
 
For the three months ended September 30, 2016:
 
 
 
 
 
Interest rate contracts
$

 
$
(2
)
 
Interest expense
Foreign exchange forward contracts

 

 
Cost of sales
Total
$

 
$
(2
)
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2016:
 
 
 
 
 
Interest rate contracts
$

 
$
(6
)
 
Interest expense
Foreign exchange forward contracts
(1
)
 
(1
)
 
Cost of sales
Total
$
(1
)
 
$
(7
)
 
 
 
 
 
 
 
 
For the three months ended September 30, 2015:
 
 
 
 
 
Interest rate contracts
$
(24
)
 
$
(2
)
 
Interest expense
Foreign exchange forward contracts

 
1

 
Cost of sales
Total
$
(24
)
 
$
(1
)
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2015:
 
 
 
 
 
Interest rate contracts
$
(9
)
 
$
(6
)
 
Interest expense
Foreign exchange forward contracts

 
1

 
Cost of sales
Total
$
(9
)
 
$
(5
)
 
 
There was no hedge ineffectiveness recognized in earnings for the three and nine months ended September 30, 2016 and 2015 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 September 30, 2016:
 
 
 
 
Interest rate contracts
 
$
1

 
Interest expense
Total
 
$
1

 
 
 
 
 
 
 
For the nine months ended September 30, 2016:
 
 
 
 
Interest rate contracts
 
$
8

 
Interest expense
Total
 
$
8

 
 
 
 
 
 
 
For the three months ended September 30, 2015:
 
 
 
 
Interest rate contracts
 
$
4

 
Interest expense
Total
 
$
4

 
 
 
 
 
 
 
For the nine months ended September 30, 2015:
 
 
 
 
Interest rate contracts
 
$
13

 
Interest expense
Total
 
$
13

 
 
For the three months ended September 30, 2016, no hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges. For the nine months ended September 30, 2016, $2 million of hedge ineffectiveness charges were recognized in earnings with respect to derivative instruments designated as fair value hedges. For the three and nine months ended September 30, 2015, no hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges.

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:
 
 
Amount of Gain (Loss)
 
Location of Gain (Loss)
(in millions)
 
Recognized in Income
 
Recognized in Income
For the three months ended September 30, 2016:
 
 
 
 
Commodity contracts(1)
 
$
2

 
Cost of sales
Commodity contracts(1)
 
1

 
SG&A expenses
Total
 
$
3

 
 
 
 
 
 
 
For the nine months ended September 30, 2016:
 
 
 
 
Commodity contracts(1)
 
$
11

 
Cost of sales
Commodity contracts(1)
 
9

 
SG&A expenses
Total
 
$
20

 
 
 
 
 
 
 
For the three months ended September 30, 2015:
 
 
 
 
Commodity contracts(1)
 
$
(10
)
 
Cost of sales
Commodity contracts(1)
 
(8
)
 
SG&A expenses
Total
 
$
(18
)
 
 
 
 
 
 
 
For the nine months ended September 30, 2015:
 
 
 
 
Commodity contracts(1)
 
$
(17
)
 
Cost of sales
Commodity contracts(1)
 
(9
)
 
SG&A expenses
Total
 
$
(26
)
 
 
____________________________
(1)
Commodity contracts include both realized and unrealized gains and losses.
Refer to Note 9 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.

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:
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Other non-current assets:
 
 
 
Customer incentive programs
$
60

 
$
52

Marketable securities - trading
34

 
25

Derivative instruments
78

 
33

Cost method investments
16

 
15

Other
22

 
25

Total other non-current assets
$
210

 
$
150

Other non-current liabilities:
 
 
 
Long-term payables due to Mondelēz International, Inc.
$
21

 
$
26

Long-term pension and post-retirement liability(1)
35

 
40

Multi-employer pension plan withdrawal liability(2)

 
56

Insurance liability
65

 
75

Derivative instruments

 
4

Deferred compensation liability
34

 
25

Other
35

 
34

Total other non-current liabilities
$
190

 
$
260

____________________________
(1)
During the third quarter of 2016, the Company contributed $7 million to its U.S. pension plans.
(2)
During the first quarter of 2016, we negotiated a $35 million lump-sum settlement to fully extinguish the Company's multi-employer pension plan withdrawal liability, which was paid in the second quarter of 2016. As a result of the payment in the second quarter of 2016, we recognized a $21 million gain on the extinguishment of this liability, which is included in Other (income) expense, net, within our unaudited Condensed Consolidated Statements of Income.
8. Income Taxes
The effective tax rates for the three months ended September 30, 2016 and 2015 were 29.7% and 34.4%, respectively. The effective tax rates for the nine months ended September 30, 2016 and 2015 were 33.4% and 35.2%, respectively.
For the three months and nine months ended September 30, 2016, the provision for income taxes included an income tax benefit of $17 million driven primarily by a restructuring of the ownership of our Canadian business. The income tax benefit includes a valuation allowance release of $11 million.
9. 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 under current market conditions. 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.

19

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, 2016 and December 31, 2015:
 
September 30, 2016
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
(in millions)
Level 1
 
Level 2
 
Level 3
Commodity contracts
$

 
$
14

 
$

Interest rate contracts

 
73

 

Marketable securities - trading
34

 

 

Total assets
$
34

 
$
87

 
$

 
 
 
 
 
 
Commodity contracts
$

 
$
5

 
$

Foreign exchange forward contracts

 

 

Total liabilities
$

 
$
5

 
$

 
December 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
$

 
$
42

 
$

Marketable securities - trading
25

 

 

Total assets
$
25

 
$
42

 
$

 
 
 
 
 
 
Commodity contracts
$

 
$
31

 
$

Interest rate contracts

 
2

 

Total liabilities
$

 
$
33

 
$

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 September 30, 2016 and December 31, 2015, 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 the fair value hierarchy during the three and nine months ended September 30, 2016 and 2015.

20

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


ESTIMATED FAIR VALUE OF THE COMPANY'S FINANCIAL STATEMENT INSTRUMENTS
The carrying values and estimated fair values of the Company's financial instruments that are not required to be measured at fair value in the unaudited Condensed Consolidated Balance Sheet are as follows:
 
Fair Value Hierarchy Level
 
September 30, 2016
 
December 31, 2015
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(1)
1
 
$
620

 
$
620

 
$
911

 
$
911

Liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt – 2016 Notes(2)
2
 

 

 
500

 
500

Long-term debt – 2018 Notes(2)
2
 
724

 
786

 
723

 
802

Long-term debt – 2019 Notes(2)
2
 
250

 
256

 
250

 
248

Long-term debt – 2020 Notes(2)
2
 
249

 
252

 
246

 
244

Long-term debt – 2021 Notes(2)
2
 
255

 
265

 
250

 
253

Long-term debt – 2022 Notes(2)
2
 
273

 
257

 
265

 
241

Long-term debt – 2025 Notes(2)
2
 
495

 
535

 
494

 
491

Long-term debt – 2026 Notes(2)
2
 
396

 
398

 

 

Long-term debt – 2038 Notes(2)
2
 
289

 
365

 
271

 
344

Long-term debt – 2045 Notes(2)
2
 
247

 
285

 
247

 
244

____________________________
(1)
Cash equivalents are composed of certificates of deposit, time deposits and other interest-bearing investments with original maturity dates of three months or less. Cash equivalents are recorded at cost, which approximates fair value.
(2)
The fair value amounts of long term debt were based on current market rates available to the Company. The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all debt and related unamortized costs to be incurred at such date. The carrying amount includes the unamortized discounts and issuance costs 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.
10. 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").
Beginning in 2016, RSUs granted for certain participants in the DPS Stock Plan will vest ratably over three years. Outstanding RSUs granted prior to January 1, 2016 will continue to vest on a cliff schedule of three years.
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 September 30,
 
For the Nine Months Ended September 30,
(in millions)
2016
 
2015
 
2016
 
2015
Total stock-based compensation expense
$
11

 
$
12

 
$
33

 
$
33

Income tax benefit recognized in the statement of income
(4
)
 
(5
)
 
(12
)
 
(12
)
Stock-based compensation expense, net of tax
$
7

 
$
7

 
$
21

 
$
21


21

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, 2016:
 
Stock Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of January 1, 2016
1,231,118

 
$
58.98

 
8.24
 
$
42

Granted
406,858

 
91.98

 
 
 
 
Exercised
(277,917
)
 
49.99

 
 
 
12

Forfeited or expired
(8,656
)
 
81.01

 
 
 
 
Outstanding as of September 30, 2016
1,351,403

 
70.62

 
8.17
 
28

Exercisable as of September 30, 2016
458,671

 
55.53

 
7.26
 
16

As of September 30, 2016, there was $6 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 1.02 years.
RESTRICTED STOCK UNITS    
The table below summarizes RSU activity for the nine months ended September 30, 2016. 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, 2016
1,497,416

 
$
55.40

 
1.03
 
$
140

Granted
351,548

 
91.98

 
 
 
 
Vested and released
(598,775
)
 
44.33

 
 
 
55

Forfeited
(32,353
)
 
71.23

 
 
 
 
Outstanding as of September 30, 2016
1,217,836

 
70.98

 
1.04
 
111

As of September 30, 2016, there was $43 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 1.03 years.
During the nine months ended September 30, 2016, 598,775 shares subject to previously granted RSUs vested. A majority of these vested RSUs were net share settled. The Company withheld 191,755 shares based upon the Company's closing stock price on the vesting date to settle the employees' minimum statutory obligation for 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 $19 million and $22 million for the nine months ended September 30, 2016 and 2015, respectively, and are reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows. These payments were used for tax withholdings related to the net share settlements of RSUs and dividend equivalent units ("DEUs"). These 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.

22

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, 2016. 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, 2016
443,374

 
$
55.54

 
0.88
 
$
41

Granted
105,995

 
71.94

 
 
 
 
Performance adjustment(1)
172,500

 
43.82

 
 
 
 
Vested and released
(345,000
)
 
43.82

 
 
 
32

Forfeited
(2,718
)
 
66.98

 
 
 
 
Outstanding as of September 30, 2016
374,151

 
67.91

 
1.13
 
34

____________________________
(1)
For PSUs which vested during the nine months ended September 30, 2016, the Company awarded additional PSUs, as actual results measured at the end of the performance period exceeded target performance levels.
As of September 30, 2016, there was $12 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 1.13 years.
During the nine months ended September 30, 2016, 345,000 units subject to previously granted PSUs vested. A majority of these vested PSUs were net share settled. The Company withheld 119,084 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 $12 million and $5 million for the nine months ended September 30, 2016 and 2015, respectively, and are reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows. These payments were used for tax withholdings related to the net share settlements of PSUs and DEUs. These 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)


11. 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 September 30,
 
For the Nine Months Ended September 30,
(in millions, except per share data)
2016
 
2015
 
2016
 
2015
Basic EPS:
 
 
 
 
 
 
 
Net income
$
240

 
$
202

 
$
682

 
$
579

Weighted average common shares outstanding
184.8

 
190.4

 
186.1

 
191.6

Earnings per common share — basic
$
1.30

 
$
1.06

 
$
3.66

 
$
3.02

Diluted EPS:
 
 
 
 
 
 
 
Net income
$
240

 
$
202

 
$
682

 
$
579

Weighted average common shares outstanding
184.8

 
190.4

 
186.1

 
191.6

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
0.2

 
0.2

 
0.2

 
0.3

RSUs
0.7

 
0.9

 
0.7

 
0.9

PSUs

 

 
0.1

 

Weighted average common shares outstanding and common stock equivalents
185.7

 
191.5

 
187.1

 
192.8

Earnings per common share — diluted
$
1.29

 
$
1.05

 
$
3.64

 
$
3.00

Stock options, RSUs, PSUs and DEUs totaling 0.3 million and 0.4 million shares were excluded from the diluted weighted average shares outstanding for the three and nine months ended September 30, 2016, respectively, as they were not dilutive. Stock options, RSUs, PSUs and DEUs totaling 0.4 million shares were excluded from the diluted weighted average shares outstanding for both the three and nine months ended September 30, 2015, 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 DEUs are forfeitable, they are defined as non-participating securities. As of September 30, 2016, there were 63,644 DEUs, which will vest at the time that the underlying RSU or PSU vests.
Through 2015, the Company's Board authorized a total aggregate share repurchase plan of $4 billion. In February 2016, the Board authorized an additional $1 billion of share repurchases. The Company repurchased and retired 1.6 million shares of common stock valued at approximately $157 million and 5.0 million shares of common stock valued at approximately $460 million for the three and nine months ended September 30, 2016, respectively. The Company repurchased and retired 2.0 million shares of common stock valued at approximately $153 million and 5.2 million shares of common stock valued at approximately $404 million for the three and nine months ended September 30, 2015, respectively. These amounts were recorded as a reduction of equity in the unaudited Condensed Consolidated Statement of Equity. As of September 30, 2016, $1,191 million remains available for share repurchases under the Board's authorization.

24

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


12. Accumulated Other Comprehensive Loss
The following tables provide 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 July 1, 2016
$
(135
)
 
$
(35
)
 
$
(32
)
 
$
(202
)
OCI before reclassifications
(14
)
 

 
1

 
(13
)
Amounts reclassified from AOCL

 
1

 
1

 
2

Net current year OCI
(14
)
 
1

 
2

 
(11
)
Balance as of September 30, 2016
$
(149
)
 
$
(34
)
 
$
(30
)
 
$
(213
)
 (in millions)
Foreign Currency Translation
 
Change in Pension Liability
 
Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance as of January 1, 2015
$
(61
)
 
$
(40
)
 
$
(36
)
 
$
(137