ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our Audited Consolidated Financial Statements and the related Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors including the factors we describe under "Special Note Regarding Forward-Looking Statements", "Risk Factors" and elsewhere in this Annual Report on Form 10-K, including documents incorporated by reference.
References in the following discussion to "we", "our", "us", "DPS" or "the Company" refer to Dr Pepper Snapple Group, Inc. and all entities included in our Audited Consolidated Financial Statements.
The periods presented in this section are the years ended
December 31, 2016
,
2015
and
2014
, which we refer to as "
2016
", "
2015
" and "
2014
", respectively.
OVERVIEW
We are a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the U.S., Canada and Mexico with a diverse portfolio of flavored (non-cola) CSDs and NCBs, including ready-to-drink teas, juices, juice drinks, water and mixers. Our brand portfolio includes popular CSD brands such as Dr Pepper, Canada Dry, Peñafiel, Squirt, 7UP, Crush, A&W, Sunkist soda and Schweppes, and NCB brands such as Snapple, Hawaiian Punch, Mott's, Clamato, Bai Brands, Mr & Mrs T mixers and Rose's. Our largest brand, Dr Pepper, is a leading flavored CSD in the U.S. according to IRi. We have some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers.
We operate as an integrated brand owner, manufacturer and distributor through our three segments. We believe our integrated business model strengthens our route-to-market and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our DSD system and our WD delivery system. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.
We operate primarily in the U.S., Mexico and Canada and we also distribute our products in the Caribbean. In
2016
,
90%
of our net sales were generated in the U.S.,
7%
in Mexico and the Caribbean and
3%
in Canada.
UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS
We believe the North American LRB market is influenced by certain key trends and uncertainties. Some of these items, such as increased health consciousness and changes in economic factors, have created category headwinds for our CSDs during recent years. The key trends and uncertainties that could affect our business include:
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•
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Increased health consciousness.
Consumers are increasingly becoming more concerned about health and wellness, focusing on caloric intake and sugar content in both regular CSDs and juices
, the use of artificial sweeteners in diet CSDs and the use of natural, organic or simple ingredients in LRB products.
We believe the main beneficiaries of this trend include bottled waters, naturally sweetened, low calorie drinks, all natural and organic beverages and ready-to-drink teas. Our completion of the Bai Brands Merger on
January 31, 2017
will allow us to continue distribution and capture additional growth as a result of this key trend.
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|
•
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Changes in consumer preferences.
We are impacted by shifting consumer demographics and needs. We believe marketing and product innovations that target fast growing population segments, such as the Hispanic community in the U.S., could drive market growth. Additionally, as more consumers are faced with a busy and on-the-go lifestyle, sales of single-serve beverages could increase, which typically have higher margins.
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•
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Increased competition in the LRB market.
A number of our competitors are large corporations with significant financial resources. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities, which could reduce the demand for our products.
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•
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Fluctuations in foreign exchange rates.
We are exposed to foreign currency exchange rate variability in the expected future cash flows associated with certain third-party and intercompany transactions denominated in currencies other than our Mexican and Canadian entities' functional currencies. We use derivative instruments such as foreign exchange forward contracts to mitigate a portion of our exposure in these expected future cash flows to changes in foreign exchange rates. Significant changes in these exchange rates will impact our results of operations.
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•
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Increased government regulation.
Government agencies, as a result of concerns about the public health consequences and health care costs associated with obesity, have been proposing and, in some cases, enacting new taxes or regulations on sugar-sweetened and diet beverages. Any changes of regulations or imposed taxes could reduce demand and/or cause us to raise our prices.
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•
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Volatility in the costs of raw materials.
The costs of a substantial portion of the raw materials used in the beverage industry are dependent on commodity prices for resin, aluminum, diesel fuel, corn, apple juice concentrate, sucrose, natural gas and other commodities. We are also dependent on commodity prices for apples related to our applesauce production. Commodity price volatility has, from time to time, exerted pressure on industry margins and operating results.
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•
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Product and packaging innovation.
We believe brand owners and bottling companies will continue to create new products and packages, such as beverages with new ingredients and new premium flavors and innovative convenient packaging, that address changes in consumer tastes and preferences.
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•
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Changing retailer landscape.
As retailers continue to consolidate, we believe retailers will support consumer product companies that can provide an attractive portfolio of products, a strong value proposition and efficient delivery.
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As a result of these uncertainties and other factors, we currently believe the following guidance for the year ending
December 31, 2017
compared to the year ended
December 31, 2016
:
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•
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Net sales could increase approximately 4.5%, which includes a 3.0% increase in net sales due to the Bai Brands Merger and a 1.0% unfavorable foreign currency translation impact.
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•
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Non-cash costs related to the Bai Brands Merger are expected to reduce income from operations between $33 million - $36 million.
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•
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Excluding the Bai Brands Merger, packaging and ingredient costs for the year ending
December 31, 2017
are expected to increase 0.5% on a constant volume/mix basis as compared to the year ended
December 31, 2016
.
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•
|
The adoption of a new accounting standard will result in incremental income tax benefit of approximately $14 million.
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Refer to Item 1A, "Risk Factors" of this Annual Report on Form 10-K for additional information about risks and uncertainties facing our Company.
SEASONALITY
The beverage market is subject to some seasonal variations. Our beverage sales are generally higher during the warmer months and also can be influenced by the timing of holidays as well as weather fluctuations.
SEGMENTS
We report our business in three operating segments:
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The Beverage Concentrates segment reflects sales of our branded concentrates and syrup to third party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are CSD brands.
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•
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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 our own brands and third party brands, through both DSD and WD.
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•
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The Latin America Beverages segment reflects sales in Mexico, the Caribbean and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.
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Segment results are based on management reports. Net sales and SOP are the significant financial measures used to assess the operating performance of our operating segments.
VOLUME
In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates or finished beverages.
Beverage Concentrates Sales Volume
In our Beverage Concentrates segment, we measure our sales volume in two ways: (1) "concentrate case sales" and (2) "bottler case sales." The unit of measurement for both concentrate case sales and bottler case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.
Concentrate case sales represent units of measurement for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases.
Although net sales in our concentrate businesses are based on concentrate case sales, we believe that bottler case sales are also a significant measure of our performance because they measure sales of packaged beverages into retail channels.
Packaged Beverages and Latin America Beverages Sales Volume
In our Packaged Beverages and Latin America Beverages segments, we measure volume as case sales to customers. A case sale represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case sales include both our owned brands and certain brands licensed to and/or distributed by us.
Volume in Bottler Case Sales
In addition to sales volume, we measure volume in bottler case sales ("volume (BCS)") as sales of packaged beverages, in equivalent 288 fluid ounce cases, sold by us and our bottling partners to retailers and independent distributors. Our contract manufacturing sales are not included or reported as part of volume (BCS).
Bottler case sales and concentrates and packaged beverage sales volumes are not equal during any given period due to changes in bottler concentrates inventory levels, which can be affected by seasonality, bottler inventory and manufacturing practices and the timing of price increases and new product introductions.
RESULTS OF OPERATIONS
Executive Summary -
2016
Financial Overview and Recent Developments
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•
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On November 21, 2016, we entered into the Merger Agreement with Bai Brands whereby we agreed to acquire Bai Brands for consideration of approximately
$1,700 million
, subject to certain adjustments in the Merger Agreement.
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•
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On
January 31, 2017
, we completed the Bai Brands Merger and paid
$1,548 million
, net of the Company's previous ownership interest, and held back
$103 million
, which was placed in escrow, in exchange for the remaining ownership interests and seller transaction costs. As a result, our existing equity interest in Bai Brands was remeasured to fair value, which resulted in a gain of
$28 million
, which will be recognized in the first quarter of 2017 and included in other operating (income) expense, net.
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•
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During the fourth quarter of 2016, we completed the issuance of senior unsecured notes with an aggregate principal amount of
$1,550 million
. The net proceeds from the offering, together with cash on hand, funded the Bai Brands Merger.
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•
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During the fourth quarter of 2016, we redeemed a portion of the 6.82% senior notes due on May 1, 2018 (the "2018 Notes") and retired, at a premium, an aggregate principal amount of approximately
$360 million
. The loss on early extinguishment of the 2018 Notes was approximately
$31 million
.
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•
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During the years ended
December 31, 2016
,
2015
, and
2014
, we repurchased
5.7 million
,
6.5 million
, and
6.8 million
shares of our common stock, respectively, valued at approximately
$519 million
in
2016
,
$521 million
in
2015
, and
$400 million
in
2014
.
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•
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During the first quarter of
2017
, our Board declared a dividend of
$0.58
per share, which will be paid on April 5,
2017
, to shareholders of record as of March 14,
2017
. The dividend declared during the first quarter of
2017
increased approximately
9.4%
compared to the dividend declared in the previous quarter.
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•
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We expect to repurchase
$450 million
to
$500 million
of our common stock during the year ending
December 31, 2017
.
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References in the financial tables to percentage changes that are not meaningful are denoted by "NM."
Year Ended
December 31, 2016
Compared to
Year Ended
December 31,
2015
Consolidated Operations
The following table sets forth our
consolidated
results of operations for the
years ended December 31, 2016 and 2015
:
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For the Year Ended December 31,
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|
|
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|
2016
|
|
2015
|
|
Dollar
|
|
Percentage
|
(dollars in millions, except per share data)
|
Dollars
|
|
Percent
|
|
Dollars
|
|
Percent
|
|
Change
|
|
Change
|
Net sales
|
$
|
6,440
|
|
|
100.0
|
%
|
|
$
|
6,282
|
|
|
100.0
|
%
|
|
$
|
158
|
|
|
3
|
%
|
Cost of sales
|
2,582
|
|
|
40.1
|
|
|
2,559
|
|
|
40.7
|
|
|
23
|
|
|
1
|
|
Gross profit
|
3,858
|
|
|
59.9
|
|
|
3,723
|
|
|
59.3
|
|
|
135
|
|
|
4
|
|
Selling, general and administrative expenses
|
2,329
|
|
|
36.2
|
|
|
2,313
|
|
|
36.8
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|
|
16
|
|
|
1
|
|
Other operating (income) expense, net
|
(3
|
)
|
|
—
|
|
|
7
|
|
|
0.1
|
|
|
(10
|
)
|
|
NM
|
|
Income from operations
|
1,433
|
|
|
22.3
|
|
|
1,298
|
|
|
20.7
|
|
|
135
|
|
|
10
|
|
Interest expense
|
147
|
|
|
2.3
|
|
|
117
|
|
|
1.9
|
|
|
30
|
|
|
26
|
|
Loss on early extinguishment of debt
|
31
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
NM
|
|
Other income, net
|
(25
|
)
|
|
(0.4
|
)
|
|
(1
|
)
|
|
—
|
|
|
(24
|
)
|
|
NM
|
|
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
|
1,283
|
|
|
19.9
|
|
|
1,184
|
|
|
18.8
|
|
|
99
|
|
|
8
|
|
Provision for income taxes
|
434
|
|
|
6.7
|
|
|
420
|
|
|
6.7
|
|
|
14
|
|
|
3
|
|
Net income
|
847
|
|
|
13.2
|
%
|
|
764
|
|
|
12.2
|
%
|
|
83
|
|
|
11
|
%
|
Effective tax rate
|
33.8
|
%
|
|
NM
|
|
|
35.5
|
%
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
Volume (BCS).
Volume (BCS) increased
1%
for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
. In the U.S. and Canada, volume was
1%
higher, and in Mexico and the Caribbean, volume
in
creased
5%
, compared with the prior year. Both Branded CSD and NCB volume increased
1%
compared to the prior year.
In branded CSDs, Squirt increased
6%
primarily driven by increased sales to third-party bottlers and product innovation in our Latin America Beverages segment and our Hispanic strategy in the U.S. Schweppes grew
8%
reflecting distribution gains in our sparkling water and growth in the ginger ale category. Dr Pepper had gains of
1%
driven primarily by increases in our fountain business. Regular Dr Pepper increased compared to the prior year, which was partially offset by declines in diet. Peñafiel increased
3%
in our Latin America Beverages segment as a result of distribution gains, increased promotional activity and product innovation, partially offset by increased competition. Crush grew
3%
in the current year. These gains were partially offset by a
2%
decline in our other CSD brands compared to the prior year. Canada Dry, 7UP, A&W and Sunkist soda (our "Core 4 brands") were flat compared to the prior year, driven by an
6%
increase in Canada Dry fully offset by a
5%
decline in 7UP, a
2%
decrease in A&W and a
1%
decline in Sunkist soda.
In branded NCBs, our water category increased
18%
primarily due to incremental promotional activity behind Bai Brands primarily in our club channel, distribution gains for Bai Brands, Fiji and Core Hydration, and an increase in Aguafiel due to category growth in Mexico. Clamato increased
10%
primarily due to increased promotional activity, distribution gains, and product innovation in our Latin America Beverages segment and increased promotional activity in the U.S.. These increases were partially offset by declines in Hawaiian Punch, Mott's and our other NCB brands in total. Hawaiian Punch declined
6%
due to category headwinds and higher pricing for our single-serve packages while Mott's decreased
3%
due to declines in the juice category and higher pricing for our single-serve packages, partially offset by gains in our sauce products. Our other NCB brands in total declined
8%
. Snapple was flat compared to prior year.
Net Sales.
Net sales
in
creased
$158 million
, or approximately
3%
, for the
year ended
December 31, 2016
, compared with the
year ended
December 31,
2015
. The primary drivers of the increase in net sales included:
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favorable product and package mix, which increased net sales by about
2.5%
;
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•
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increase in shipments, which increased net sales by
1.0%
;
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•
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higher pricing, which increased net sales by
1.0%
;
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•
|
unfavorable foreign currency translation of
$79 million
, which decreased net sales by
1.0%
; and
|
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•
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unfavorable segment mix, which decreased net sales by
0.5%
.
|
Gross Profit
.
Gross profit
in
creased
$135 million
, or approximately
4%
, for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
. Gross margin was
59.9%
for the
year ended
December 31, 2016
compared to the gross margin of
59.3%
for the
year ended
December 31,
2015
. The following drivers impacted the gross margin:
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•
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favorable comparison in our mark-to-market activity on commodity derivative contracts, which increased our gross margin by
0.5%
.
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•
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lower commodity costs, led by packaging, and the change in our last-in, first-out ("LIFO") inventory provision, which increased our gross margin by
0.5%
;
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•
|
increase in our net pricing, which increased our gross margin by
0.4%
;
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•
|
ongoing productivity improvements, which increased our gross margin by
0.4%
;
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•
|
unfavorable product, package and segment mix, which decreased our gross margin by
0.7%
;
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•
|
unfavorable foreign currency effects, which decreased our gross margin by
0.3%
; and
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•
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increase in our other manufacturing costs, which decreased our gross margin by
0.2%
.
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The favorable mark-to-market activity on commodity derivative contracts for the
year ended
December 31, 2016
was
$21 million
in unrealized gains versus
$13 million
in unrealized losses in the prior year.
Selling, General and Administrative Expenses.
Selling, general and administrative ("SG&A") expenses increased
$16 million
for the
year ended
December 31, 2016
compared with the prior year. The increase was primarily driven by higher people costs, a
$4 million
arbitration award related to our Mexican joint venture, increased professional fees, a non-recurring charge of
$4 million
related to the transition of a certain employee benefit program and increases in other miscellaneous expenses. These increases were partially offset by lower logistics costs, driven by fuel rates, the impact of favorable foreign currency effects, which decreased SG&A expenses by
$27 million
, and a
$23 million
favorable comparison in the mark-to-market activity on commodity derivative contracts. For the
year ended
December 31, 2016
, we recognized
$31 million
in unrealized gains related to the mark-to-market activity on commodity derivative contracts versus
$8 million
in unrealized gains in the year ago period.
Other Operating (Income) Expense, Net.
Other operating (income) expense, net had a favorable change of
$10 million
due primarily to the
$7 million
favorable comparison related to the brand value impairment of Garden Cocktail recognized in the prior year and a
$5 million
gain on the step-acquisition of Industria Embotelladora de Bebidas Mexicanas ("IEBM") and Embotelladora Mexicana de Agua, S.A. de C.V. ("EMA").
Income from Operations.
Income from operations
in
creased
$135 million
to
$1,433 million
for the
year ended
December 31, 2016
, due primarily to the increase in gross profit, the favorable change in other operating (income) expense, net and the decrease in depreciation and amortization, driven by certain fully depreciated fixed assets. These drivers were partially offset by the increase in SG&A expenses.
Interest Expense.
Interest expense increased
$30 million
for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
, primarily driven by:
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•
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$12 million of mark-to-market activity recorded during the fourth quarter of 2016 for four derivative instruments, as the hedging relationships between the four outstanding interest rate swaps and our 2.70% senior notes due November 15, 2022 were de-designated on October 1, 2016;
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$5 million of amortization of deferred financing costs associated with the 364-day bridge loan facility (the "Bridge Facility");
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•
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higher average debt balance and higher average interest rates attributable to the issuance of our 3.40% senior notes due November 15, 2025 (the "2025 Notes") and 4.50% senior notes due November 15, 2045 (the "2045 Notes") during the fourth quarter of 2015; and
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•
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the issuance of the senior unsecured notes during the fourth quarter of 2016 for the Bai Brands Merger.
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Loss on Early Extinguishment of Debt.
In October 2016, we redeemed a portion of the 2018 Notes and retired, at a premium, an aggregate principal amount of approximately
$360 million
with the proceeds from the issuance of our 2.55% senior notes due on September 15, 2026 (the "2026 Notes"). The loss on early extinguishment of the 2018 Notes, which primarily represented the redemption premium, was approximately
$31 million
. There was no loss on early extinguishment of debt in 2015.
Other Income, Net.
Other income, net increased
$24 million
for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
driven primarily by a
$21 million
gain on the extinguishment of a multi-employer pension plan withdrawal liability.
Effective Tax Rate.
The effective tax rates for the
year ended
December 31, 2016
and
2015
were
33.8%
and
35.5%
, respectively. For the
year ended
December 31, 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
.
Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the years ended
December 31, 2016
and
2015
, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:
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For the Year Ended
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Segment Results — Net sales
|
|
|
|
Beverage Concentrates
|
$
|
1,284
|
|
|
$
|
1,241
|
|
Packaged Beverages
|
4,696
|
|
|
4,544
|
|
Latin America Beverages
|
460
|
|
|
497
|
|
Net sales
|
$
|
6,440
|
|
|
$
|
6,282
|
|
|
|
|
|
|
For the Year Ended
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Segment Results — SOP
|
|
|
|
Beverage Concentrates
|
$
|
834
|
|
|
$
|
807
|
|
Packaged Beverages
|
771
|
|
|
709
|
|
Latin America Beverages
|
78
|
|
|
88
|
|
Total SOP
|
1,683
|
|
|
1,604
|
|
Unallocated corporate costs
|
253
|
|
|
299
|
|
Other operating (income) expense, net
|
(3
|
)
|
|
7
|
|
Income from operations
|
1,433
|
|
|
1,298
|
|
Interest expense, net
|
144
|
|
|
115
|
|
Loss on early extinguishment of debt
|
31
|
|
|
—
|
|
Other income, net
|
(25
|
)
|
|
(1
|
)
|
Income before provision for income taxes and equity in (loss) earnings of unconsolidated subsidiaries
|
$
|
1,283
|
|
|
$
|
1,184
|
|
BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the
years ended December 31, 2016 and 2015
:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
December 31,
|
|
Dollar
|
|
Percentage
|
(in millions)
|
2016
|
|
2015
|
|
Change
|
|
Change
|
Net sales
|
$
|
1,284
|
|
|
$
|
1,241
|
|
|
$
|
43
|
|
|
3
|
%
|
SOP
|
834
|
|
|
807
|
|
|
27
|
|
|
3
|
|
Net Sales.
Net sales
in
creased
$43 million
for the
year ended
December 31, 2016
, compared with the
year ended
December 31,
2015
. The
in
crease was due to higher pricing, a
1%
increase in concentrate case sales, favorable product mix and lower discounts. These drivers were partially offset by
$3 million
of unfavorable foreign currency translation. The lower discounts were a result of a favorable comparison of the annual true-up of our estimated customer incentive liability partially offset by higher discounts driven by our fountain business.
SOP.
SOP
in
creased
$27 million
for the
year ended
December 31, 2016
, compared with the
year ended
December 31,
2015
, driven primarily by an increase in net sales partially offset by higher SG&A expenses. The increase in SG&A expenses was the result of a
$6 million
increase in planned marketing investments, higher people costs and increases in other operating costs.
Volume (BCS).
Volume (BCS) increased
1%
for the
year ended
December 31, 2016
, compared with the
year ended
December 31,
2015
. Schweppes had gains of
8%
driven by distribution gains in our sparkling water and growth in the ginger ale category. Dr Pepper increased
1%
, driven primarily by our fountain business. Regular Dr Pepper increased compared to the prior year, which was partially offset by declines in diet. Our Core 4 brands grew
1%
compared to the prior year as a result of a
6%
increase in Canada Dry, partially offset by a
6%
decrease in 7UP, a
3%
decline in Sunkist soda and a
2%
decrease in A&W. Crush increased
3%
for the current year. These increases were partially offset by a
7%
decline in our other brands.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the
years ended December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
December 31,
|
|
Dollar
|
|
Percentage
|
(in millions)
|
2016
|
|
2015
|
|
Change
|
|
Change
|
Net sales
|
$
|
4,696
|
|
|
$
|
4,544
|
|
|
$
|
152
|
|
|
3
|
%
|
SOP
|
771
|
|
|
709
|
|
|
62
|
|
|
9
|
|
Volume.
Sales volume was flat for the year ended December 31, 2016 as compared with the year ended December 31, 2015 as increases in our branded NCB volumes were fully offset by declines in our branded CSD volumes and contract manufacturing.
Branded CSD volumes
de
creased
1%
for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
. Volume for our Core 4 brands
de
creased
1%
, led by a
4%
decrease in 7UP, a
3%
decrease in A&W and a
1%
decline in Sunkist soda, partially offset by a
6%
in
crease in Canada Dry. Our other CSD brands decreased
6%
. The decreases were partially offset by a
5%
gain in Squirt. Dr Pepper was flat compared to the prior year as increases in regular were fully offset by declines in diet.
Branded
NCB
volumes
in
creased
2%
for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
. Our water category increased
23%
primarily due to distribution gains for Bai Brands, Fiji and Core Hydration, and incremental promotional activity behind Bai Brands primarily in our club channel. Clamato and Snapple increased
5%
and
1%
, respectively. Our other NCB brands increased
3%
, led by Body Armor and Venom. These increases were partially offset by a
5%
decline in Hawaiian Punch due to category headwinds and higher pricing for our single-serve packages and a
3%
decrease in Mott's due to declines in the juice category and higher pricing for our single-serve packages, partially offset by gains in our sauce products.
Contract manufacturing decreased
3%
for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
.
Net Sales.
Net sales
in
creased
$152 million
for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
. Net sales increased due to favorable product and package mix, as a result of our NCBs, including our allied brands, and higher pricing.
SOP.
SOP
in
creased
$62 million
for the
year ended
December 31, 2016
, compared with the
year ended
December 31,
2015
, as a result of an increase in net sales partially offset by increases in cost of sales and SG&A expenses. Cost of sales increased due to higher costs associated with product mix, as a result of our NCBs, including our allied brands, partially offset by lower commodity costs, led by packaging, and ongoing productivity improvements. SG&A expenses increased due primarily to higher people costs, increased planned marketing investments, a non-recurring charge of
$4 million
related to the transition of a certain employee benefit program and increases in other operating costs. These increases were partially offset by reductions in our logistics costs, driven primarily by lower fuel rates, and lower incentive compensation.
LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the
years ended December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
December 31,
|
|
Dollar
|
|
Percentage
|
(in millions)
|
2016
|
|
2015
|
|
Change
|
|
Change
|
Net sales
|
$
|
460
|
|
|
$
|
497
|
|
|
$
|
(37
|
)
|
|
(7
|
)%
|
SOP
|
78
|
|
|
88
|
|
|
(10
|
)
|
|
(11
|
)
|
Volume.
Sales volume
in
creased
5%
for the
year ended
December 31, 2016
as compared with the
year ended
December 31,
2015
. The
in
crease in sales volume was primarily driven by a
7%
gain in Squirt, due to increased sales to third party bottlers and product innovation. Peñafiel
in
creased
3%
as a result of distribution gains, increased promotional activity and product innovation, partially offset by increased competition. Clamato increased
20%
due to increased promotional activity, distribution gains, and product innovation. Aguafiel and Crush increased
7%
and
11%
, respectively. Our other brands increased approximately
1%
. These increases were partially offset by a
de
cline in 7UP of
4%
, driven by declines in Puerto Rico.
Net Sales.
Net sales
de
creased
$37 million
for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
. Net sales
de
creased as a result of unfavorable foreign currency translation of
$72 million
, which was partially offset by increased sales volume and higher pricing.
SOP.
SOP
de
creased
$10 million
for the
year ended
December 31, 2016
compared with the
year ended
December 31,
2015
, driven by a decrease in net sales, partially offset by decreases in cost of sales and SG&A expenses. Cost of sales decreased in the current year primarily as a result of favorable foreign currency effects, ongoing productivity improvements, and lower commodity costs, led by sweeteners and packaging, which were partially offset by higher costs associated with increased sales volumes. SG&A expenses decreased in the current year primarily due to favorable foreign currency effects, which were partially offset by higher people costs, a
$4 million
arbitration award related to our former Mexican joint venture, increased professional fees, higher marketing investments, and increases in other operating costs. The impact of the favorable foreign currency effects, which decreased cost of sales and SG&A expenses, totaled
$44 million
.
Year Ended December 31,
2015
Compared to Year Ended December 31,
2014
Consolidated Operations
The following table sets forth our consolidated results of operations for the years ended December 31,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
2015
|
|
2014
|
|
Dollar
|
|
Percentage
|
(dollars in millions, except per share data)
|
Dollars
|
|
Percent
|
|
Dollars
|
|
Percent
|
|
Change
|
|
Change
|
Net sales
|
$
|
6,282
|
|
|
100.0
|
%
|
|
$
|
6,121
|
|
|
100.0
|
%
|
|
$
|
161
|
|
|
3
|
%
|
Cost of sales
|
2,559
|
|
|
40.7
|
|
|
2,491
|
|
|
40.7
|
|
|
68
|
|
|
3
|
|
Gross profit
|
3,723
|
|
|
59.3
|
|
|
3,630
|
|
|
59.3
|
|
|
93
|
|
|
3
|
|
Selling, general and administrative expenses
|
2,313
|
|
|
36.8
|
|
|
2,334
|
|
|
38.1
|
|
|
(21
|
)
|
|
(1
|
)
|
Income from operations
|
1,298
|
|
|
20.7
|
|
|
1,180
|
|
|
19.3
|
|
|
118
|
|
|
10
|
|
Interest expense
|
117
|
|
|
1.9
|
|
|
109
|
|
|
1.8
|
|
|
8
|
|
|
7
|
|
Provision (benefit) for income taxes
|
420
|
|
|
6.7
|
|
|
371
|
|
|
6.1
|
|
|
49
|
|
|
13
|
|
Net income
|
764
|
|
|
12.2
|
|
|
703
|
|
|
11.5
|
|
|
61
|
|
|
9
|
%
|
Effective tax rate
|
35.5
|
%
|
|
NM
|
|
|
34.6
|
%
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
Volume (BCS).
Volume (BCS) increased 2% for the year ended December 31, 2015 compared with the year ended December 31, 2014. In the U.S. and Canada, volume was 1% higher, and in Mexico and the Caribbean, volume increased 8%, compared with the year ago period. Branded CSD volume increased 1% while branded NCB volume was 4% higher compared to the prior year.
In branded CSDs, Peñafiel grew 14% in our Latin America Beverages segment as a result of distribution gains and increased promotional activity. Squirt increased 7% primarily driven by increased sales to third-party bottlers. Schweppes grew 9% reflecting distribution gains in our sparkling water and growth in the ginger ale category. These gains were partially offset by a 1% decrease in Dr Pepper, driven primarily by declines in our diet products, a 3% decrease in RC Cola and a 1% decline in Crush. Canada Dry, 7UP, A&W and Sunkist soda (our "Core 4 brands") were flat compared to the prior year, driven by an 8% increase in Canada Dry fully offset by a 6% decline in 7UP, a 4% decrease in Sunkist soda and a 1% decline in A&W. Our other CSD brands in total were also flat compared to the prior year.
In branded NCBs, our water category increased 13% due to distribution gains and product innovation for Bai Brands and marketing investments behind Fiji. Snapple grew 6% over last year primarily driven by product innovation and distribution gains. Clamato increased 12% primarily due to distribution gains and increased promotional activity in our Latin America Beverages segment. Hawaiian Punch grew 3% primarily as a result of package innovation. These increases were partially offset by a 1% decrease in Mott's and a 3% decline in our other NCB brands in total.
Net Sales.
Net sales increased $161 million, or approximately 3%, for the year ended December 31, 2015 compared with the year ended December 31, 2014. The primary drivers of the increase were favorable product and package mix, an increase in branded sales volumes, favorable segment mix and higher pricing, partially offset by $115 million in unfavorable foreign currency translation.
Gross Profit
.
Gross profit increased $93 million, or approximately 3%, for the year ended December 31, 2015 compared with the year ended December 31, 2014. Although the gross margin for the year ended December 31, 2015 of 59.3% remain unchanged year over year, the following drivers impacted the gross margin:
|
|
•
|
lower commodity costs, led by packaging, and net of the change in our last-in, first-out ("LIFO") inventory provision, which increased our gross margin by 0.8%;
|
|
|
•
|
ongoing productivity improvements, which increased our gross margin by 0.5%;
|
|
|
•
|
decrease in our other manufacturing costs, which increased our gross margin by 0.2%;
|
|
|
•
|
increase in our net pricing, which increased our gross margin by 0.1%;
|
|
|
•
|
unfavorable product, package and segment mix, which decreased our gross margin by 0.7%;
|
|
|
•
|
unfavorable foreign currency effects, which decreased our gross margin by 0.5%; and
|
|
|
•
|
unfavorable comparison in our mark-to-market activity on commodity derivative contracts, which decreased our gross margin by 0.4%.
|
The unfavorable mark-to-market activity on commodity derivative contracts for the year ended December 31, 2015 was $13 million in unrealized losses versus $11 million in unrealized gains in the prior year.
SG&A
Expenses.
SG&A
expenses decreased $21 million for the year ended December 31, 2015 compared with the prior year. The decrease was primarily driven by the impact of favorable foreign currency effects, which decreased SG&A expenses by $41 million, and a $32 million favorable comparison in the mark-to-market activity on commodity derivative contracts. For the year ended December 31, 2015, we recognized $8 million in unrealized gains related to the mark-to-market activity on commodity derivative contracts versus $24 million in unrealized losses in the year ago period. These drivers were partially offset by higher people costs, which were driven by inflationary increases and the impact of increased sales volumes, and higher performance-based incentive compensation.
Income from Operations.
Income from operations increased $118 million to $1,298 million for the year ended December 31, 2015, due primarily to the increase in gross profit and decreases in SG&A expenses and depreciation and amortization, partially offset by a non-cash charge of $7 million for the brand value impairment of Garden Cocktail.
Interest Expense.
Interest expense increased $8 million primarily driven by the impact of the issuance of our 3.40% senior notes due November 15, 2025 (the "2025 Notes") and 4.50% senior notes due November 15, 2045 (the "2045 Notes") during the fourth quarter of 2015.
Effective Tax Rate.
The effective tax rates for the year ended December 31, 2015 and 2014 were 35.5% and 34.6%, respectively. The 2015 effective tax rate was higher, compared to the prior year, as a result of an income tax benefit in 2014 of $4 million due to the resolution of a tax audit in a foreign jurisdiction.
Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the years ended December 31,
2015
and
2014
, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
December 31,
|
(in millions)
|
2015
|
|
2014
|
Segment Results — Net sales
|
|
|
|
Beverage Concentrates
|
$
|
1,241
|
|
|
$
|
1,228
|
|
Packaged Beverages
|
4,544
|
|
|
4,361
|
|
Latin America Beverages
|
497
|
|
|
532
|
|
Net sales
|
$
|
6,282
|
|
|
$
|
6,121
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
December 31,
|
(in millions)
|
2015
|
|
2014
|
Segment Results — SOP
|
|
|
|
Beverage Concentrates
|
$
|
807
|
|
|
$
|
790
|
|
Packaged Beverages
|
709
|
|
|
636
|
|
Latin America Beverages
|
88
|
|
|
78
|
|
Total SOP
|
1,604
|
|
|
1,504
|
|
Unallocated corporate costs
|
299
|
|
|
323
|
|
Other operating expense, net
|
7
|
|
|
1
|
|
Income from operations
|
1,298
|
|
|
1,180
|
|
Interest expense, net
|
115
|
|
|
107
|
|
Other income, net
|
(1
|
)
|
|
—
|
|
Income before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries
|
$
|
1,184
|
|
|
$
|
1,073
|
|
BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the years ended December 31,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
December 31,
|
|
Dollar
|
|
Percentage
|
(in millions)
|
2015
|
|
2014
|
|
Change
|
|
Change
|
Net sales
|
$
|
1,241
|
|
|
$
|
1,228
|
|
|
$
|
13
|
|
|
1
|
%
|
SOP
|
807
|
|
|
790
|
|
|
17
|
|
|
2
|
|
Net Sales.
Net sales increased $13 million for the year ended December 31, 2015, compared with the year ended December 31, 2014. The increase was due to favorable mix, primarily driven by our fountain business, and higher pricing. The increases were partially offset by higher discounts primarily driven by our fountain business, unfavorable foreign currency translation of $11 million and a slight reduction in our concentrate case sales.
SOP.
SOP increased $17 million for the year ended December 31, 2015, compared with the year ended December 31, 2014, driven primarily by an increase in net sales and a decrease in cost of sales. The decrease in cost of sales was primarily driven by a favorable LIFO comparison, favorable manufacturing and delivery costs, ongoing productivity improvements and lower commodity costs.
Volume (BCS).
Volume (BCS) was flat for the year ended December 31, 2015 compared with the year ended December 31, 2014. Schweppes had gains of 8% driven by distribution gains in our sparkling water and growth in the ginger ale category. Our Core 4 brands increased 1% compared to the prior year as a result of a 7% increase in Canada Dry, partially offset by a 7% decrease in 7UP, a 4% decline in Sunkist soda and a 3% decrease in A&W. These increases were fully offset by decreases in Dr Pepper, Crush and our other brands. Dr Pepper decreased 1%, driven primarily by declines in our diet products. Crush decreased 1% for 2015. Our other brands declined 3%.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the years ended December 31,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
December 31,
|
|
Dollar
|
|
Percentage
|
(in millions)
|
2015
|
|
2014
|
|
Change
|
|
Change
|
Net sales
|
$
|
4,544
|
|
|
$
|
4,361
|
|
|
$
|
183
|
|
|
4
|
%
|
SOP
|
709
|
|
|
636
|
|
|
73
|
|
|
11
|
|
Volume.
Branded CSD volumes were flat for the year ended December 31, 2015, compared with the year ended December 31, 2014. Squirt increased 5%, compared to the prior year, driven primarily by our Hispanic strategy. Volume for our Core 4 brands increased 1%, led by a 13% increase in Canada Dry and a 1% gain in A&W, partially offset by a 5% decrease in 7UP and a 3% decline in Sunkist soda. These increases were fully offset by 1% declines in Dr Pepper, driven primarily by declines in our diet products, RC Cola and our other CSD brands.
Branded NCB volumes increased 6% for the year ended December 31, 2015 compared with the year ended December 31, 2014. Our water category increased 22% primarily due to distribution gains for Bai Brands and marketing investments behind Fiji. Snapple gained 6% primarily driven by product innovation and distribution gains, while Hawaiian Punch increased 4% primarily as a result of package innovation. Clamato increased 6% while Mott's was flat. Our other NCB brands were 2% higher compared to the prior year, led by Venom.
Net Sales.
Net sales increased $183 million for the year ended December 31, 2015 compared with the year ended December 31, 2014. Net sales increased due to favorable product mix, higher branded sales volumes and net pricing increases, partially offset by $22 million of unfavorable foreign currency translation.
SOP.
SOP increased $73 million for the year ended December 31, 2015, compared with the year ended December 31, 2014, as a result of an increase in net sales partially offset by increases in cost of sales and SG&A expenses. Cost of sales increased as a result of higher costs associated with product mix and increased branded sales volumes. These increases in our cost of sales were partially offset by lower commodity costs, led by packaging, and ongoing productivity improvements. SG&A expenses increased due primarily to higher people costs, which were driven by inflationary increases and the impact of increased sales volumes. Other drivers of the change included an increase in litigation expense and higher incentive compensation, partially offset by favorable foreign currency effects. The increase in litigation expense was the result of various settlements agreed to during the year and the unfavorable comparison of a litigation provision reversed in the prior year. The impact of the favorable foreign currency effects, which decreased cost of sales and SG&A expenses, totaled $6 million.
LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the years ended December 31,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
December 31,
|
|
Dollar
|
|
Percentage
|
(in millions)
|
2015
|
|
2014
|
|
Change
|
|
Change
|
Net sales
|
$
|
497
|
|
|
$
|
532
|
|
|
$
|
(35
|
)
|
|
(7
|
)%
|
SOP
|
88
|
|
|
78
|
|
|
10
|
|
|
13
|
|
Volume.
Sales volume increased 8% for the year ended December 31, 2015 as compared with the year ended December 31, 2014. The increase in sales volume was primarily driven by a 14% increase in Peñafiel as a result of distribution gains and increased promotional activity. Squirt grew by 8% as a result of increased sales to third party bottlers. Clamato increased 22% due to distribution gains and increased promotional activity, while 7UP increased 4%. These increases were partially offset by declines in Crush and Aguafiel of 4% and 1%, respectively, while our other brands decreased 6%.
Net Sales.
Net sales decreased $35 million for the year ended December 31, 2015 compared with the year ended December 31, 2014. Net sales decreased as a result of unfavorable foreign currency translation of $82 million, which was partially offset by increased sales volume.
SOP.
SOP increased $10 million for the year ended December 31, 2015 compared with the year ended December 31, 2014, driven by decreases in cost of sales and SG&A expenses, which were partially offset by a decrease in net sales. Cost of sales decreased in 2015 primarily as a result of favorable foreign currency effects, ongoing productivity improvements, and lower commodity costs, led by packaging, which were partially offset by higher costs associated with increased sales volumes. SG&A expenses decreased in 2015 primarily due to favorable foreign currency effects and lower marketing investments, which were partially offset by higher logistics costs, driven by increased sales volumes. The impact of the favorable foreign currency effects, which decreased cost of sales and SG&A expenses, totaled $52 million.
LIQUIDITY AND CAPITAL RESOURCES
Trends and Uncertainties Affecting Liquidity
Customer and consumer demand for our products may be impacted by various risk factors discussed in Item 1A, "Risk Factors", including recession or other economic downturn in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume. Similarly, disruptions in financial and credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials.
We believe that the following events, trends and uncertainties may also impact liquidity:
|
|
•
|
the closing of the Bai Brands Merger in January 2017, which reduced our liquidity by approximately $1,653 million;
|
|
|
•
|
our continued repurchases of our outstanding common stock pursuant to our repurchase programs;
|
|
|
•
|
continued payment of dividends;
|
|
|
•
|
continued capital expenditures;
|
|
|
•
|
seasonality of our operating cash flows could impact short-term liquidity;
|
|
|
•
|
our ability to negotiate a new credit agreement to replace our existing credit facility which expires in September 2017;
|
|
|
•
|
our ability to issue unsecured commercial paper notes ("Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of
$500 million
;
|
|
|
•
|
fluctuations in our tax obligations;
|
|
|
•
|
future equity investments in allied brands; and
|
|
|
•
|
future mergers or acquisitions of regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.
|
Financing Arrangements
The following descriptions represent our available financing arrangements as of
December 31, 2016
. As of
December 31, 2016
, we were in compliance with all covenant requirements fo
r our senior unsecured notes,
unsecured credit agreement,
commercial paper program
and bridge financing commitment letter.
Commercial Paper Program
On December 10, 2010, we entered into a commercial paper program under which we may issue Commercial Paper on a private placement basis up to a maximum aggregate amount outstanding at any time of
$500 million
. The maturities of the Commercial Paper will vary, but may not exceed 364 days from the date of issuance. We issue Commercial Paper as needed for general corporate purposes. The program is supported by the Revolver (as defined below). Outstanding Commercial Paper reduces the amount of borrowing capacity available under the Revolver and outstanding amounts under the Revolver reduce the Commercial Paper availability. Under this program, we had weighted average Commercial Paper borrowings of
$1 million
,
$23 million
and
$67 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, with maturities of 90 days or less. These Commercial Paper borrowings had a weighted average rate of
0.65%
,
0.50%
and
0.23%
for
2016
,
2015
and
2014
, respectively. As of
December 31, 2016
and
2015
, we had
no
Commercial Paper outstanding.
Unsecured Credit Agreement
On September 25, 2012, we entered into a five-year unsecured credit agreement (the "Credit Agreement"), which provides for a
$500 million
revolving line of credit (the "Revolver"). Borrowings under the Revolver bear interest at a floating rate per annum based upon the alternate base rate ("ABR") or the Eurodollar rate, in each case plus an applicable margin which varies based upon our debt ratings. Rates range from
0.000%
to
0.300%
for ABR loans and from
0.795%
to
1.300%
for Eurodollar loans. The ABR is defined as the greater of (a) JPMorgan Chase Bank's prime rate, (b) the federal funds effective rate plus
0.500%
and (c) the adjusted LIBOR for a one month interest period. The adjusted LIBOR is the London interbank offered rate for dollars adjusted for a statutory reserve rate set by the Board of Governors of the U.S. Federal Reserve System.
Additionally, the Revolver is available for the issuance of letters of credit and swingline advances not to exceed
$75 million
and
$50 million
, respectively. Swingline advances will accrue interest at a rate equal to the ABR plus the applicable margin. Letters of credit and swingline advances will reduce, on a dollar for dollar basis, the amount available under the Revolver.
We are currently in the process of negotiating a new credit agreement to replace the Credit Agreement, as it is maturing in September 2017.
The following table provides amounts utilized and available under the Revolver and each sublimit arrangement type as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
(in millions)
|
Amount Utilized
|
|
Balances Available
|
Revolver
|
$
|
—
|
|
|
$
|
500
|
|
Letters of credit
|
—
|
|
|
75
|
|
Swingline advances
|
—
|
|
|
50
|
|
The Credit Agreement further provides that we may request at any time, subject to the satisfaction of certain conditions, that the aggregate commitments under the facility be increased by a total amount not to exceed
$250 million
.
The Credit Agreement's representations, warranties, covenants and events of default are generally customary for investment grade credit and include a financial covenant that requires us to maintain a ratio of consolidated total debt (as defined in the Credit Agreement) to annualized consolidated EBITDA (as defined in the Credit Agreement) of no more than
3.00
to
1.00
, tested quarterly. Upon the occurrence of an event of default, among other things, amounts outstanding under the Credit Agreement may be accelerated and the commitments may be terminated. Our obligations under the Credit Agreement are guaranteed by certain of our direct and indirect domestic subsidiaries on the terms set forth in the Credit Agreement. The Credit Agreement has a maturity date of September 25, 2017; however, with the consent of lenders holding more than
50%
of the total commitments under the Credit Agreement and subject to the satisfaction of certain conditions, we may extend the maturity date for up to two additional one-year terms.
A
facility fee is payable quarterly to the lenders on the unused portion of the commitments available under the Revolver equal to
0.08%
to
0.20%
per annum, depending upon our debt ratings.
Bridge Financing for Bai Brands
On November 21, 2016, the
Company
entered into the Bridge Facility in an aggregate principal amount of up to
$1,700 million
, in order to ensure that financing would be available for the Bai Brands Merger. Refer to
Note 9 of the Notes to our Audited Consolidated Financial Statements
for information on fees incurred in connection with the Bridge Facility.
The capacity of the Bridge Facility is reduced dollar-for-dollar by the consummation of any debt or equity offerings or any asset sales, as defined in the Commitment Letter filed in our Form 8-K on November 23, 2016. The issuance of four tranches of senior unsecured notes, consisting of the
2021-B Notes
for
$250 million
, the
2023 Notes
for
$500 million
, the
2027 Notes
for
$400 million
and the
2046 Notes
for
$400 million
(collectively, the "Acquisition Notes") in December 2016 reduced the capacity of the Bridge Facility by the net proceeds received of
$1,541 million
, and as of December 31, 2016,
$159 million
remained available to the
Company
under the Bridge Facility. On
January 31, 2017
, in accordance with its terms, the remaining commitment under the Bridge Facility was automatically terminated upon the Company's funding of the Bai Brands Merger with the net proceeds from the Acquisition Notes and cash on hand.
Shelf Registration Statement
On August 10, 2016, our Board authorized us to issue up to
$2,000 million
of securities from time to time. Subsequently, we filed a "well-known seasoned issuer" shelf registration statement with the
SEC
, effective September 2, 2016, which registers an indeterminable amount of securities for future sales. On November 16, 2016, the Board increased the authorized aggregate amount of securities available to be issued by an additional
$400 million
. As of
December 31, 2016
, we have issued senior unsecured notes of
$1,950 million
, as described in
Note 9 of the Notes to our Audited Consolidated Financial Statements
, leaving
$450 million
available for issuance under the authorization as of
December 31, 2016
.
Letters of Credit Facilities
We currently have letters of credit facilities available in addition to the portion of the Revolver available for issuance of letters of credit. Under these incremental letters of credit facilities,
$120 million
is available for the issuance of letters of credit,
$60 million
of which was utilized as of
December 31, 2016
and
$60 million
of which remains available for use.
Liquidity
Based on our current and anticipated level of operations, we believe that our operating cash flows and cash on hand will be sufficient to meet our anticipated obligations for the next twelve months. To the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may utilize amounts available under our financing arrangements, if necessary.
The following table summarizes our cash activity for the
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Net cash provided by operating activities
|
$
|
939
|
|
|
$
|
991
|
|
|
$
|
1,022
|
|
Net cash used in investing activities
|
(189
|
)
|
|
(194
|
)
|
|
(185
|
)
|
Net cash provided by (used in) financing activities
|
130
|
|
|
(114
|
)
|
|
(747
|
)
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities
de
creased
$52 million
for the
year ended
December 31, 2016
, as compared to the
year ended
December 31, 2015
, primarily due to our $35 million multi-employer pension plan settlement payment.
Net cash provided by operating activities
de
creased
$31 million
for the year ended
December 31, 2015
, as compared to the year ended
December 31, 2014
, primarily due to unfavorable working capital comparisons to the prior year.
NET CASH USED IN INVESTING ACTIVITIES
2016
Cash used in investing activities for the
year ended
December 31, 2016
consisted primarily of purchases of property, plant and equipment of
$180 million
, the step acquisition of IEBM and EMA of
$15 million
and an additional investment in BA Sports Nutrition, LLC ("BA Sports") of
$6 million
, partially offset by cash received in the step acquisition of IEBM and EMA of
$17 million
.
2015
Cash used in investing activities for the year ended
December 31, 2015
, consisted primarily of purchases of property, plant and equipment of
$179 million
and investments in BA Sports and Bai Brands of
$20 million
and
$15 million
, respectively, partially offset by
$20 million
of proceeds from disposals of property, plant and equipment.
2014
Cash used in investing activities for the year ended
December 31, 2014
, consisted primarily of purchases of property, plant and equipment of
$170 million
and
$19 million
paid in connection with the acquisition of Davis Beverages Group, Inc. and Davis Bottling Co., Inc. (“Davis”).
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
2016
Net cash provided by financing activities for the
year ended
December 31, 2016
primarily consisted of proceeds from our issuances of senior unsecured notes, partially offset by stock repurchases of
$519 million
, dividend payments of
$386 million
, the repayment at maturity of our 2.90% Notes due 2016 of $500 million, and our partial redemption of our 6.82% Senior Notes due 2018, which included
$360 million
for principal repayments and $31 million related to the redemption premium.
On September 16, 2016, we completed the issuance of $400 million aggregate principal amount of 2.55% Senior Notes due 2026.
On December 14, 2016, we issued an additional $1,550 million of senior unsecured notes consisting of
$250 million
aggregate principal amount of
2.53%
Senior Notes due 2021,
$500 million
aggregate principal amount of
3.13%
Senior Notes due 2023,
$400 million
aggregate principal amount of
3.43%
Senior Notes due 2027, and
$400 million
aggregate principal amount of
4.42%
Senior Notes due 2046.
2015
Net cash used in financing activities for the year ended
December 31, 2015
primarily consisted of stock repurchases of
$521 million
and dividend payments of
$355 million
, largely offset by proceeds from our issuance of senior unsecured notes.
On November 9, 2015,
we
completed the issuance of two tranches of senior unsecured notes, consisting of
$500 million
aggregate principal amount of our 3.40% Senior Notes due November 15, 2025 and
$250 million
aggregate principal amount of our 4.50% Senior Notes due November 15, 2045.
2014
Net cash used in financing activities for the year ended
December 31,
2014
primarily consisted of stock repurchases of
$400 million
and dividend payments of
$317 million
.
Debt Ratings
As of
December 31, 2016
, our debt ratings were as follows:
|
|
|
|
|
|
Rating Agency
|
Long-Term Debt Rating
|
Commercial Paper Rating
|
Outlook
|
Date of Last Change
|
Moody's
|
Baa1
|
P-2
|
Stable
|
May 18, 2011
|
S&P
|
BBB+
|
A-2
|
Stable
|
November 13, 2013
|
These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.
Capital Expenditures
Capital expenditures were
$180 million
,
$179 million
and
$170 million
for the
years ended December 31, 2016, 2015 and 2014
, respectively. Capital expenditures for the year ended
December 31, 2016
primarily related to machinery and equipment, our distribution fleet, and costs associated with a new manufacturing plant in Mexico.
Capital expenditures for the year ended
December 31, 2015
primarily related to machinery and equipment including production improvements in our Mexico facilities, distribution fleet and buildings and improvements.
Capital expenditures for the year ended
December 31, 2014
primarily related to machinery and equipment including production improvements in our Mexico facilities, our distribution fleet, IT investments and expansion and replacement of existing cold drink equipment.
In
2017
, we expect to incur annual capital expenditures, net of proceeds from disposals, in an amount of approximately 3% of our net sales, which we expect to fund through cash provided by operating activities.
Cash and Cash Equivalents
As a result of the above items, cash and cash equivalents
in
creased
$876 million
since
December 31, 2015
to
$1,787 million
as of
December 31, 2016
, primarily driven by the issuance of senior unsecured notes in December 2016 and our net cash provided by operating activities, partially offset by increased distributions to our shareholders.
Our cash balances are used to fund acquisitions, working capital requirements, scheduled debt and interest payments, income tax obligations, repurchases of our common stock, dividend payments and capital expenditures. Cash generated by our foreign operations is generally repatriated to the U.S. periodically except when required to fund working capital requirements in those jurisdictions. Foreign cash balances were
$51 million
and
$52 million
as of
December 31, 2016
and
2015
, respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.
Acquisitions and Investments
We have shown a disciplined approach to strategic investments in certain allied brands to enhance our position in premium and high growth categories and strengthen our existing distribution partnerships. During the year ended
December 31,
2015, we acquired a minor equity interest in Bai Brands for $15 million. On November 21, 2016, we entered into the Merger Agreement with Bai Brands whereby we agreed to acquire the remaining equity interests in Bai Brands for an aggregate purchase price of $1.7 billion, subject to certain adjustments in the Merger Agreement. On
January 31, 2017
, we completed the Bai Brands Merger. Refer to Notes 3 and 24 of the Notes to our Audited Consolidated Financial Statements for additional information on the Bai Brands Merger.
During the year ended
December 31,
2015, the
Company
acquired an
11.7%
equity interest in BA Sports Nutrition, LLC for
$20 million
. During the year ended December 31, 2016, we acquired an additional interest of 3.8% in BA Sports Nutrition, LLC for $6 million, which increased our total ownership interest to 15.5%.
We have also made acquisitions to strengthen our route to market and support efforts to build and enhance our leading brands. On September 13, 2016, we agreed to purchase all of the outstanding shares of IEBM and EMA, previously 50:50 joint ventures between one of our subsidiaries and Acqua Minerale San Benedetto S.P.A. ("San Benedetto"). We paid approximately
$15 million
in cash for all of the outstanding shares of IEBM and EMA owned by San Benedetto.
On October 31, 2014, we acquired certain assets and liabilities of Davis in exchange for
$19 million
in cash and a
$2 million
holdback liability to satisfy any working capital adjustments and applicable indemnification claims, pursuant to the terms of the purchase agreement. During the year ended December 31, 2015, we paid out
$1 million
of the holdback liability.
We may continue to make future equity investments in allied brands and/or acquisitions of regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage. Any acquisitions may require additional funding for future capital expenditures and possibly restructuring expenses.
Total Shareholder Distributions
|
|
|
Our Board declared aggregate dividends per share during the years ended December 31, 2016, 2015 and 2014 of $2.12, $1.92 and $1.64, respectively, and we continued common stock repurchases based upon authorizations from our Board. The following chart details these payments during the years ended December 31, 2016, 2015 and 2014.
|
|
We increased our shareholder distributions 3% and 22%, respectively, for the years ended December 31, 2016 and 2015.
|
Refer to Part II, Item 5 "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" of this Annual Report on Form 10-K for additional information regarding these repurchases.
|
Contractual Commitments and Obligations
We enter into various contractual obligations that impact, or could impact, our liquidity. Based on our current and anticipated level of operations, we believe that our proceeds from operating cash flows and cash on hand will be sufficient to meet our anticipated obligations. To the extent that our operating cash flows and cash on hand are not sufficient to meet our liquidity needs, we may utilize amounts available under our financing arrangements, if necessary. Refer to
Note 9 of the Notes to our Audited Consolidated Financial Statements
for additional information regarding the senior unsecured notes payments described in this table.
The following table summarizes our contractual obligations and contingencies as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in Year
|
(in millions)
|
Total
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
After 2021
|
Senior unsecured notes
(1)
|
$
|
4,314
|
|
|
$
|
—
|
|
|
$
|
364
|
|
|
$
|
250
|
|
|
$
|
250
|
|
|
$
|
500
|
|
|
$
|
2,950
|
|
Bai Brands Merger consideration
(2)
|
1,651
|
|
|
1,555
|
|
|
86
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
Capital leases
(3)
|
191
|
|
|
20
|
|
|
20
|
|
|
19
|
|
|
18
|
|
|
17
|
|
|
97
|
|
Operating leases
(4)
|
245
|
|
|
40
|
|
|
33
|
|
|
30
|
|
|
25
|
|
|
23
|
|
|
94
|
|
Purchase obligations
(5)
|
1,045
|
|
|
663
|
|
|
170
|
|
|
111
|
|
|
68
|
|
|
9
|
|
|
24
|
|
Interest payments
(6)
|
1,914
|
|
|
148
|
|
|
143
|
|
|
132
|
|
|
127
|
|
|
126
|
|
|
1,238
|
|
Payable to Mondelēz International, Inc.
|
26
|
|
|
5
|
|
|
5
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
9,386
|
|
|
$
|
2,431
|
|
|
$
|
821
|
|
|
$
|
558
|
|
|
$
|
498
|
|
|
$
|
675
|
|
|
$
|
4,403
|
|
____________________________
|
|
(1)
|
Amounts represent payment for the senior unsecured notes issued by us. Please refer to
Note 9 of the Notes to our Audited Consolidated Financial Statements
for further information.
|
|
|
(2)
|
Amount represents consideration for the Bai Brands Merger, which was primarily paid on
January 31, 2017
. Please refer to Note 3 and Note 24 of the Notes to our Audited Consolidated Financial Statements for further information.
|
|
|
(3)
|
Amounts represent our contractual payment obligations for our lease arrangements classified as capital leases. These amounts exclude renewal options not yet executed but were included in the lease term to determine the capital lease obligation as the lease imposes a penalty on us in such amount that the renewal appeared reasonably assured at lease inception.
|
|
|
(4)
|
Amounts represent minimum rental commitments under non-cancelable operating leases.
|
|
|
(5)
|
Amounts represent payments under agreements to purchase goods or services that are legally binding and that specify all significant terms, including capital obligations and long-term contractual obligations. Long-term contractual obligations include, but are not limited to, commodity commitments and marketing commitments including sponsorships. Amounts exclude any gain or loss upon settlement of commodity derivative instruments. Refer to
Note 10 of the Notes to our Audited Consolidated Financial Statements
for further information.
|
|
|
(6)
|
Amounts represent our estimated interest payments based on specified interest rates for fixed rate debt and the impact of interest rate swaps that effectively convert fixed interest rates to variable interest rates. Amounts exclude any gain or loss upon settlement of related interest rate swaps. Refer to
Note 10 of the Notes to our Audited Consolidated Financial Statements
for further information.
|
Amounts excluded from our table
As of
December 31, 2016
, we had $19 million of non-current unrecognized tax benefits, related interest and penalties classified as a long-term liability. The table above does not reflect any payments related to these amounts as it is not possible to make a reasonable estimate of the amount or timing of the payment. Refer to
Note 12 of the Notes to our Audited Consolidated Financial Statements
for further information.
The total accrued benefit liability representing the underfunded position for pension and other postretirement benefit plans recognized as of
December 31, 2016
was approximately $39 million. This amount is impacted by, among other items, funding levels, plan amendments, changes in plan assumptions and the investment return on plan assets. We did not include estimated payments related to our total accrued benefit liability in the table above.
The Pension Protection Act of 2006 was enacted in August 2006 and established, among other things, new standards for funding of U.S. defined benefit pension plans. We generally expect to fund all future contributions with cash flows from operating activities. Our international pension plans are generally funded in accordance with local laws and income tax regulations. We did not include our estimated contributions to our various single employer plans in the table above.
Refer to
Note 13 of the Notes to our Audited Consolidated Financial Statements
for further information regarding our single employer plans discussed above.
We have a deferred compensation plan where the assets are maintained in a rabbi trust and the corresponding liability related to the plan is recorded in other non-current liabilities. We did not include estimated payments related to the deferred compensation liability as the timing and payment of these amounts are determined by the participants and outside our control. Refer to
Note 2 of the Notes to our Audited Consolidated Financial Statements
for further information.
In general, we are covered under conventional insurance programs with high deductibles or are self-insured for large portions of many different types of claims. Our accrued liabilities for our losses related to these programs is estimated through actuarial procedures of the insurance industry and by using industry assumptions, adjusted for our specific expectations based on our claim history. As of
December 31, 2016
, our accrued liabilities for our losses related to these programs totaled approximately
$103 million
. Refer to Notes 8 and 11 of the Notes to our Audited Consolidated Financial Statements for further information. We did not include estimated payments related to our insurance liability in the table above.
OFF-BALANCE SHEET ARRANGEMENTS
We currently participate in three multi-employer pension plans. In the event that we withdraw from participation in one of these plans, the plan will ultimately assess us a withdrawal liability for exiting the plan, and U.S. GAAP would require us to record the withdrawal charge as an expense in our consolidated statements of income and as a liability on our consolidated balance sheets once the multi-employer pension withdrawal charge is probable and estimable. There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our results of operations, financial condition, liquidity, capital expenditures or capital resources other than letters of credit outstanding.
Refer to
Note 9 of the Notes to our Audited Consolidated Financial Statements
for additional information regarding outstanding letters of credit.
CRITICAL ACCOUNTING ESTIMATES
The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. We have not made any material changes in the accounting methodology we use to assess or measure our critical accounting estimates. We have identified the items described below as our critical accounting estimates. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use in our critical accounting estimates. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material to our consolidated financial statements. See
Note 2 of the Notes to our Audited Consolidated Financial Statements
for a discussion of these and other accounting policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Judgments and Uncertainties
|
|
Effect if Actual Results Differ from Assumptions
|
Goodwill and Other Indefinite Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
For goodwill and other indefinite lived intangible assets, we conduct tests for impairment annually, as of October 1, or more frequently if events or circumstances indicate the carrying amount may not be recoverable. We use present value and other valuation techniques to make this assessment. If the carrying amount of goodwill or an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For purposes of impairment testing we assign goodwill to the reporting unit that benefits from the synergies arising from each business combination and also assign indefinite lived intangible assets to our reporting units. We define reporting units as Beverage Concentrates, Latin America Beverages, and Packaged Beverages' two reporting units, DSD and WD.
The impairment test for indefinite lived intangible assets encompasses calculating a fair value of an indefinite lived intangible asset and comparing the fair value to its carrying value. If the carrying value exceeds the estimated fair value, impairment is recorded. The impairment tests for goodwill include comparing a fair value of the respective reporting unit with its carrying value, including goodwill and considering any indefinite lived intangible asset impairment charges ("Step 1"). If the carrying value exceeds the estimated fair value, impairment is indicated and a second step ("Step 2") analysis must be performed.
|
|
For our detailed impairment analysis, we used an income based approach to determine the fair value of our assets, as well as an overall consideration of market capitalization and our enterprise value. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. These assumptions could be negatively impacted by various risks discussed in "Risk Factors" in this Annual Report on Form 10-K.
Critical assumptions include revenue growth and profit performance, as well as an appropriate discount rate. Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums. For 2016, such discount rates ranged from 5.00% to 10.25%.
|
|
The carrying values of goodwill and indefinite lived intangible assets as of December 31, 2016, were $2,993 million and $2,656 million, respectively.
We have not identified any impairments in goodwill or other indefinite lived intangible assets during the year.
The effect of a 1% increase in the discount rate used to determine the fair value of the reporting units as of October 1, 2016 would not change our conclusion, as the fair value of the reporting units would still exceed the carrying value for all of our goodwill by at least 100%.
The effect of a 1% increase in the discount rate used to determine the fair value of our brands as of October 1, 2016 would reduce the fair value of our brands but would not change our conclusion. The result of this effect would impact the amount of headroom over the carrying value of our brands as follows (in millions):
|
|
|
|
|
Fair Value
|
|
Carrying Value
|
|
|
Headroom Percentage
|
|
Result
|
|
+ 1%
|
|
Result
|
|
+ 1%
|
|
|
0 - 50%
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
|
51 - 100%
|
|
—
|
|
|
362
|
|
|
—
|
|
|
191
|
|
|
|
>100%
|
|
17,745
|
|
|
14,441
|
|
|
2,622
|
|
|
2,431
|
|
|
|
|
|
$
|
17,745
|
|
|
$
|
14,803
|
|
|
$
|
2,622
|
|
|
$
|
2,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognize revenue, net of the costs of our customer incentives, at the time risk of loss has been transferred to our customer.
Accruals for customer incentives and marketing programs are established for the expected payout based on contractual terms, volume-based metrics and/or historical trends.
|
|
Our customer incentives and marketing accrual methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate our customer participation and volume performance levels which impact the expense recognition. Our estimate of the amount and timing of customer participation and volume performance levels is based primarily on a combination of known or historical transaction experience and forecasted volumes. Differences between estimated expenses and actual costs are normally insignificant and are recognized to earnings in the period differences are determined.
Further judgment is required to ensure the classification of the spend is correctly recorded as either a reduction from gross sales or advertising and marketing expense.
|
|
A 10% change in the accrual for our customer incentives and marketing programs as of December 31, 2016, would have affected our net sales and SG&A expenses by $25 million and $3 million for the year ended December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Judgments and Uncertainties
|
|
Effect if Actual Results Differ from Assumptions
|
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
We have several pension plans covering employees who satisfy age and length of service requirements. Depending on the plan, pension benefits are based on a combination of factors, which may include salary, age and years of service.
Our largest U.S. defined benefit pension plan, which is a cash balance plan, was suspended and the accrued benefit was frozen effective December 31, 2008. Participants in this plan no longer earn additional benefits for future services or salary increases.
Employee benefit plan obligations and expenses included in our Consolidated Financial Statements are determined from actuarial analyses based on plan assumptions, employee demographic data, years of service, compensation, benefits paid and employer contributions.
|
|
The calculation of pension plan obligations and related expenses is dependent on several assumptions used to estimate the present value of the benefits earned while the employee is eligible to participate in the plans.
The key assumptions we use in the actuarial methods to determine the plan obligations and related expenses include: (1) the discount rate used to calculate the present value of the plan liabilities; (2) retirement age and mortality; and (3) the expected return on plan assets. Our assumptions reflect our historical experience and our best judgment regarding future performance.
Refer to
Note 13 of the Notes to our Audited Consolidated Financial Statements
for further information about the key assumptions.
|
|
The effect of a 1% increase or decrease in the weighted-average discount rate used to determine the pension benefit obligations for U.S. plans would
change the benefit obligation as of December 31, 2016 by approximately a $24 million decrease and a $29 million increase, respectively.
The effect of a 1% increase or decrease in the weighted-average discount rate used to determine the net periodic pension costs would change the costs for the year ended
December 31, 2016
by approximately a $2 million decrease and a $3 million increase, respectively.
The effect of a 1% increase or decrease in the expected return on plan assets used to determine the net periodic pension costs would change the costs for the year ended
December 31, 2016 by approximately $2 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Programs
|
|
|
|
|
|
|
|
|
|
|
We retain selected levels of property, casualty, workers' compensation, health and other business risks. Many of these risks are covered under conventional insurance programs with high deductibles or self-insured retentions.
|
|
We believe the use of actuarial methods to estimate our future losses provides a consistent and effective way to measure our self-insured liabilities. However, the estimation of our liability is judgmental and uncertain given the nature of claims involved and length of time until their ultimate cost is known.
Accrued liabilities related to the retained casualty and health risks are calculated based on loss experience and development factors, which contemplate a number of variables including claim history and expected trends. These loss development factors are established in consultation with actuaries.
|
|
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. The final settlement amount of claims can differ materially from our estimate as a result of changes in factors such as the frequency and severity of accidents, medical cost inflation, legislative actions, uncertainty around jury verdicts and awards and other factors outside of our control.
A 10% change in our accrued liabilities related to the retained risks, net of associated receivables, as of December 31, 2016 would have affected income from operations by approximately $9
million
for the year ended December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount, or (3) the tax position is “more likely than not” to be sustained , but not in the financial period in which the tax position was originally taken.
We assess the likelihood of realizing our deferred tax assets. Valuation allowances reduce deferred tax assets to the amount more likely than not to be realized.
|
|
Our liability for uncertain tax positions contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various tax positions.
We base our judgment of the recoverability of our deferred tax asset primarily on historical earnings, our estimate of current and expected future earnings and prudent and feasible tax planning strategies.
|
|
Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. As these audits progress, events may occur that cause us to change our liability for uncertain tax positions.
To the extent we prevail in matters for which a liability for uncertain tax positions has been established, or are required to pay amounts in excess of our established liability, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective tax rate in the period of resolution.
If results differ from our assumptions, a valuation allowance against deferred tax assets may be increased or decreased which would impact our effective tax rate.
|
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board issued Accounting Standards Update ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting
("ASU 2016-09") which we will adopt as of January 1, 2017. We estimate the adoption of the standard will result in incremental income tax benefit of $14 million for the year ended December 31, 2017. Fluctuations in the our stock price and changes in expected option holder activity may increase or decrease our estimated income tax benefit.
Refer to
Note 2 of the Notes to our Audited Consolidated Financial Statements
for a discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP, including the provisions of
ASU 2016-09
.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
Audited Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
Long-term Obligations and Borrowing Arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dr Pepper Snapple Group, Inc.
Plano, Texas
We have audited the accompanying consolidated balance sheets of Dr Pepper Snapple Group, Inc. and subsidiaries (the "Company") as of
December 31, 2016
and
2015
, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended
December 31, 2016
. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dr Pepper Snapple Group, Inc. and subsidiaries at
December 31, 2016
and
2015
, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2016
, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31,
2016
, based on the criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 14, 2017
expressed an unqualified opinion on the Company’s internal control over financial reporting.
|
|
/s/ DELOITTE & TOUCHE LLP
|
|
Dallas, Texas
February 14, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dr Pepper Snapple Group, Inc.
Plano, Texas
We have audited the internal control over financial reporting of Dr Pepper Snapple Group, Inc. and subsidiaries (the "Company") as of
December 31, 2016
, based on
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, appearing under Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016
, based on the criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended
December 31, 2016
of the Company and our report dated
February 14, 2017
expressed an unqualified opinion on those financial statements.
|
|
/s/ DELOITTE & TOUCHE LLP
|
|
Dallas, Texas
February 14, 2017
DR PEPPER SNAPPLE GROUP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
For the
Years Ended December 31, 2016, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
Year Ended
|
|
December 31,
|
(in millions, except per share data)
|
2016
|
|
2015
|
|
2014
|
Net sales
|
$
|
6,440
|
|
|
$
|
6,282
|
|
|
$
|
6,121
|
|
Cost of sales
|
2,582
|
|
|
2,559
|
|
|
2,491
|
|
Gross profit
|
3,858
|
|
|
3,723
|
|
|
3,630
|
|
Selling, general and administrative expenses
|
2,329
|
|
|
2,313
|
|
|
2,334
|
|
Depreciation and amortization
|
99
|
|
|
105
|
|
|
115
|
|
Other operating (income) expense, net
|
(3
|
)
|
|
7
|
|
|
1
|
|
Income from operations
|
1,433
|
|
|
1,298
|
|
|
1,180
|
|
Interest expense
|
147
|
|
|
117
|
|
|
109
|
|
Interest income
|
(3
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Loss on early extinguishment of debt
|
31
|
|
|
—
|
|
|
—
|
|
Other income, net
|
(25
|
)
|
|
(1
|
)
|
|
—
|
|
Income before provision for income taxes and equity in (loss) earnings of unconsolidated subsidiaries
|
1,283
|
|
|
1,184
|
|
|
1,073
|
|
Provision for income taxes
|
434
|
|
|
420
|
|
|
371
|
|
Income before equity in (loss) earnings of unconsolidated subsidiaries
|
849
|
|
|
764
|
|
|
702
|
|
Equity in (loss) earnings of unconsolidated subsidiaries, net of tax
|
(2
|
)
|
|
—
|
|
|
1
|
|
Net income
|
$
|
847
|
|
|
$
|
764
|
|
|
$
|
703
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
$
|
4.57
|
|
|
$
|
4.00
|
|
|
$
|
3.59
|
|
Diluted
|
4.54
|
|
|
3.97
|
|
|
3.56
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
185.4
|
|
|
190.9
|
|
|
195.8
|
|
Diluted
|
186.6
|
|
|
192.4
|
|
|
197.4
|
|
The accompanying notes are an integral part of these
consolidated
financial statements.
DR PEPPER SNAPPLE GROUP, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For the
Years Ended December 31, 2016, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
Year Ended
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Net income
|
$
|
847
|
|
|
$
|
764
|
|
|
$
|
703
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
Foreign currency translation adjustments
|
(39
|
)
|
|
(64
|
)
|
|
(44
|
)
|
Net change in pension liability, net of tax of $0, $1 and ($4)
|
(1
|
)
|
|
4
|
|
|
(7
|
)
|
Net change in cash flow hedges, net of tax of $4, $1 and $1
|
6
|
|
|
2
|
|
|
2
|
|
Total other comprehensive loss, net of tax
|
(34
|
)
|
|
(58
|
)
|
|
(49
|
)
|
Comprehensive income
|
$
|
813
|
|
|
$
|
706
|
|
|
$
|
654
|
|
The accompanying notes are an integral part of these
consolidated
financial statements.
DR PEPPER SNAPPLE GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
As of
December 31, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions, except share and per share data)
|
2016
|
|
2015
|
Assets
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
1,787
|
|
|
$
|
911
|
|
Accounts receivable:
|
|
|
|
Trade, net
|
595
|
|
|
570
|
|
Other
|
51
|
|
|
58
|
|
Inventories
|
202
|
|
|
209
|
|
Prepaid expenses and other current assets
|
101
|
|
|
69
|
|
Total current assets
|
2,736
|
|
|
1,817
|
|
Property, plant and equipment, net
|
1,138
|
|
|
1,156
|
|
Investments in unconsolidated subsidiaries
|
23
|
|
|
31
|
|
Goodwill
|
2,993
|
|
|
2,988
|
|
Other intangible assets, net
|
2,656
|
|
|
2,663
|
|
Other non-current assets
|
183
|
|
|
150
|
|
Non-current deferred tax assets
|
62
|
|
|
64
|
|
Total assets
|
$
|
9,791
|
|
|
$
|
8,869
|
|
Liabilities and Stockholders' Equity
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
303
|
|
|
$
|
277
|
|
Deferred revenue
|
64
|
|
|
64
|
|
Short-term borrowings and current portion of long-term obligations
|
10
|
|
|
507
|
|
Income taxes payable
|
4
|
|
|
27
|
|
Other current liabilities
|
670
|
|
|
708
|
|
Total current liabilities
|
1,051
|
|
|
1,583
|
|
Long-term obligations
|
4,468
|
|
|
2,875
|
|
Non-current deferred tax liabilities
|
812
|
|
|
787
|
|
Non-current deferred revenue
|
1,117
|
|
|
1,181
|
|
Other non-current liabilities
|
209
|
|
|
260
|
|
Total liabilities
|
7,657
|
|
|
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, 1
83,119,843 and
1
87,841,509
shares issued and outstanding for 2016 and 2015, respectively
|
2
|
|
|
2
|
|
Additional paid-in capital
|
95
|
|
|
211
|
|
Retained earnings
|
2,266
|
|
|
2,165
|
|
Accumulated other comprehensive loss
|
(229
|
)
|
|
(195
|
)
|
Total stockholders' equity
|
2,134
|
|
|
2,183
|
|
Total liabilities and stockholders' equity
|
$
|
9,791
|
|
|
$
|
8,869
|
|
The accompanying notes are an integral part of these
consolidated
financial statements.
DR PEPPER SNAPPLE GROUP, INC
.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the
Years Ended December 31, 2016, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Operating activities:
|
|
|
|
|
|
Net income
|
$
|
847
|
|
|
$
|
764
|
|
|
$
|
703
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation expense
|
191
|
|
|
192
|
|
|
199
|
|
Amortization expense
|
33
|
|
|
35
|
|
|
36
|
|
Amortization of deferred revenue
|
(64
|
)
|
|
(64
|
)
|
|
(65
|
)
|
Impairment of intangible asset
|
—
|
|
|
7
|
|
|
—
|
|
Employee stock-based compensation expense
|
45
|
|
|
44
|
|
|
48
|
|
Deferred income taxes
|
29
|
|
|
29
|
|
|
43
|
|
Loss on early extinguishment of debt
|
31
|
|
|
—
|
|
|
—
|
|
Gain on step acquisition of unconsolidated subsidiaries
|
(5
|
)
|
|
—
|
|
|
—
|
|
Gain on extinguishment of multi-employer plan withdrawal liability
|
(21
|
)
|
|
—
|
|
|
—
|
|
Unrealized (gains) losses on economic hedges
|
(40
|
)
|
|
5
|
|
|
13
|
|
Other, net
|
(9
|
)
|
|
(15
|
)
|
|
8
|
|
Changes in assets and liabilities, net of effects of acquisition:
|
|
|
|
|
|
Trade accounts receivable
|
(31
|
)
|
|
(26
|
)
|
|
—
|
|
Other accounts receivable
|
3
|
|
|
1
|
|
|
(5
|
)
|
Inventories
|
3
|
|
|
(11
|
)
|
|
(8
|
)
|
Other current and non-current assets
|
(50
|
)
|
|
8
|
|
|
(25
|
)
|
Other current and non-current liabilities
|
(53
|
)
|
|
(11
|
)
|
|
58
|
|
Trade accounts payable
|
32
|
|
|
(9
|
)
|
|
29
|
|
Income taxes payable
|
(2
|
)
|
|
42
|
|
|
(12
|
)
|
Net cash provided by operating activities
|
939
|
|
|
991
|
|
|
1,022
|
|
Investing activities:
|
|
|
|
|
|
Acquisition of business
|
(15
|
)
|
|
—
|
|
|
(19
|
)
|
Cash acquired in step acquisition of unconsolidated subsidiaries
|
17
|
|
|
—
|
|
|
—
|
|
Purchase of property, plant and equipment
|
(180
|
)
|
|
(179
|
)
|
|
(170
|
)
|
Purchase of intangible assets
|
(2
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Investment in unconsolidated subsidiaries
|
(6
|
)
|
|
(20
|
)
|
|
—
|
|
Purchase of cost method investments
|
(1
|
)
|
|
(15
|
)
|
|
—
|
|
Proceeds from disposals of property, plant and equipment
|
6
|
|
|
20
|
|
|
8
|
|
Other, net
|
(8
|
)
|
|
1
|
|
|
(3
|
)
|
Net cash used in investing activities
|
(189
|
)
|
|
(194
|
)
|
|
(185
|
)
|
Financing activities:
|
|
|
|
|
|
Proceeds from issuance of senior unsecured notes
|
1,950
|
|
|
750
|
|
|
—
|
|
Repayment of senior unsecured notes
|
(891
|
)
|
|
—
|
|
|
—
|
|
Net repayment of commercial paper
|
—
|
|
|
—
|
|
|
(65
|
)
|
Repurchase of shares of common stock
|
(519
|
)
|
|
(521
|
)
|
|
(400
|
)
|
Dividends paid
|
(386
|
)
|
|
(355
|
)
|
|
(317
|
)
|
Tax withholdings related to net share settlements of certain stock awards
|
(31
|
)
|
|
(27
|
)
|
|
(16
|
)
|
Proceeds from stock options exercised
|
14
|
|
|
30
|
|
|
41
|
|
Excess tax benefit on stock-based compensation
|
22
|
|
|
23
|
|
|
11
|
|
Deferred financing charges paid
|
(19
|
)
|
|
(6
|
)
|
|
—
|
|
Capital lease payments
|
(9
|
)
|
|
(5
|
)
|
|
(1
|
)
|
Other, net
|
(1
|
)
|
|
(3
|
)
|
|
—
|
|
Net cash provided by (used in) financing activities
|
130
|
|
|
(114
|
)
|
|
(747
|
)
|
Cash and cash equivalents — net change from:
|
|
|
|
|
|
Operating, investing and financing activities
|
880
|
|
|
683
|
|
|
90
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(4
|
)
|
|
(9
|
)
|
|
(6
|
)
|
Cash and cash equivalents at beginning of year
|
911
|
|
|
237
|
|
|
153
|
|
Cash and cash equivalents at end of year
|
$
|
1,787
|
|
|
$
|
911
|
|
|
$
|
237
|
|
See Note
18
for supplemental cash flow disclosures.
The accompanying notes are an integral part of these
consolidated
financial statements.
DR PEPPER SNAPPLE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended
December 31, 2016
,
2015
and
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2014
|
198.0
|
|
|
$
|
2
|
|
|
$
|
970
|
|
|
$
|
1,393
|
|
|
$
|
(88
|
)
|
|
$
|
2,277
|
|
Shares issued under employee stock-based compensation plans and other
|
1.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
703
|
|
|
—
|
|
|
703
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(49
|
)
|
|
(49
|
)
|
Dividends declared, $1.64 per share
|
—
|
|
|
—
|
|
|
4
|
|
|
(325
|
)
|
|
—
|
|
|
(321
|
)
|
Stock options exercised and stock-based compensation, net of tax of ($11)
|
—
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
—
|
|
|
84
|
|
Common stock repurchases
|
(6.8
|
)
|
|
—
|
|
|
(400
|
)
|
|
—
|
|
|
—
|
|
|
(400
|
)
|
Balance as of December 31, 2014
|
193.0
|
|
|
2
|
|
|
658
|
|
|
1,771
|
|
|
(137
|
)
|
|
2,294
|
|
Shares issued under employee stock-based compensation plans and other
|
1.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
764
|
|
|
—
|
|
|
764
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(58
|
)
|
|
(58
|
)
|
Dividends declared, $1.92 per share
|
—
|
|
|
—
|
|
|
4
|
|
|
(370
|
)
|
|
—
|
|
|
(366
|
)
|
Stock options exercised and stock-based compensation, net of tax of ($23)
|
—
|
|
|
—
|
|
|
70
|
|
|
—
|
|
|
—
|
|
|
70
|
|
Common stock repurchases
|
(6.5
|
)
|
|
—
|
|
|
(521
|
)
|
|
—
|
|
|
—
|
|
|
(521
|
)
|
Balance as of December 31, 2015
|
187.9
|
|
|
2
|
|
|
211
|
|
|
2,165
|
|
|
(195
|
)
|
|
2,183
|
|
Shares issued under employee stock-based compensation plans and other
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
847
|
|
|
—
|
|
|
847
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34
|
)
|
|
(34
|
)
|
Dividends declared, $2.12 per share
|
—
|
|
|
—
|
|
|
3
|
|
|
(396
|
)
|
|
—
|
|
|
(393
|
)
|
Stock options exercised and stock-based compensation, net of tax of ($22)
|
—
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
—
|
|
|
50
|
|
Common stock repurchases
|
(5.7
|
)
|
|
—
|
|
|
(169
|
)
|
|
(350
|
)
|
|
—
|
|
|
(519
|
)
|
Balance as of December 31, 2016
|
183.1
|
|
|
$
|
2
|
|
|
$
|
95
|
|
|
$
|
2,266
|
|
|
$
|
(229
|
)
|
|
$
|
2,134
|
|
The accompanying notes are an integral part of these consolidated financial statements.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
1
.
|
Business and Basis of Presentation
|
References in
the Notes to Audited Consolidated Financial Statements
to "
DPS
" or "the
Company
" refer to Dr Pepper Snapple Group, Inc. and all entities included in the
Audited Consolidated Financial Statements
. Cadbury plc and Cadbury Schweppes plc are hereafter collectively referred to as "
Cadbury
".
The Notes to Audited Consolidated Financial Statements refer
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.
Nature of Operations
DPS
is a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States ("
U.S.
"), Mexico and Canada with a diverse portfolio of flavored (non-cola) carbonated soft drinks ("
CSD
s") and non-carbonated beverages ("
NCB
s"), including ready-to-drink teas, juices, juice drinks, water and mixers. The Company's brand portfolio includes popular
CSD
brands such as Dr Pepper, Canada Dry, Peñafiel, Squirt, 7UP, Crush, A&W, Sunkist soda and Schweppes, and
NCB
brands such as Snapple, Hawaiian Punch, Mott's and Clamato.
The Company was incorporated in Delaware on October 24, 2007. In 2008,
Cadbury
separated its beverage business in the
U.S.
, Canada, Mexico and the Caribbean (the "
Americas Beverages business
") from its global confectionery business by contributing the subsidiaries that operated its
Americas Beverages business
to the Company.
Principles of Consolidation
DPS
consolidates all wholly-owned subsidiaries. Investments in entities in which DPS does not have a controlling financial interest are accounted for under either the equity method or cost method of accounting, as appropriate. Judgment regarding the level of influence over each equity method or cost 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 (“
VIE
s”) 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 consolidated financial statements and the intercompany transactions with its equity method investees.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("
U.S. GAAP
"). In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included.
Reclassifications
Unrealized gains and losses on derivatives classified as economic hedges have been reclassified from other, net to the unrealized (gains) losses on economic hedges caption within the operating activities section in the Consolidated Statements of Cash Flows for prior years to conform to the current year's presentation, with no impact to total cash provided by (used in) operating, investing or financing activities.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
2
.
|
Significant Accounting Policies
|
Use of Estimates
The process of preparing
DPS
'
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.
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments in short-term, highly liquid securities, with original maturities of three months or less.
The
Company
is exposed to potential risks associated with its cash and cash equivalents.
DPS
places its cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand and, therefore, the
Company
believes the financial risks associated with these financial instruments are minimal.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest.
The
Company
is exposed to potential credit risks associated with its accounts receivable, as it generally does not require collateral on its accounts receivable. The
Company
determines the required allowance for doubtful collections using information such as its customer credit history and financial condition, industry and market segment information, economic trends and conditions and credit reports. Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies. Account balances are charged against the allowance when it is determined that the receivable will not be recovered. The
Company
has not experienced significant credit-related losses.
Activity in the allowance for doubtful accounts
during the
years ended December 31, 2016, 2015 and 2014
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Balance, beginning of the year
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
3
|
|
Charges to bad debt expense
|
1
|
|
|
2
|
|
|
1
|
|
Write-offs and adjustments
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Balance, end of the year
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
2
|
|
As of
December 31, 2016 and 2015
, Wal-Mart Store
s, Inc. ("Walmart")
accounted for approximately
$69 million
and
$65 million
of trade receivables, respectively, which exceeded 10% of the
Company
's total trade accounts receivable.
Inventories
Inventories are stated at the lower of cost or market value. Cost is primarily determined for inventories of the
Company
's
U.S.
subsidiaries by the last-in, first-out ("
LIFO
") valuation method. The costs for inventories of the
Company
's foreign subsidiaries are determined by the first-in, first-out ("
FIFO
") valuation method. The costs of finished goods inventories include raw materials, direct labor and indirect production and overhead costs. Reserves for excess and obsolete inventories are based on an assessment of slow-moving and obsolete inventories, determined by historical usage and demand. Excess and obsolete inventory reserves were
$2 million
as of
December 31, 2016
and
2015
.
Refer to Note 4 for additional information
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Property, Plant and Equipment, Net
Property, plant and equipment is stated at cost plus capitalized interest on borrowings during the actual construction period of major capital projects, net of accumulated depreciation. Significant improvements which substantially extend the useful lives of assets are capitalized. The costs of major rebuilds and replacements of plant and equipment are capitalized and expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred. The Company
capitalizes certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use, which are included in property, plant and equipment.
When property, plant and equipment is sold or retired, the costs and the related accumulated depreciation are removed from the accounts, and any net gain or loss is recorded in o
ther operating (income) expense, net
in the Consolidated Statements of Income.
Refer to Note 5 for additional information
.
For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful asset lives as follows:
|
|
|
|
|
Type of Asset
|
Useful Life
|
Buildings
|
|
|
40 years
|
Building improvements
|
5
|
to
|
35 years
|
Machinery and equipment
|
3
|
to
|
25 years
|
Vehicles
|
5
|
to
|
18 years
|
Cold drink equipment
|
3
|
to
|
7 years
|
Computer software
|
3
|
to
|
8 years
|
Leasehold improvements, which are primarily considered building improvements, are depreciated over the shorter of the estimated useful life of the assets or the lease term. Estimated useful lives are periodically reviewed and, when warranted, are updated.
The
Company
periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In order to assess recoverability,
DPS
compares the estimated undiscounted future pre-tax cash flows from the use of the asset or group of assets, as defined, to the carrying amount of such assets. Measurement of an impairment loss is based on the excess of the carrying amount of the asset or group of assets over the long-lived asset's fair value. For the years ended
December 31, 2016
and
2015
, no impairment was recorded.
Investments
The
Company
holds investment securities under the deferred compensation plan, which consist of readily marketable equity securities and included in other non-current assets caption on the Consolidated Balance Sheets. Gains or losses from investments classified as trading, if any, are charged to earnings.
The
Company
also holds non-controlling investments in certain privately held entities which are accounted for as equity method or cost method investments. The companies over which we exert significant influence, but do not control the financial and operating decisions, are accounted for as equity method investments. The
Company
's proportionate share of the net income (loss) resulting from these investments are reported under the line item captioned equity in earnings of unconsolidated subsidiaries, net of tax, in the Consolidated Statements of Income. The carrying value of our equity method investments is reported in investments
in unconsolidated subsidiaries
in our Consolidated Balance Sheets. The Company classifies distributions received from equity-method investments using the cumulative earnings approach on the Consolidated Statements of Cash Flows.
Refer to Note 6 for additional information
on our equity-method investments. Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for under the cost method and reported in other non-current assets in our Consolidated Balance Sheets.
Refer to Note 11 for additional information
.
The
Company
's equity method investments are reported at cost and adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any, while cost method investments are carried at cost. The entities do not have a readily determinable fair value and are periodically evaluated for impairment. An impairment loss would be recorded whenever a decline in value of an investment below its carrying amount is determined to be other than temporary.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Goodwill and Other Intangible Assets
The
Company
classifies intangible assets into two categories: (1) intangible assets with definite lives subject to amortization and (2) intangible assets with indefinite lives not subject to amortization. The majority of the
Company
's intangible asset balance is made up of brands which the
Company
has determined to have indefinite useful lives. In arriving at the conclusion that a brand has an indefinite useful life, management reviews factors such as size, diversification and market share of each brand. Management expects to acquire, hold and support brands for an indefinite period through consumer marketing and promotional support. The
Company
also considers factors such as its ability to continue to protect the legal rights that arise from these brand names indefinitely or the absence of any regulatory, economic or competitive factors that could truncate the life of the brand name. If the criteria are not met to assign an indefinite life, the brand is amortized over its expected useful life.
Identifiable intangible assets deemed by the
Company
to have determinable finite useful lives are amortized on a straight-line basis over their estimated useful lives as follows:
|
|
|
|
|
Type of Intangible Asset
|
Useful Life
|
Customer relationships
|
|
|
10 years
|
Distribution rights
|
5
|
to
|
15 years
|
DPS
conducts tests for impairment in accordance with
U.S. GAAP
. For intangible assets with definite lives, tests for impairment are performed if conditions exist that indicate the carrying value may not be recoverable. For goodwill and indefinite-lived intangible assets, the
Company
conducts tests for impairment annually, as of October 1, or more frequently if events or circumstances indicate the carrying amount may not be recoverable. We use present value and other valuation techniques to make this assessment.
The tests for impairment include significant judgment in estimating the fair value of reporting units and intangible assets primarily by analyzing forecasts of future revenues and profit performance. Fair value is based on what the reporting units and intangible assets would be worth to a third party market participant. Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums. Management's estimates of fair value, which fall under Level 3, are based on historical and projected operating performance.
Refer to Note 7 for additional information
.
Capitalized Customer Incentive Programs
The
Company
provides support to certain customers to cover various programs and initiatives to increase net sales, including contributions to customers or vendors for cold drink equipment used to market and sell the
Company
's products. These programs and initiatives generally directly benefit the
Company
over a period of time. Accordingly, costs of these programs and initiatives are recorded in prepaid expenses and other current assets and other non-current assets in the Consolidated Balance Sheets. The costs for these programs are amortized over the period to be directly benefited based upon a methodology consistent with the
Company
's contractual rights under these arrangements.
These programs and initiatives recorded in the current and non-current assets within the Consolidated Balance Sheets were
$81 million
and
$73 million
, net of accumulated amortization, as of
December 31, 2016
and
2015
, respectively. The amortization charge for the cost of contributions to customers or vendors for cold drink equipment was
$3 million
,
$4 million
and
$4 million
during the
years ended December 31, 2016, 2015 and 2014
, respectively, and was recorded in selling, general and administ
rative ("
SG&A
") expenses in the Consolidated Statements of Income. The amortization charge for the cost of other programs and incentives was
$10 million
,
$9 million
and
$13 million
during the
years ended December 31, 2016, 2015 and 2014
, respectively, and was recorded as a deduction from gross sales.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Derivatives
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 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 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 as a hedging instrument, which creates an economic hedge, or 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 swap agreements 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 at the time the derivative contract is entered into, and at least quarterly thereafter, whether the derivative instrument is effective in offsetting the changes in fair value or cash flows.
DPS
also measures hedge ineffectiveness on a quarterly basis throughout the designated period. For fair value hedges, 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. For cash flow hedges, ineffectiveness, if any, related to the Company's changes in estimates about the forecasted transaction would be recognized directly in earnings during the period incurred.
If a fair value or cash flow hedge were to cease to qualify for hedge accounting, or were terminated, it would continue to be carried on the balance sheet at fair value until settled, but hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in long term obligations or
AOCL
, respectively, are reclassified to earnings at that time.
Refer to Note 10 for additional information
.
Fair Value
The fair value of senior unsecured notes and marketable securities as of
December 31, 2016
and
2015
are based on quoted market prices for publicly traded securities.
The
Company
estimates fair values of financial instruments measured at fair value in the financial statements on a recurring basis to ensure they are calculated based on market rates to settle the instruments. These values represent the estimated amounts
DPS
would pay or receive to terminate agreements, taking into consideration current market rates and creditworthiness. The fair value for financial instruments categorized as Level 1 is based on quoted prices in active markets for identical assets or liabilities. The fair value of financial instruments categorized as Level 2 is determined using valuation techniques based on inputs derived from observable market data, quoted market prices for similar instruments or pricing models, such as discounted cash flow techniques. Refer to Note
14
for additional information.
Transfers between levels are recognized at the end of each reporting period.
Pension and Postretirement Benefits
The
Company
has
U.S.
and foreign pension and postretirement benefit plans which provide benefits to a defined group of employees who satisfy age and length of service requirements at the discretion of the
Company
. As of
December 31, 2016
, the
Company
has several stand-alone non-contributory defined benefit plans and postretirement medical plans. Depending on the plan, pension and postretirement benefits are based on a combination of factors, which may include salary, age and years of service.
Pension expense has been determined in accordance with the principles of
U.S. GAAP
. The
Company
's policy is to fund pension plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. Employee benefit plan obligations and expenses included in the Consolidated Financial Statements are determined from actuarial analyses based on plan assumptions, employee demographic data, years of service, compensation, benefits and claims paid and employer contributions.
The expense related to the postretirement plans has been determined in accordance with
U.S. GAAP
and the
Company
accrues the cost of these benefits during the years that employees render service.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
Company
participates in three multi-employer pension plans and makes contributions to those plans, which are recorded in either cost of sales or
SG&A
expenses.
Refer to Note 13 for additional information
.
Risk Management Programs
The
Company
retains selected levels of property, casualty, workers' compensation, health and other business risks. Many of these risks are covered under conventional insurance programs with high deductibles or self-insured retentions. Accrued liabilities related to the retained casualty and health risks are calculated based on loss experience and development factors, which contemplate a number of variables including claim history and expected trends. As of
December 31, 2016
and
2015
, the
Company
had accrued liabilities related to the retained risks of
$103 million
and
$117 million
, respectively, including both other current and long-term liabilities. As of
December 31, 2016
and
2015
, the
Company
recorded receivables of
$13 million
and
$21 million
, respectively, for insurance recoveries related to these retained risks.
Income Taxes
Income taxes are accounted for using the asset and liability approach under
U.S. GAAP
. This method involves determining the temporary differences between assets and liabilities recognized for financial reporting and the corresponding amounts recognized for tax purposes and computing the tax-related carryforwards at the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The resulting amounts are deferred tax assets or liabilities. The total of taxes currently payable per the tax return, the deferred tax expense or benefit and the impact of uncertain tax positions represents the income tax expense or benefit for the year for financial reporting purposes.
The
Company
periodically assesses the likelihood of realizing its deferred tax assets based on the amount that the
Company
believes is more likely than not to be realized. The
Company
bases its judgment of the recoverability of its deferred tax assets primarily on historical earnings, its estimate of current and expected future earnings and prudent and feasible tax planning strategies.
Refer to Note 12 for additional information
.
The
Company
establishes income tax liabilities to remove some or all of the income tax benefit of any of the
Company
's income tax positions at the time
DPS
determines that the positions become uncertain based upon one of the following: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken. The
Company
's evaluation of whether or not a tax position is uncertain is based on the following: (1)
DPS
presumes the tax position will be examined by the relevant taxing authority such as the Internal Revenue Service ("
IRS
") that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other tax positions taken. The
Company
adjusts these income tax liabilities when the
Company
's judgment changes as a result of new information. Any change will impact income tax expense in the period in which such determination is made.
DPS
' effective tax rate may fluctuate on a quarterly and/or annual basis due to various factors, including, but not limited to, total earnings and the mix of earnings by jurisdiction, the timing of changes in tax laws and the amount of tax provided for uncertain tax positions.
Common Stock Share Repurchases
The Company may repurchase shares of DPS common stock under a program authorized by the Board of Directors, including plans meeting the requirements of Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934. Shares repurchased are retired and not displayed separately as treasury stock on the financial statements. Instead, the par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital and from retained earnings, once additional paid-in capital is depleted.
Revenue Recognition
The
Company
recognizes sales revenue when all of the following have occurred: (1) delivery; (2) persuasive evidence of an agreement exists; (3) pricing is fixed or determinable; and (4) collection is reasonably assured. Delivery is not considered to have occurred until the title and the risk of loss passes to the customer. Net sales are reported net of costs associated with customer marketing programs and incentives, as described below, as well as sales taxes and other similar taxes.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Multiple deliverables were included in the arrangements entered into with PepsiCo, Inc. ("
PepsiCo
") and The Coca-Cola
Company
("
Coca-Cola
") during 2010. In these cases, the
Company
first determined whether each deliverable met the separation criteria under
U.S. GAAP
. The primary requirement for a deliverable to meet the separation criteria is if the deliverable has stand-alone value to the customer. Each deliverable that meets the separation criteria is considered a separate "unit of accounting". As the sale of the manufacturing and distribution rights and the ongoing sales of concentrate would not have stand-alone value to the customer, both deliverables were determined to represent a single element of accounting for purposes of revenue recognition. The one-time nonrefundable cash receipts from
PepsiCo
and
Coca-Cola
were therefore recorded as deferred revenue and are recognized as net sales ratably over the estimated
25
-year life of the customer relationship.
Customer Marketing Programs and Incentives
The
Company
offers a variety of incentives and discounts to bottlers, customers and consumers through various programs to support the distribution of its products. These incentives and discounts include cash discounts, price allowances, volume based rebates, product placement fees and other financial support for items such as trade promotions, displays, new products, consumer incentives and advertising assistance. These incentives and discounts are reflected as a reduction of gross sales to arrive at net sales. The aggregate deductions from gross sales recorded in relation to these programs were approximately
$4,082 million
,
$3,844 million
and
$3,682 million
during the
years ended December 31, 2016, 2015 and 2014
, respectively. Accruals are established for the expected payout based on contractual terms, volume-based metrics and/or historical trends and require management judgment with respect to estimating customer participation and performance levels.
Cost of Sales
Cost of goods sold includes all costs to acquire and manufacture our products including raw materials, direct and indirect labor, manufacturing overhead, including depreciation expense, and all other costs incurred to bring the product to salable condition. All other costs incurred after this condition is met are considered selling costs and included in SG&A expenses.
Transportation and Warehousing Costs
The
Company
incurred
$792 million
,
$806 million
and
$802 million
of transportation and warehousing costs during the
years ended December 31, 2016, 2015 and 2014
, respectively. These amounts, which primarily relate to shipping and handling costs are recorded in
SG&A
expenses in the Consolidated Statements of Income.
Advertising and Marketing Expense
Advertising and marketing production costs related to television, print, radio and other marketing investments are expensed as of the first date the advertisement takes place. All other advertising and marketing costs are expensed as incurred. Advertising and marketing expense was approximately
$477 million
,
$473 million
and
$473 million
during the
years ended December 31, 2016, 2015 and 2014
, respectively. These expenses are recorded in
SG&A
expenses in the Consolidated Statements of Income. As of
December 31, 2016
and
2015
, prepaid advertising and marketing costs of approximately
$10 million
and
$11 million
, respectively, were recorded as other current and non-current assets in the Consolidated Balance Sheets.
Research and Development
Costs
Research and development costs are expensed when incurred and amounted to
$20 million
,
$19 million
and
$18 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. These expenses are recorded in
SG&A
expenses in the Consolidated Statements of Income.
Stock-Based Compensation Expense
The
Company
accounts for its stock-based compensation plans in accordance with
U.S. GAAP
, which requires the recognition of compensation expense in the Consolidated Statements of Income related to the fair value of employee stock-based awards. Compensation cost is based on the grant-date fair value, which is estimated using the Black-Scholes option pricing model for stock options. The fair value of restricted stock units ("
RSU
s") and performance-based restricted stock units ("
PSU
s") without a market condition is determined based on the number of units granted and the grant date price of common stock. Beginning with the 2015 grant, the fair value of the market-based
PSU
s is estimated at the date of grant using a Monte-Carlo simulation. Stock-based compensation expense is recognized ratably, less estimated forfeitures, over the vesting period in the Consolidated Statements of Income. Stock-based compensation expense for
PSU
s is adjusted quarterly based on the current estimate of performance compared to the target metrics.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
Company
is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The
Company
uses historical data to estimate pre-vesting option,
RSU
and
PSU
forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
Refer to Note 15 for additional information
.
Deferred Compensation Plan
Employee and employer matching contributions under the Supplemental Savings Plan ("
SSP
") are maintained in a rabbi trust and are not readily available to us. Participants can direct the investment of their deferred compensation plan accounts in the same investment funds offered by the
DPS
' Savings Incentive Plan (the "
SIP
")
. Although participants direct the investment of these funds, the investments are classified as trading securities and are included in other non-current assets. The corresponding liability related to the deferred compensation plan is recorded in other non-current liabilities. Gains and losses in connection with these trading securities are recorded in other expense (income), net, with an offset for the same amount recorded in
SG&A
expenses. The Company had deferred compensation plan assets of
$35 million
and
$25 million
as of
December 31, 2016
and
2015
, respectively. There were
$3 million
and
$1 million
of gains associated with these trading securities for the years ended
December 31, 2016
and 2014.
No
gains or losses were recorded in December 31,
2015
.
Foreign Currency Translation and Transaction
The functional currency of the
Company
's operations outside the
U.S.
is generally the local currency of the country where the operations are located. The balance sheets of operations outside the
U.S.
are translated into
U.S.
dollars at the end of year rates. The results of operations are translated into
U.S.
dollars at a monthly average rate, calculated using daily exchange rates.
The following table sets forth exchange rate information for the periods and currencies indicated:
|
|
|
|
|
|
|
Mexican Peso to U.S. Dollar Exchange Rate
|
End of Year Rates
|
|
Annual Average Rates
|
2016
|
20.62
|
|
|
18.68
|
|
2015
|
17.25
|
|
|
15.87
|
|
2014
|
14.74
|
|
|
13.31
|
|
|
|
|
|
|
|
|
Canadian Dollar to U.S. Dollar Exchange Rate
|
End of Year Rates
|
|
Annual Average Rates
|
2016
|
1.34
|
|
|
1.33
|
|
2015
|
1.38
|
|
|
1.28
|
|
2014
|
1.16
|
|
|
1.10
|
|
Differences arising from the translation of opening balance sheets of these entities to the rate ruling at the end of the financial year are recognized in
AOCL
. The differences arising from the
translation of foreign results at the average rate are also recognized in
AOCL
. Such translation differences are recognized as income or expense in the period in which the
Company
disposes of the operations.
Transactions in foreign currencies are recorded at the approximate rate of exchange at the transaction date. Assets and liabilities resulting from these transactions are translated at the rate of exchange in effect at the balance sheet date. All such differences are recorded in results of operations.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recently Issued Accounting Standards
Effective in 2017
In July 2015, the Financial Accounting Standards Board ("
FASB
") issued Accounting Standards Update ("ASU") 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
("ASU 2015-11"). This ASU requires inventories measured under any methods other than LIFO or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Subsequent measurement of inventory using LIFO or the retail inventory method is unchanged by this ASU. ASU 2015-11 is effective for public companies for interim and annual periods beginning after December 15, 2016. The Company does not anticipate a significant impact to the Company's financial position as a result of this change.
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 benefit or 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 November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230), Restricted Cash
, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending amounts shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating the potential impacts of this new guidance on the Company’s consolidated financial statements and related disclosures and intends to early adopt in the first quarter of 2017.
Effective in 2018
In May 2014, the
FASB
issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in
U.S. GAAP
. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to be entitled to 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).
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At this point in time, the Company intends to adopt the above standards using the modified retrospective approach for the quarter ending March 31, 2018. In preparation for the Company's adoption of the new standard in the quarter ending March 31, 2018, management assembled a project management team, which has obtained representative samples of contracts and other forms of agreements with our customers and is evaluating the provisions contained within those documents based on the new guidance. While the Company does not expect this change to have a material impact on the Company's results of operations, financial position and cash flows once implemented on an annual basis, the Company does expect that it could have an impact on its net sales in interim periods due to timing. The Company is still evaluating the disclosure requirements under these standards. As the Company completes its overall evaluation, the Company is also identifying and preparing to implement changes to its accounting policies, practices and controls to support the new standards.
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. The
Company
is currently evaluating the impact that the standard will have on the Consolidated Financial Statements.
Effective in 2019
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
does not intend to early adopt the standard. The Company has assembled a project management team and is in the early stages of evaluation. The Company anticipates the impact of the standard to be significant to its Consolidated Balance Sheet due to the amount of the Company's lease commitments.
See Note
19
for further information regarding leases.
The Company is currently evaluating the other impacts that ASU 2016-02 will have on the consolidated financial statements.
Effective in 2020
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
("ASU 2016-13"). The standard provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The
Company
does not anticipate ASU 2016-13 to have a material impact on the consolidated financial statements.
Effective in 2021
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). The standard provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. The
Company
does not currently anticipate ASU 2017-04 to have a material impact 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. The standard requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount, as if the accounting had been completed at the acquisition date. The adoption had no impact to the 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. The
Company
early adopted ASU 2016-05 as of March 31, 2016, on a prospective basis, with no impact to the consolidated financial statements.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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. The
Company
early adopted ASU 2016-07 as of March 31, 2016, on a prospective basis, with no impact to the consolidated financial statements.
As of December 31, 2016, the Company adopted ASU 2014-15,
Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern,
which provides guidance on management's responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and to provide related disclosure requirements. The standard had no impact on the Company's consolidated financial statements.
During the fourth quarter of 2016, the Company early adopted 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)
. The standard provides guidance on eight specific cash flow issues, with the objective of reducing diversity in practice. The standard was adopted on retrospective basis and had no impact to the consolidated financial statements for the years ended December 31, 2016, 2015 or 2014 or interim periods within those annual periods.
2016 ACQUISITIONS
Bai Brands LLC
On November 21, 2016, the
Company
entered into an Agreement and Plan of Merger (the "Merger Agreement") with Bai Brands LLC ("Bai Brands") for consideration of
$1.7 billion
, subject to certain adjustments in the Merger Agreement (the "Bai Brands Merger"). The acquisition of Bai Brands will further enable the Company to meet growing consumer demand for better-for-you beverages, which are positioned for expanding growth in key beverage segments.
Refer to Note 24 for additional information
on the completion of the Bai Brands Merger during the first quarter of 2017.
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 during 2016 and included in other operating (income) expense, net.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 Consolidated Statements of Income. Prior to September 2016, the Company's
50%
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 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 Consolidated Financial Statements.
2014 ACQUISITION
On October 31, 2014, the
Company
acquired certain assets and liabilities of Davis Beverages Group, Inc. and Davis Bottling Co., Inc. (“Davis”) to strengthen the
Company
’s route to market in the
U.S.
and support efforts to build and enhance the
Company
's leading brands. At acquisition, the fair value of the consideration paid for this acquisition was
$21 million
and was settled by
$19 million
in cash and a
$2 million
holdback liability to satisfy any working capital adjustments and applicable indemnification claims, pursuant to the terms of the purchase agreement. During the year ended December 31, 2015, the Company paid out
$1 million
of the holdback liability.
The following table summarizes the allocation of fair value, as of the acquisition date, of the assets acquired and liabilities assumed by major class for the acquisition:
|
|
|
|
|
|
|
|
(in millions)
|
|
Fair Value
|
|
Useful Life
|
Property, plant & equipment
|
|
$
|
10
|
|
|
1 - 10 years
|
Distribution rights: indefinite-lived
|
|
3
|
|
|
—
|
Goodwill
|
|
6
|
|
|
—
|
Current assets, net of current liabilities assumed
|
|
2
|
|
|
—
|
Total
|
|
$
|
21
|
|
|
|
The acquisition was accounted for as 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.
In connection with this acquisition, the
Company
recorded goodwill of
$6 million
, which is deductible for tax purposes. The
Company
also recorded
$3 million
in intangible assets related to distribution rights.
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
Consolidated
Financial Statements.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories as of
December 31, 2016 and 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Raw materials
|
$
|
77
|
|
|
$
|
101
|
|
Spare parts
|
22
|
|
|
18
|
|
Work in process
|
5
|
|
|
4
|
|
Finished goods
|
130
|
|
|
123
|
|
Inventories at FIFO cost
|
234
|
|
|
246
|
|
Reduction to LIFO cost
|
(32
|
)
|
|
(37
|
)
|
Inventories
|
$
|
202
|
|
|
$
|
209
|
|
Approximately
$158 million
and
$154 million
of the
Company
's inventory was accounted for under the
LIFO
method of accounting as of
December 31, 2016 and 2015
, respectively. The reduction to
LIFO
cost reflects the excess of the current cost of
LIFO
inventories as of
December 31, 2016 and 2015
, over the amount at which these inventories were valued on the
Consolidated
Balance Sheets. For the year ended
December 31, 2016
, LIFO inventory liquidation increased the
Company
's earnings by
$5 million
. For the years ended
December 31, 2015
and
2014
, there was
no
LIFO
inventory liquidation.
|
|
5
.
|
Property, Plant and Equipment
|
Net property, plant and equipment consisted of the following as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Land
|
$
|
73
|
|
|
$
|
73
|
|
Buildings and improvements
|
533
|
|
|
504
|
|
Machinery and equipment
|
1,569
|
|
|
1,465
|
|
Cold drink equipment
|
268
|
|
|
279
|
|
Software
|
253
|
|
|
252
|
|
Construction in progress
|
26
|
|
|
76
|
|
Gross property, plant and equipment
|
2,722
|
|
|
2,649
|
|
Less: accumulated depreciation and amortization
|
(1,584
|
)
|
|
(1,493
|
)
|
Net property, plant and equipment
|
$
|
1,138
|
|
|
$
|
1,156
|
|
Net property, plant and equipment in the above table includes the following assets under capital lease
as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Buildings and improvements
|
$
|
49
|
|
|
$
|
47
|
|
Machinery and equipment
|
116
|
|
|
92
|
|
Gross property, plant and equipment under capital lease
|
165
|
|
|
139
|
|
Less: accumulated depreciation and amortization
|
(26
|
)
|
|
(15
|
)
|
Net property, plant and equipment under capital lease
|
$
|
139
|
|
|
$
|
124
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the location of depreciation expense within the Consolidated Statements of Income for the
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
Cost of sales
|
|
$
|
95
|
|
|
$
|
93
|
|
|
$
|
89
|
|
Depreciation and amortization
|
|
96
|
|
|
99
|
|
|
110
|
|
|
|
$
|
191
|
|
|
$
|
192
|
|
|
$
|
199
|
|
The depreciation expense above also includes the charge to income resulting from amortization of assets recorded under capital leases.
6
.
Investments in Unconsolidated Subsidiaries
The following table summarizes the equity method investments held by the
Company
as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Ownership
|
|
Carrying
|
|
Ownership
|
|
Carrying
|
(in millions)
|
Interest
|
|
Value
|
|
Interest
|
|
Value
|
IEBM and EMA
(1)
|
(1)
|
|
$
|
—
|
|
|
50.0
|
%
|
|
$
|
11
|
|
BA Sports Nutrition, LLC
(2)
|
15.5
|
%
|
|
23
|
|
|
11.7
|
%
|
|
20
|
|
Investments in unconsolidated subsidiaries
|
|
|
$
|
23
|
|
|
|
|
$
|
31
|
|
___________________________
|
|
(1)
|
Investment in IEBM and EMA was consolidated during the year ended
December 31, 2016
upon acquisition of the remaining
50%
ownership.
Refer to Note 3 for additional information
regarding the acquisition.
|
|
|
(2)
|
During the year ended
December 31, 2016
, the Company acquired an additional
3.8%
interest in BA Sports Nutrition, LLC for
$6 million
. The investment is accounted for as an equity method investment as the Company is deemed to have the ability to exercise influence through more than a minor interest in the investee in accordance with U.S. GAAP.
|
Refer to Note
11
for information regarding cost method investments.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7
.
Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
years ended December 31, 2016 and 2015
, 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, 2015
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,732
|
|
|
$
|
1,222
|
|
|
$
|
188
|
|
|
$
|
28
|
|
|
$
|
3,170
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
—
|
|
|
(180
|
)
|
|
1,732
|
|
|
1,222
|
|
|
8
|
|
|
28
|
|
|
2,990
|
|
Foreign currency translation
|
1
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(3
|
)
|
Acquisitions
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Balance as of December 31, 2015
|
|
|
|
|
|
|
|
|
|
Goodwill
|
1,733
|
|
|
1,222
|
|
|
189
|
|
|
24
|
|
|
3,168
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
—
|
|
|
(180
|
)
|
|
1,733
|
|
|
1,222
|
|
|
9
|
|
|
24
|
|
|
2,988
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Acquisitions
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
Balance as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
Goodwill
|
1,733
|
|
|
1,222
|
|
|
189
|
|
|
29
|
|
|
3,173
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
—
|
|
|
(180
|
)
|
|
$
|
1,733
|
|
|
$
|
1,222
|
|
|
$
|
9
|
|
|
$
|
29
|
|
|
$
|
2,993
|
|
____________________________
|
|
(1)
|
The Packaged Beverages segment is comprised of two reporting units, the Direct Store Delivery ("
DSD
") system and the Warehouse Direct ("
WD
") system.
|
|
|
(2)
|
Goodwill was recorded to the Latin America Beverages reporting unit during 2016 as a result of the step acquisition of IEBM and EMA.
Refer to Note 3 for additional information
.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The net carrying amounts of intangible assets other than goodwill as of
December 31, 2016 and 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Gross
|
|
Accumulated
|
|
Net
|
|
Gross
|
|
Accumulated
|
|
Net
|
(in millions)
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Brands
(1)
|
$
|
2,621
|
|
|
$
|
—
|
|
|
$
|
2,621
|
|
|
$
|
2,627
|
|
|
$
|
—
|
|
|
$
|
2,627
|
|
Distribution rights
|
27
|
|
|
—
|
|
|
27
|
|
|
27
|
|
|
—
|
|
|
27
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Brands
|
29
|
|
|
(29
|
)
|
|
—
|
|
|
29
|
|
|
(29
|
)
|
|
—
|
|
Distribution rights
|
16
|
|
|
(8
|
)
|
|
8
|
|
|
14
|
|
|
(6
|
)
|
|
8
|
|
Customer relationships
|
76
|
|
|
(76
|
)
|
|
—
|
|
|
76
|
|
|
(75
|
)
|
|
1
|
|
Bottler agreements
|
19
|
|
|
(19
|
)
|
|
—
|
|
|
19
|
|
|
(19
|
)
|
|
—
|
|
Total
|
$
|
2,788
|
|
|
$
|
(132
|
)
|
|
$
|
2,656
|
|
|
$
|
2,792
|
|
|
$
|
(129
|
)
|
|
$
|
2,663
|
|
____________________________
|
|
(1)
|
In
2016
, brands with indefinite lives decreased due to the
$7 million
impact of foreign currency translation, partially offset by an addition of
$1 million
for Aguafiel, a brand recorded as a result of the step acquisition of IEBM and EMA.
Refer to Note 3 for additional information
.
|
As of
December 31, 2016
, the weighted average useful life of intangible assets with finite lives was
10 years
for distribution rights. Amortization expense for intangible assets was
$3 million
,
$6 million
and
$5 million
for the
years ended December 31, 2016, 2015 and 2014
, respectively.
Amortization expense of these intangible assets over the
next five years
is expected to be the following:
|
|
|
|
|
Year
|
Aggregate Amortization Expense
(in millions)
|
2017
|
$
|
1
|
|
2018
|
1
|
|
2019
|
1
|
|
2020
|
1
|
|
2021
|
1
|
|
In accordance with
U.S. GAAP
, the
Company
conducts impairment tests of goodwill and indefinite-lived intangible assets annually, as of October 1, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of impairment testing, the
Company
assigns goodwill to the reporting unit that benefits from the synergies arising from each business combination and also assigns indefinite-lived intangible assets to its reporting units. The
Company
defines reporting units as Beverage Concentrates, Latin America Beverages and Packaged Beverages' two reporting units,
DSD
and
WD
.
The impairment test for indefinite lived intangible assets encompasses calculating a fair value of an indefinite lived intangible asset and comparing the fair value to its carrying value. If the carrying value exceeds the estimated fair value, impairment is recorded. The impairment tests for goodwill include comparing a fair value of the respective reporting unit with its carrying value, including goodwill and considering any indefinite lived intangible asset impairment charges ("Step 1"). If the carrying value exceeds the estimated fair value, impairment is indicated and a second step analysis must be performed.
Fair value is measured based on what each intangible asset or reporting unit would be worth to a third party market participant. Methodologies used to determine the fair values of the assets include an income based approach, as well as an overall consideration of market capitalization and the
Company
's enterprise value. Management's estimates of fair value, which fall under Level 3, are based on historical and projected operating performance. Discount rates are based on a weighted average cost of equity and cost of debt and were adjusted with various risk premiums.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The range of discount rates used for the
2016
and
2015
impairment analyses was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Range
|
|
2015 Range
|
|
|
Low
|
|
High
|
|
Low
|
|
High
|
Goodwill
|
|
5.00
|
%
|
|
9.00
|
%
|
|
5.00
|
%
|
|
9.10
|
%
|
Intangible assets - brands
|
|
7.25
|
%
|
|
10.25
|
%
|
|
7.25
|
%
|
|
10.35
|
%
|
Results of our Impairment Analyses
2016
As of
October 1,
2016
, the results of the annual impairment tests indicated
no
impairment of the
Company
's goodwill or brands was required. The estimated fair value of each reporting unit exceeded the
carrying
value for all of the
Company
's goodwill by at least
100%
.
2015
As of October 1,
2015
, the results of the annual impairment tests indicated
no
impairment of the
Company
's goodwill was required. The estimated fair value of each reporting unit exceeded the carrying value for all of the
Company
's goodwill by at least
100%
.
As a result of the
2015
annual impairment analysis of DPS' brands, the
Company
recognized a non-cash charge of
$7 million
to fully impair Garden Cocktail, a Canadian brand recorded in the
WD
reporting unit. During the fourth quarter of 2015, as a part of the Company's annual budget process, the Company revised its assessment of Garden Cocktail's long-term projected sales volumes based on declines in the vegetable juice category in Canada. The charge was recorded in o
ther operating (income) expense, net
in the Consolidated Statements of Income. There was no indication of impairment for the
Company
's remaining brands.
Comparison of Fair Value to Carrying Value - Indefinite-Lived Brands
The results of the impairment analysis of our indefinite-lived brands as of October 1,
2016
and
2015
are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016 Impairment Analysis
|
|
2015 Impairment Analysis
(1)
|
Headroom Percentage
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
0 - 100%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
> 100%
|
|
17,745
|
|
|
2,622
|
|
|
15,647
|
|
|
2,628
|
|
|
|
$
|
17,745
|
|
|
$
|
2,622
|
|
|
$
|
15,647
|
|
|
$
|
2,628
|
|
____________________________
|
|
(1)
|
Garden Cocktail was excluded from this presentation as a result of the
$7 million
non-cash impairment charge.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
8
.
|
Prepaid Expenses and Other Current Assets and Other Current Liabilities
|
The table below details the components of prepaid expenses and other current assets and other current liabilities as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Prepaid expenses and other current assets:
|
|
|
|
Customer incentive programs
|
$
|
24
|
|
|
$
|
21
|
|
Derivative instruments
|
19
|
|
|
9
|
|
Prepaid income taxes
|
18
|
|
|
—
|
|
Current assets held for sale
|
1
|
|
|
—
|
|
Other
|
39
|
|
|
39
|
|
Total prepaid expenses and other current assets
|
$
|
101
|
|
|
$
|
69
|
|
Other current liabilities:
|
|
|
|
Customer rebates and incentives
|
$
|
280
|
|
|
$
|
283
|
|
Accrued compensation
|
134
|
|
|
133
|
|
Insurance liability
|
36
|
|
|
42
|
|
Interest accrual
|
24
|
|
|
30
|
|
Dividends payable
|
97
|
|
|
90
|
|
Derivative instruments
|
2
|
|
|
29
|
|
Other
|
97
|
|
|
101
|
|
Total other current liabilities
|
$
|
670
|
|
|
$
|
708
|
|
|
|
9
.
|
Long-term Obligations and Borrowing Arrangements
|
LONG-TERM OBLIGATIONS
The following table summarizes the
Company
's long-term obligations as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Senior unsecured notes
|
$
|
4,325
|
|
|
$
|
3,246
|
|
Capital lease obligations
|
153
|
|
|
136
|
|
Subtotal
|
4,478
|
|
|
3,382
|
|
Less — current portion
|
(10
|
)
|
|
(507
|
)
|
Long-term obligations
|
$
|
4,468
|
|
|
$
|
2,875
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM OBLIGATIONS
The following table summarizes the
Company
's short-term borrowings and current portion of long-term obligations as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Commercial paper
|
$
|
—
|
|
|
$
|
—
|
|
Current portion of long-term obligations
|
|
|
|
Senior unsecured notes
|
—
|
|
|
500
|
|
Capital lease obligations
|
10
|
|
|
7
|
|
Short-term borrowings and current portion of long-term obligations
|
$
|
10
|
|
|
$
|
507
|
|
SENIOR UNSECURED NOTES
The
Company
's senior unsecured notes (collectively, the "Notes") consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
|
Carrying Amount
|
(in millions)
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
Issuance
|
|
Maturity Date
|
|
Rate
|
|
2016
|
|
2016
|
|
2015
|
2016 Notes
|
|
January 15, 2016
|
|
2.90%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
2018 Notes
|
|
May 1, 2018
|
|
6.82%
|
|
364
|
|
|
364
|
|
|
723
|
|
2019 Notes
|
|
January 15, 2019
|
|
2.60%
|
|
250
|
|
|
249
|
|
|
250
|
|
2020 Notes
|
|
January 15, 2020
|
|
2.00%
|
|
250
|
|
|
247
|
|
|
246
|
|
2021-A Notes
|
|
November 15, 2021
|
|
3.20%
|
|
250
|
|
|
249
|
|
|
250
|
|
2021-B Notes
|
|
November 15, 2021
|
|
2.53%
|
|
250
|
|
|
246
|
|
|
—
|
|
2022 Notes
|
|
November 15, 2022
|
|
2.70%
|
|
250
|
|
|
273
|
|
|
265
|
|
2023 Notes
|
|
December 15, 2023
|
|
3.13%
|
|
500
|
|
|
495
|
|
|
—
|
|
2025 Notes
|
|
November 15, 2025
|
|
3.40%
|
|
500
|
|
|
495
|
|
|
494
|
|
2026 Notes
|
|
September 15, 2026
|
|
2.55%
|
|
400
|
|
|
396
|
|
|
—
|
|
2027 Notes
|
|
June 15, 2027
|
|
3.43%
|
|
400
|
|
|
397
|
|
|
—
|
|
2038 Notes
|
|
May 1, 2038
|
|
7.45%
|
|
250
|
|
|
270
|
|
|
271
|
|
2045 Notes
|
|
November 15, 2045
|
|
4.50%
|
|
250
|
|
|
247
|
|
|
247
|
|
2046 Notes
|
|
December 15, 2046
|
|
4.42%
|
|
400
|
|
|
397
|
|
|
—
|
|
|
|
|
|
|
|
$
|
4,314
|
|
|
$
|
4,325
|
|
|
$
|
3,246
|
|
The indentures governing the Notes, among other things, limit the
Company
's ability to incur indebtedness secured by principal properties, to enter into certain sale and leaseback transactions and to enter into certain mergers or transfers of substantially all of
DPS
' assets. The Notes are guaranteed by substantially all of the
Company
's existing and future direct and indirect domestic subsidiaries. As of
December 31, 2016
, the
Company
was in compliance with all financial covenant requirements of the Notes.
The 2021-B, 2023, 2027 and 2046 Notes
On December 14, 2016, the
Company
completed the issuance of four tranches of senior unsecured notes, consisting of the
2021-B Notes
for
$250 million
, the
2023 Notes
for
$500 million
, the
2027 Notes
for
$400 million
and the
2046 Notes
for
$400 million
(collectively, the "Acquisition Notes"). The discount associated with the Acquisition Notes was approximately
$1 million
, and debt issuance costs related to the Acquisition Notes were approximately
$11 million
. The
Company
used the net proceeds to complete the Bai Brands Merger in the first quarter of 2017.
Refer to Note 24 for additional information
regarding the use of proceeds to complete the Bai Brands Merger.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The 2026 Notes
On September 16, 2016, the
Company
completed the issuance of the 2026 Notes for
$400 million
. 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
used 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.
The 2025 and 2045 Notes
On November 9, 2015,
the
Company
completed the issuance of two tranches of senior unsecured notes, consisting of the
2025 Notes
for
$500 million
and the
2045 Notes
for
$250 million
. The discount associated with these notes was approximately
$4 million
. Debt issuance costs related to the issuance of these notes were approximately
$6 million
. The net proceeds were used to retire
the
Company
's 2016 Notes at maturity and for general corporate purposes.
The 2020 and 2022 Notes
On November 20, 2012, the
Company
completed the issuance of two tranches of senior unsecured notes, consisting of the
2020 Notes
for
$250 million
and the
2022 Notes
for
$250 million
.
The discount associated with these notes was approximately
$3 million
. Debt issuance costs related to the issuance of these notes were approximately
$3 million
.
The 2019 Notes and 2021-A Notes
On November 15, 2011, the
Company
completed the issuance of two tranches of senior unsecured notes consisting of the
2019 Notes
for
$250 million
and the
2021-A Notes
for
$250 million
.
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 2016 Notes
On January 11, 2011, the
Company
completed the issuance of the
2016 Notes
for
$500 million
at a discount of
$1 million
and debt issuance costs of
$3 million
.
The
2016 Notes
were repaid at maturity in January 2016.
The 2018 and 2038 Notes
On April 30, 2008, the
Company
completed the issuance of two tranches of senior unsecured notes consisting of the
2018 Notes
for
$1,200 million
and the
2038 Notes
for
$250 million
. Debt issuance costs associated with the
2018 Notes
and the
2038 Notes
were
$11 million
.
In December 2010, the
Company
completed a tender offer for a portion of the
2018 Notes
and retired, at a premium, an aggregate principal amount of approximately
$476 million
. In October 2016, the
Company
redeemed a portion of the
2018 Notes
and retired, at a premium, an aggregate principal amount of approximately
$360 million
. The loss on early extinguishment of the 2018 Notes related to the 2016 partial redemption was
$31 million
. The aggregate principal amount of the outstanding
2018 Notes
was
$364 million
and
$724 million
as of
December 31, 2016 and 2015
, respectively.
BORROWING ARRANGEMENTS
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 the Revolver, which is discussed below. Outstanding
Commercial Paper
reduces the amount of borrowing capacity available under the Revolver and outstanding amounts under the Revolver reduce the
Commercial Paper
availability. As of
December 31, 2016 and 2015
, the
Company
had
no
outstanding
Commercial Paper
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Unsecured Credit Agreement
On September 25, 2012, the
Company
entered into a five-year unsecured credit agreement (the "
Credit Agreement
"), which provides for a
$500 million
revolving line of credit (the "
Revolver
"). Borrowings under the
Revolver
bear interest at a floating rate per annum based upon the alternate base rate ("
ABR
") or the Eurodollar rate, in each case plus an applicable margin which varies based upon the
Company
's debt ratings. Rates range from
0.000%
to
0.300%
for ABR loans and from
0.795%
to
1.300%
for Eurodollar loans. The
ABR
is defined as the greater of (a) JPMorgan Chase Bank's prime rate, (b) the federal funds effective rate plus
0.500%
and (c) the adjusted LIBOR for a one month interest period. The adjusted LIBOR is the London interbank offered rate for dollars adjusted for a statutory reserve rate set by the Board of Governors of the Federal Reserve System of the United States of America.
Additionally, the
Revolver
is available for the issuance of letters of credit and swingline advances not to exceed
$75 million
and
$50 million
, respectively. Swingline advances will accrue interest at a rate equal to the
ABR
plus the applicable margin. Letters of credit and swingline advances will reduce, on a dollar for dollar basis, the amount available under the
Revolver
.
The
Credit Agreement
further provides that the
Company
may request at any time, subject to the satisfaction of certain conditions, that the aggregate commitments under the facility be increased by a total amount not to exceed
$250 million
.
The
Credit Agreement
's representations, warranties, covenants and events of default are generally customary for investment grade credit and include a financial covenant that requires the
Company
to maintain a ratio of consolidated total debt (as defined in the
Credit Agreement
) to annualized consolidated EBITDA (as defined in the
Credit Agreement
) of no more than
3.00
to
1.00
, tested quarterly. Upon the occurrence of an event of default, among other things, amounts outstanding under the
Credit Agreement
may be accelerated and the commitments may be terminated. The
Company
's obligations under the
Credit Agreement
are guaranteed by certain of the
Company
's direct and indirect domestic subsidiaries on the terms set forth in the
Credit Agreement
. The
Credit Agreement
has a maturity date of September 25, 2017; however, with the consent of lenders holding more than
50%
of the total commitments under the
Credit Agreement
and subject to the satisfaction of certain conditions, the
Company
may extend the maturity date for up to two additional one-year terms.
The following table provides amounts utilized and available under the
Revolver
and each sublimit arrangement type as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
(in millions)
|
Amount Utilized
|
|
Balances Available
|
Revolver
|
$
|
—
|
|
|
$
|
500
|
|
Letters of credit
|
—
|
|
|
75
|
|
Swingline advances
|
—
|
|
|
50
|
|
A facility fee is payable quarterly to the lenders on the unused portion of the commitments of the
Revolver
equal to
0.08%
to
0.20%
per annum, depending upon the
Company
's debt ratings.
The
Company
incurred
$1 million
in facility fees during the years ended
December 31, 2016
,
2015
and
2014
.
As of
December 31, 2016
, the
Company
was in compliance with all financial covenant requirements relating to its unsecured credit agreement.
Bridge Financing for Bai Brands
On November 21, 2016, the
Company
entered into a commitment letter for a 364-day bridge loan facility (the "Bridge Facility") in an aggregate principal amount of up to
$1,700 million
, in order to ensure that financing would be available for the Bai Brands transaction. The
Company
paid fees of approximately
$5 million
in connection with the Bridge Facility during the year ended December 31, 2016.
The capacity of the Bridge Facility is reduced dollar-for-dollar by the consummation of any debt or equity offerings or any asset sales, as defined in the Commitment Letter filed on the Form 8-K on November 23, 2016. The issuance of the Acquisition Notes in December reduced the capacity of the Bridge Facility by the net proceeds received of
$1,541 million
, and as of December 31, 2016,
$159 million
remained available to the
Company
under the Bridge Facility.
Refer to Note 24 for additional information
regarding the reduced availability of the Bridge Facility subsequent to year-end as a result of the Bai Brands Merger.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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. On November 16, 2016, the Board increased the authorized aggregate amount of securities available to be issued by an additional
$400 million
, which raised the full authorized amount to
$2,400 million
. As of
December 31, 2016
, the Company has issued
$1,950 million
of securities, and
$450 million
remained authorized to be issued. Refer to Note
24
for additional information regarding the Post-Effective Amendment to the shelf registration statement, which was filed subsequent to year-end.
Letters of Credit Facilities
In addition to the portion of the
Revolver
available 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
December 31, 2016
and
$60 million
of which remains available for use.
10
.
Derivatives
DPS
is exposed to market risks arising from adverse changes in:
•
interest rates;
•
foreign exchange rates; and
•
commodity prices affecting the cost of raw materials and fuels.
The
Company
manages these risks through a variety of strategies, including the use of interest rate contracts, foreign exchange forward contracts, commodity forward and future contracts and supplier pricing agreements.
DPS
does not hold or issue derivative financial instruments for trading or speculative purposes.
INTEREST RATES
Cash Flow Hedges
In order to hedge the variability in cash flows from interest rate changes associated with the Company's issuances of long-term debt, the Company entered into forward starting swap agreements in November 2016:
•
two
instruments on the future issuance of 10 year notes with a total notional value of
$200 million
; and
•
two
instruments on the future issuance of 30 year notes with a total notional value of
$200 million
.
These forward starting swaps were unwound in December 2016 in connection with the Company's issuance of the Acquisition Notes. Upon termination, the Company received
$2 million
as settlement of the contracts with the counterparties, which will be amortized to interest expense over the respective term of the issued debt.
During the
year ended December 31, 2016
, the Company realized
no
ineffectiveness as a result of these hedging relationships prior to termination.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except number of instruments)
|
|
|
|
|
|
Impact to the carrying value
|
|
|
|
|
|
|
Method of
|
|
|
|
of long-term debt
|
|
|
Hedging
|
|
Number of
|
|
measuring
|
|
Notional
|
|
December 31,
|
|
December 31,
|
Period entered
|
|
relationship
|
|
instruments
|
|
effectiveness
|
|
value
|
|
2016
|
|
2015
|
November 2011
|
|
2019 Notes
|
|
2
|
|
Short cut method
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
1
|
|
November 2011
|
|
2021-A Notes
|
|
2
|
|
Short cut method
|
|
150
|
|
|
—
|
|
|
1
|
|
November 2012
|
|
2020 Notes
|
|
5
|
|
Short cut method
|
|
120
|
|
|
(2
|
)
|
|
(2
|
)
|
December 2013
|
|
2022 Notes
(1)
|
|
4
|
|
Cumulative dollar offset
|
|
250
|
|
|
24
|
|
|
17
|
|
February 2015
|
|
2038 Notes
(2)
|
|
1
|
|
Regression
|
|
100
|
|
|
22
|
|
|
23
|
|
December 2016
(3)
|
|
2021-B Notes
|
|
2
|
|
Short cut method
|
|
250
|
|
|
(2
|
)
|
|
—
|
|
December 2016
(3)
|
|
2023 Notes
|
|
2
|
|
Short cut method
|
|
150
|
|
|
(1
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
1,120
|
|
|
$
|
41
|
|
|
$
|
40
|
|
____________________________
|
|
(1)
|
In October 2016, the Company de-designated the hedging relationships between the four outstanding interest rate swaps and the 2022 Notes. The Company will amortize
$25 million
into earnings over the remaining term of the 2022 Notes which represents the increase to the carrying value of the debt upon de-designation consisting of changes in fair market value of the debt, pull to par adjustments and ineffectiveness recorded under the previous hedging relationship. The Company recorded the change in the fair value of the interest rate swaps after de-designation into interest expense.
|
|
|
(2)
|
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 this hedge relationship.
|
|
(3)
|
In December 2016, the
Company
entered into interest rate swaps having notional amounts of
$250 million
and
$150 million
, maturing in November 2021 and December 2023, in order to effectively convert portions of the
2021-B Notes
and
2023 Notes
, respectively, from fixed-rate debt to floating-rate debt, and designated them as fair value hedges. The
Company
used the short cut method for these hedges.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOREIGN EXCHANGE
Cash Flow Hedges
The
Company
's Canadian and Mexican business purchases certain inventory through transactions denominated and settled in
U.S.
dollars, a currency different from the functional currency of the Canadian and Mexican business. These inventory purchases are subject to exposure from movements in exchange rates. During the
years ended December 31, 2016, 2015 and 2014
, the
Company
utilized foreign exchange forward contracts designated as cash flow hedges to manage a small percentage of 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
four months
as of
December 31, 2016
. The
Company
had outstanding foreign exchange forward contracts with notional amounts of
$7 million
as of
December 31, 2016 and 2015
.
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
years ended December 31, 2016, 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
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
$296 million
and
$159 million
as of
December 31, 2016 and 2015
, respectively.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FAIR VALUE OF DERIVATIVE INSTRUMENTS
The following table summarizes the location of the fair value of the
Company
's derivative instruments within the
Consolidated
Balance Sheets as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balance Sheet Location
|
|
December 31,
2016
|
|
December 31,
2015
|
Assets:
|
|
|
|
|
|
Derivative instruments designated as hedging instruments under U.S. GAAP:
|
|
|
|
|
|
Interest rate contracts
|
Prepaid expenses and other current assets
|
|
$
|
6
|
|
|
$
|
9
|
|
Interest rate contracts
|
Other non-current assets
|
|
21
|
|
|
33
|
|
Derivative instruments not designated as hedging instruments under U.S. GAAP:
|
|
|
|
|
|
Interest rate contracts
|
Prepaid expenses and other current assets
|
|
4
|
|
|
—
|
|
Commodity contracts
|
Prepaid expenses and other current assets
|
|
9
|
|
|
—
|
|
Interest rate contracts
|
Other non-current assets
|
|
8
|
|
|
—
|
|
Commodity contracts
|
Other non-current assets
|
|
12
|
|
|
—
|
|
Total assets
|
|
|
$
|
60
|
|
|
$
|
42
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments designated as hedging instruments under U.S. GAAP:
|
|
|
|
|
|
Interest rate contracts
|
Other current liabilities
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
7
|
|
|
1
|
|
Derivative instruments not designated as hedging instruments under U.S. GAAP:
|
|
|
|
|
|
Commodity contracts
|
Other current liabilities
|
|
1
|
|
|
28
|
|
Commodity contracts
|
Other non-current liabilities
|
|
—
|
|
|
3
|
|
Total liabilities
|
|
|
$
|
9
|
|
|
$
|
33
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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
Consolidated
Statements of Income and Comprehensive Income for the
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain 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 year ended December 31, 2016:
|
|
|
|
|
|
Interest rate contracts
|
$
|
2
|
|
|
$
|
(8
|
)
|
|
Interest expense
|
Foreign exchange forward contracts
|
(2
|
)
|
|
(1
|
)
|
|
Cost of sales
|
Total
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015:
|
|
|
|
|
|
Interest rate contracts
|
$
|
(5
|
)
|
|
$
|
(8
|
)
|
|
Interest expense
|
Foreign exchange forward contracts
|
2
|
|
|
2
|
|
|
Cost of sales
|
Total
|
$
|
(3
|
)
|
|
$
|
(6
|
)
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2014:
|
|
|
|
|
|
Interest rate contracts
|
$
|
(2
|
)
|
|
$
|
(8
|
)
|
|
Interest expense
|
Foreign exchange forward contracts
|
(2
|
)
|
|
1
|
|
|
Cost of sales
|
Total
|
$
|
(4
|
)
|
|
$
|
(7
|
)
|
|
|
There was
no
hedge ineffectiveness recognized in earnings for the
years ended December 31, 2016, 2015 and 2014
with respect to derivative instruments designated as cash flow hedges. During the next 12 months, the
Company
expects to reclassify net losses of
$9 million
from
AOCL
into income.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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
Consolidated
Statements of Income for the
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
Location of Gain (Loss)
|
(in millions)
|
|
Recognized in Income
|
|
Recognized in Income
|
For the year ended December 31, 2016:
|
|
|
|
|
Interest rate contracts
(1)(2)
|
|
$
|
12
|
|
|
Interest expense
|
Total
|
|
$
|
12
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015:
|
|
|
|
|
Interest rate contracts
(1)
|
|
$
|
17
|
|
|
Interest expense
|
Total
|
|
$
|
17
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2014:
|
|
|
|
|
Interest rate contracts
|
|
$
|
16
|
|
|
Interest expense
|
Total
|
|
$
|
16
|
|
|
|
____________________________
(1) Interest expense for the
years ended December 31, 2016 and 2015
includes amortization of the interest rate swap associated with the 2038 Notes, which was de-designated in February 2015, and basis adjustments related to the 2038 Notes and 2022 Notes prior to de-designation.
(2) Interest expense for the
year ended December 31, 2016
includes amortization of the interest rate swaps associated with the 2022 Notes, which were de-designated in October 2016.
For the
year ended December 31, 2016
,
no
hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges. For the
year ended December 31, 2015
,
$1 million
in hedge ineffectiveness charges were recognized in earnings with respect to derivative instruments designated as fair value hedges, and
no
hedge ineffectiveness was recognized in earnings for the year ended December 31,
2014
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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
Consolidated
Statements of Income for the
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
Location of Gain (Loss)
|
(in millions)
|
|
Recognized in Income
|
|
Recognized in Income
|
For the year ended December 31, 2016:
|
|
|
|
|
Commodity contracts
(1)
|
|
$
|
11
|
|
|
Cost of sales
|
Commodity contracts
(1)
|
|
18
|
|
|
SG&A expenses
|
Interest rate contracts
(2)
|
|
(11
|
)
|
|
Interest expense
|
Total
|
|
$
|
18
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015:
|
|
|
|
|
Commodity contracts
(1)
|
|
$
|
(24
|
)
|
|
Cost of sales
|
Commodity contracts
(1)
|
|
(14
|
)
|
|
SG&A expenses
|
Total
|
|
$
|
(38
|
)
|
|
|
|
|
|
|
|
For the year ended December 31, 2014:
|
|
|
|
|
Commodity contracts
(1)
|
|
$
|
1
|
|
|
Cost of sales
|
Commodity contracts
(1)
|
|
(26
|
)
|
|
SG&A expenses
|
Total
|
|
$
|
(25
|
)
|
|
|
____________________________
|
|
(1)
|
Commodity contracts include both realized and unrealized gains and losses.
|
|
|
(2)
|
Represents gains and losses on the interest rate contracts related to the 2022 Notes after the hedging relationship was de-designated in October 2016.
|
Refer to Note 14 for additional information
on the valuation of derivative instruments. The
Company
has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically,
DPS
has not experienced credit losses as a result of counterparty nonperformance. The
Company
selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines and monitors the market position of the programs at least on a quarterly basis.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11
.
Other Non-Current Assets and Other Non-Current Liabilities
The table below details the components of other non-current assets and other non-current liabilities as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Other non-current assets:
|
|
|
|
Customer incentive programs
|
$
|
57
|
|
|
$
|
52
|
|
Marketable securities - trading
|
35
|
|
|
25
|
|
Derivative instruments
|
41
|
|
|
33
|
|
Cost method investments
|
16
|
|
|
15
|
|
Other
|
34
|
|
|
25
|
|
Total other non-current assets
|
$
|
183
|
|
|
$
|
150
|
|
Other non-current liabilities:
|
|
|
|
Long-term payables due to Mondelēz International, Inc.
|
$
|
21
|
|
|
$
|
26
|
|
Long-term pension and post-retirement liability
|
41
|
|
|
40
|
|
Multi-employer pension plan withdrawal liability
(1)
|
—
|
|
|
56
|
|
Insurance liability
|
67
|
|
|
75
|
|
Derivative instruments
|
7
|
|
|
4
|
|
Deferred compensation liability
|
35
|
|
|
25
|
|
Other
|
38
|
|
|
34
|
|
Total other non-current liabilities
|
$
|
209
|
|
|
$
|
260
|
|
____________________________
|
|
(1)
|
During the year ended December 31, 2016, the Company negotiated and paid a
$35 million
lump-sum settlement to fully extinguish the
Company
's multi-employer pension plan withdrawal liability. Accordingly, the Company recognized a
$21 million
gain on the extinguishment of this liability, which is included in
Other income, net
, within our Consolidated Statements of Income.
|
12
.
Income Taxes
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
U.S.
|
$
|
1,169
|
|
|
$
|
1,070
|
|
|
$
|
958
|
|
Non-U.S.
|
114
|
|
|
114
|
|
|
115
|
|
Total
|
$
|
1,283
|
|
|
$
|
1,184
|
|
|
$
|
1,073
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provision for income taxes has the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
311
|
|
|
$
|
307
|
|
|
$
|
259
|
|
State
|
50
|
|
|
52
|
|
|
49
|
|
Non-U.S.
|
44
|
|
|
32
|
|
|
20
|
|
Total current provision
|
405
|
|
|
391
|
|
|
328
|
|
Deferred:
|
|
|
|
|
|
Federal
|
18
|
|
|
21
|
|
|
36
|
|
State
|
8
|
|
|
7
|
|
|
1
|
|
Non-U.S.
|
3
|
|
|
1
|
|
|
6
|
|
Total deferred provision
|
29
|
|
|
29
|
|
|
43
|
|
Total provision for income taxes
|
$
|
434
|
|
|
$
|
420
|
|
|
$
|
371
|
|
The following is a reconciliation of the provision for income taxes computed at the
U.S.
federal statutory tax rate to the provision for income taxes reported in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Statutory federal income tax of 35%
|
$
|
449
|
|
|
$
|
414
|
|
|
$
|
375
|
|
State income taxes, net
|
38
|
|
|
39
|
|
|
32
|
|
U.S. federal domestic manufacturing benefit
|
(29
|
)
|
|
(29
|
)
|
|
(26
|
)
|
Impact of non-U.S. operations
|
(8
|
)
|
|
(7
|
)
|
|
(14
|
)
|
Other
(1)
|
(16
|
)
|
|
3
|
|
|
4
|
|
Total provision for income taxes
|
$
|
434
|
|
|
$
|
420
|
|
|
$
|
371
|
|
Effective tax rate
|
33.8
|
%
|
|
35.5
|
%
|
|
34.6
|
%
|
____________________________
|
|
(1)
|
For the year ended December 31, 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.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Deferred tax assets (liabilities) were comprised of the following as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Deferred income tax assets:
|
|
|
|
|
|
Deferred revenue
|
$
|
449
|
|
|
$
|
474
|
|
Accrued liabilities
|
67
|
|
|
69
|
|
Compensation
|
51
|
|
|
42
|
|
Pension and postretirement benefits
|
14
|
|
|
35
|
|
Net operating loss and credit carryforwards
|
37
|
|
|
21
|
|
Other
|
28
|
|
|
43
|
|
|
646
|
|
|
684
|
|
Deferred income tax liabilities:
|
|
|
|
Intangible assets and goodwill
|
(1,174
|
)
|
|
(1,162
|
)
|
Fixed assets
|
(189
|
)
|
|
(192
|
)
|
Other
|
(19
|
)
|
|
(25
|
)
|
|
(1,382
|
)
|
|
(1,379
|
)
|
Valuation allowance
|
(14
|
)
|
|
(28
|
)
|
Net deferred income tax liability
|
$
|
(750
|
)
|
|
$
|
(723
|
)
|
As of
December 31, 2016
, the
Company
had
$37 million
in tax effected credit carryforwards and net operating loss carryforwards. Net operating loss and credit carryforwards, other than the
$18 million
of foreign tax credits generated in 2011, will expire in periods beyond the next five years. The foreign tax credits of $18 million will expire in 2020; however, the Company currently expects to utilize $10 million of these credits.
The
Company
had a deferred tax valuation allowance of
$14 million
and
$28 million
as of
December 31, 2016
and
2015
, respectively. A valuation allowance of
$6 million
relates to a foreign operation and was established as part of the separation transaction. Additionally, with respect to the prior year valuation allowance of
$18 million
related to foreign tax credits generated in 2011, the Company released
$10 million
in 2016 primarily as a result of restructuring the ownership of our Canadian business. The remaining
$8 million
of foreign tax credits has a valuation allowance as the Company does not believe that the benefits will be realized in future years.
As of
December 31, 2016
and
2015
, undistributed earnings in non-
U.S.
subsidiaries for which no deferred taxes have been provided totaled approximately
$204 million
and
$371 million
, respectively.
The reduction was primarily due to distributed earnings from the restructuring of the ownership of our Canadian business in the third quarter of 2016. Deferred income taxes have not been provided on these earnings because the Company has asserted indefinite reinvestment or outside tax basis exceeds book basis. It is not practicable to estimate the amount of additional tax that might be payable on these undistributed foreign earnings.
The
Company
files income tax returns for
U.S.
federal purposes and in various state jurisdictions. The
Company
also files income tax returns in various foreign jurisdictions, principally Canada and Mexico. The
U.S.
and most state income tax returns for years prior to 2013 are closed to examination by applicable tax authorities. Canadian income tax returns are open for audit for tax years 2009 and forward and Mexican income tax returns are generally open for tax years 2008 and forward. Canadian income tax returns are under audit for the 2009-2013 tax years.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Beginning balance
|
$
|
19
|
|
|
$
|
13
|
|
|
$
|
14
|
|
Increases related to tax positions taken during the current year
|
—
|
|
|
—
|
|
|
—
|
|
Increases related to tax positions taken during the prior year
|
12
|
|
|
10
|
|
|
3
|
|
Decreases related to tax positions taken during the prior year
|
—
|
|
|
(1
|
)
|
|
(2
|
)
|
Decreases related to settlements with taxing authorities
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
Decreases related to lapse of applicable statute of limitations
|
(3
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Ending balance
|
$
|
27
|
|
|
$
|
19
|
|
|
$
|
13
|
|
The total amount of unrecognized tax benefits that, if recognized, would reduce the effective tax rate is
$20 million
after considering the federal impact of state income taxes. Du
ring the next twelve months, the
Company
does not expect a significant change to its unrecognized tax benefits
.
The
Company
accrues interest and penalties on its uncertain tax positions as a component of its provision for income taxes. The Company did not recognize any interest and penalties for uncertain tax positions for the years ended December 31, 2016 and 2014. The
Company
recognized
$1 million
of interest and penalties for uncertain tax positions for the year ended
December 31, 2015
.
The
Company
had a total of
$5 million
accrued for interest and penalties for its uncertain tax positions primarily reported as part of other non-current liabilities as of
December 31, 2016 and 2015
.
13
.
Employee Benefit Plans
PENSION PLANS
Overview
The
Company
has
U.S.
and foreign pension plans which provide benefits to a defined group of employees. The
Company
has several non-contributory defined benefit plans, each having a measurement date of December 31. To participate in the defined benefit plans, eligible employees must have been employed by the
Company
for at least one year. Employee benefit plan obligations and expenses included in the
Company
's Audited Consolidated Financial Statements are determined using actuarial analyses based on plan assumptions including employee demographic data such as years of service and compensation, benefits and claims paid and employer contributions, among others. The
Company
also participates in various multi-employer defined benefit plans.
The
Company
's largest
U.S.
defined benefit pension plan, which is a cash balance plan, was suspended and the accrued benefit was frozen effective December 31, 2008. Participants in this plan no longer earn additional benefits for future services or salary increases. The cash balance plans maintain individual recordkeeping accounts for each participant which are annually credited with interest credits equal to the 12-month average of one-year
U.S.
Treasury Bill rates, plus
1%
, with a required minimum rate of
5%
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Financial Statement Impact
The following tables set forth amounts recognized in the
Company
's financial statements and the pension plans' funded status for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
(in millions)
|
2016
|
|
2015
|
Projected Benefit Obligations
|
|
|
|
|
|
As of beginning of year
|
$
|
206
|
|
|
$
|
227
|
|
Service cost
|
3
|
|
|
3
|
|
Interest cost
|
10
|
|
|
9
|
|
Actuarial losses (gains), net
|
9
|
|
|
(14
|
)
|
Benefits paid
|
(3
|
)
|
|
(3
|
)
|
Currency exchange adjustments
|
(1
|
)
|
|
(3
|
)
|
Settlements
|
(8
|
)
|
|
(13
|
)
|
As of end of year
|
$
|
216
|
|
|
$
|
206
|
|
Fair Value of Plan Assets
|
|
|
|
As of beginning of year
|
$
|
169
|
|
|
$
|
187
|
|
Actual return on plan assets
|
11
|
|
|
(7
|
)
|
Employer contributions
|
8
|
|
|
8
|
|
Benefits paid
|
(3
|
)
|
|
(3
|
)
|
Currency exchange adjustments
|
—
|
|
|
(3
|
)
|
Settlements
|
(8
|
)
|
|
(13
|
)
|
As of end of year
|
$
|
177
|
|
|
$
|
169
|
|
|
|
|
|
Funded status of plan / net amount recognized
|
$
|
(39
|
)
|
|
$
|
(37
|
)
|
|
|
|
|
Net amount recognized consists of:
|
|
|
|
Non-current assets
|
$
|
—
|
|
|
$
|
1
|
|
Current liabilities
|
(1
|
)
|
|
(1
|
)
|
Non-current liabilities
|
(38
|
)
|
|
(37
|
)
|
Net amount recognized
|
$
|
(39
|
)
|
|
$
|
(37
|
)
|
The accumulated benefit obligations for the defined benefit pension plans were
$214 million
and
$202 million
as of
December 31, 2016
and
2015
, respectively. The pension plan assets and the projected benefit obligations of
DPS
'
U.S.
pension plans represent approximately
92%
of the total plan assets and
91%
of the total projected benefit obligation of all plans combined as of
December 31, 2016
. The following table summarizes key pension plan information regarding plans whose accumulated benefit obligations exceed the fair value of their respective plan assets:
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
Aggregate projected benefit obligation
|
$
|
201
|
|
|
$
|
194
|
|
Aggregate accumulated benefit obligation
|
200
|
|
|
190
|
|
Aggregate fair value of plan assets
|
163
|
|
|
156
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the components of the net periodic benefit cost and changes in plan assets and benefit obligations recognized in
OCI
for the stand alone
U.S.
and foreign plans for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Net Periodic Benefit Costs
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Interest cost
|
10
|
|
|
9
|
|
|
13
|
|
Expected return on assets
|
(8
|
)
|
|
(9
|
)
|
|
(14
|
)
|
Amortization of net actuarial loss
|
3
|
|
|
4
|
|
|
3
|
|
Settlements
|
2
|
|
|
3
|
|
|
16
|
|
Net periodic benefit costs
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
20
|
|
Changes Recognized in OCI
|
|
|
|
|
|
Settlement effects
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
$
|
(16
|
)
|
Current year net actuarial loss
|
7
|
|
|
2
|
|
|
30
|
|
Recognition of net actuarial loss
|
(4
|
)
|
|
(4
|
)
|
|
(3
|
)
|
Total recognized in OCI
|
$
|
1
|
|
|
$
|
(5
|
)
|
|
$
|
11
|
|
The
Company
uses the corridor approach for amortization of actuarial gains or losses. The corridor is calculated as 10% of the greater of the plans’ projected benefit obligation or assets. The amortization period for plans with active participants is the average future service of covered active employees, and the amortization period for plans with no active participants is the average future lifetime of plan participants.
The estimated net actuarial loss for the defined benefit pension plans that will be amortized from
AOCL
into periodic benefit cost in
2017
is approximately
$4 million
.
The estimated prior service cost for the defined benefit pension plans that will be amortized from
AOCL
into periodic benefit costs in
2017
is not significant.
During the years ended
December 31, 2016
and
2015
, the
Company
recognized non-cash settlement charges of
$2 million
and
$3 million
, respectively, as the total amount of lump sum payments made to participants of various
U.S.
defined pension plans exceeded the estimated annual interest and service costs. The
Company
recognized a non-cash settlement loss of
$16 million
during the year ended December 31,
2014
, which included
$14 million
as a result of purchased annuity contracts. The settlement loss is primarily due to the recognition of previously unrecognized actuarial losses that were included in
AOCL
.
The following table summarizes amounts included in
AOCL
for the plans as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
(in millions)
|
2016
|
|
2015
|
Prior service cost
|
$
|
1
|
|
|
$
|
2
|
|
Net losses
|
54
|
|
|
52
|
|
Amounts in AOCL
|
$
|
55
|
|
|
$
|
54
|
|
Contributions and Expected Benefit Payments
The following table summarizes the contributions made to the
Company
's pension plans for the years ended
December 31, 2016
and
2015
, as well as the projected contributions for the year ending December 31,
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
|
|
Actual
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
Pension plan contributions
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
8
|
|
The contributions for each year ended December 31,
2016
and
2015
included
$7 million
of discretionary contributions.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the expected future benefit payments cash activity for the
Company
's pension plans in the future:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022-2026
|
Pension plan expected future benefit payments
|
$
|
11
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
13
|
|
|
$
|
66
|
|
Actuarial Assumptions
The
Company
's pension expense was calculated based upon a number of actuarial assumptions including discount rates, retirement age, mortality rates, compensation rate increases and expected long-term rate of return on plan assets for pension benefits.
The discount rate utilized to determine the
Company
's projected benefit obligations as of
December 31, 2016
and
2015
, as well as projected
2017
net periodic benefit cost for
U.S.
plans, reflects the current rate at which the associated liabilities could be effectively settled as of the end of the year. The
Company
set its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
For the
years ended December 31, 2016, 2015 and 2014
, the expected long-term rate of return on
U.S.
pension fund assets held by the
Company
's pension trusts was determined based on several factors, including the impact of active portfolio management and projected long-term returns of broad equity and bond indices. The plans' historical returns were also considered. The expected long-term rate of return on the assets in the plans was based on an asset
allocation
assumption of approximately
25%
with equity managers, with expected long-term rates of return of approximately
8.5%
,
8.7%
and
9.2%
for the
years ended December 31, 2016, 2015 and 2014
, respectively and approximately
75%
with fixed income managers, with an expected long-term rate of return of approximately
3.2%
,
3.7%
and
3.9%
for the
years ended December 31, 2016, 2015 and 2014
, respectively.
Expected mortality is a key assumption in the measurement for pension benefit obligations. During the year ended
December 31, 2016
, the
Company
used the RP-2014 mortality tables and the Mortality Improvement Scale MP-2016 published by the Society of Actuaries’ Retirement Plans Experience Committee for the
Company
's U.S. plans.
During the year ended December 31,
2015
, the
Company
used the RP-2014 mortality tables and the Mortality Improvement Scale MP-2015 for the
Company
's U.S. plans
.
The following table summarizes the weighted-average assumptions used to determine benefit obligations at the plan measurement dates for
U.S.
and foreign pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Foreign
|
|
Pension Plans
|
|
Pension Plans
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted-average discount rate
|
4.25
|
%
|
|
4.65
|
%
|
|
5.25
|
%
|
|
5.31
|
%
|
Rate of increase in compensation levels
|
3.00
|
%
|
|
3.00
|
%
|
|
3.89
|
%
|
|
3.94
|
%
|
The following table summarizes the weighted average actuarial assumptions used to determine the net periodic benefit costs for
U.S.
and foreign pension plans for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Foreign
|
|
Pension Plans
|
|
Pension Plans
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Weighted-average discount rate
|
4.65
|
%
|
|
4.33
|
%
|
|
5.00
|
%
|
|
6.46
|
%
|
|
6.66
|
%
|
|
7.11
|
%
|
Expected long-term rate of return on assets
|
5.00
|
%
|
|
5.25
|
%
|
|
6.00
|
%
|
|
7.07
|
%
|
|
6.72
|
%
|
|
7.41
|
%
|
Rate of increase in compensation levels
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
4.32
|
%
|
|
4.47
|
%
|
|
4.30
|
%
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Investment Policy and Strategy
DPS
has established formal investment policies for the assets associated with defined benefit pension plans. The
Company
's investment policy and strategy are mandated by the
Company
's Investment Committee. The overriding investment objective is to provide for the availability of funds for pension obligations as they become due, to maintain an overall level of financial asset adequacy and to maximize long-term investment return consistent with a reasonable level of risk.
DPS
' pension plan investment strategy includes the use of actively-managed securities. Investment performance both by investment manager and asset class is periodically reviewed, as well as overall market conditions with consideration of the long-term investment objectives. None of the plan assets are invested directly in equity or debt instruments issued by
DPS
. It is possible that insignificant indirect investments exist through its equity holdings. The equity and fixed income investments under
DPS
' sponsored pension plan assets are currently well diversified.
The plans' asset allocation policy is reviewed at least annually. Factors considered when determining the appropriate asset allocation include changes in plan liabilities, an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. The investment policy contains allowable ranges in asset mix as outlined in the table below:
|
|
|
Asset Category
|
Target Range
|
U.S. equity securities
|
16% - 20%
|
International equity securities
|
6% - 8%
|
U.S. fixed income
|
69% - 81%
|
The asset allocation for the
U.S.
defined benefit pension plans for
December 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
Actual
|
Asset Category
|
2017
|
|
2016
|
|
2015
|
Equity securities
|
25
|
%
|
|
25
|
%
|
|
25
|
%
|
Fixed income
|
75
|
%
|
|
75
|
%
|
|
75
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Assets of the Pension Plans
The following tables present the major categories of plan assets for the pension plan assets as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Cash and cash equivalents
|
$
|
4
|
|
|
$
|
5
|
|
Equity securities
|
|
|
|
U.S. Large-Cap equities
|
29
|
|
|
27
|
|
International equities
|
13
|
|
|
13
|
|
Fixed income securities
|
|
|
|
Derivative financial instruments
|
—
|
|
|
19
|
|
U.S. Treasuries
|
—
|
|
|
12
|
|
U.S. Municipal bonds
|
—
|
|
|
5
|
|
U.S. Corporate bonds
|
—
|
|
|
86
|
|
International bonds
|
13
|
|
|
21
|
|
Fixed income commingled funds
|
118
|
|
|
—
|
|
Total assets
|
177
|
|
|
188
|
|
|
|
|
|
Fixed income securities
|
|
|
|
Derivative financial instruments
|
—
|
|
|
19
|
|
Total liabilities
|
—
|
|
|
19
|
|
|
|
|
|
Total net assets
|
$
|
177
|
|
|
$
|
169
|
|
POST-RETIREMENT MEDICAL PLANS
The
Company
has several non-contributory defined benefit post-retirement medical plans, each having a measurement date of December 31. The majority of these post-retirement medical plans have been frozen. To participate in the defined benefit plans, eligible employees must have been employed by the
Company
for at least one year. The post-retirement benefits are limited to qualified expenses and are subject to deductibles, co-payment provisions and other provisions.
In total, the
Company
's post-retirement medical plans had a projected benefit obligation of
$6 million
and
$7 million
as of
December 31, 2016
and
2015
, respectively, and the fair value of post-retirement medical plan assets was
$6 million
and
$5 million
as of
December 31, 2016
and
2015
, respectively, which was primarily invested in fixed income commingled secutiries.
Refer to Note 14 for additional information
regarding major categories of assets held by the post-retirement medical plans. As of
December 31, 2016
, the net amount recognized consisted of
$3 million
of non-current assets and
$3 million
of non-current liabilities. As of December 31,
2015
, the net amount recognized consisted of
$1 million
of non-current assets and
$3 million
of non-current liabilities.
For the years ended
December 31, 2016
,
2015
, and
2014
, the net periodic benefit costs of the post-retirement medical plans had
no
impact on our Consolidated Statements of Income.
For the years ended
December 31, 2016
and
2014
, there was
no
change recognized in OCI related to our post-retirement medical plans. For the year ended December 31,
2015
, the total change recognized in OCI related to our post-retirement medical plans was
$1 million
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
MULTI-EMPLOYER PLANS
The
Company
participates in three trustee-managed multi-employer defined benefit pension plans for union-represented employees under certain collective bargaining agreements. The risks of participating in these multi-employer plans are different from single-employer plans due to the following:
|
|
•
|
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
•
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
•
|
If the
Company
chooses to stop participating in some of its multi-employer plans, the
Company
may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
Contributions paid into the multi-employer plans are expensed as incurred. Multi-employer plan expense was as follows
for the
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Multi-employer Plan Expense
|
|
|
|
|
|
|
|
|
Contributions to individually significant multi-employer plans
(1)
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
3
|
|
Contributions to all other multi-employer plans
|
3
|
|
|
3
|
|
|
3
|
|
Total
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
6
|
|
____________________________
|
|
(1)
|
Contributions to individually significant multi-employer plans for the year ended December 31, 2014 include amounts contributed to the Soft Drink Industry Local Union 710 Pension Fund ("
Local 710
") which the
Company
fully withdrew and ceased participation in the plan as of December 31, 2014.
Local 710
was considered an individually significant multi-employer when the contributions were made to the plan prior to the withdrawal and for the year ended December 31, 2014.
|
Individually Significant Multi-employer Plan
The
Company
participates in the following individually significant multi-employer plan as of
December 31, 2016
:
|
|
|
|
Legal name of the plan
|
|
Central States, Southeast and Southwest Areas Pension Fund ("Central States")
|
Plan's Employer Identification Number
|
|
36-6044243
|
Plan Number
|
|
001
|
Expiration dates of the collective bargaining agreements
|
|
February 17, 2018 - May 1, 2020
(2)
|
FIP/RP Status Pending/Implemented
(1)
|
|
Yes
|
PPA zone status as of December 31, 2015 and 2014
|
|
Red
|
Surcharge imposed
|
|
Yes
|
____________________________
|
|
(1)
|
FIP/RP Status Pending/Implemented indicates the plan for which a financial improvement plan ("FIP") or a rehabilitation plan ("RP") is either pending or implemented.
|
|
|
(2)
|
Central States
includes
eight
collective bargaining agreements. The largest agreement, which is set to expire February 29, 2020, covers approximately
46%
of the employees included in
Central States
. None of the collective bargaining agreements are set to expire during 2017.
|
The most recent Pension Protection Act ("
PPA
") zone status available as of
December 31, 2016
and
2015
is for the plan's year-end as of December 31,
2015
and
2014
. The plan has not utilized any extended amortization provisions that affect the calculation of the zone status.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
Company
's contributions to the
Central States
did not exceed 5% of the total contributions made to the
Central States
for the years ended December 31,
2015
and
2014
.
Future estimated contributions for the
Central States
based on the number of covered employees and the terms of the collective bargaining agreements are as follows:
|
|
|
|
|
(in millions)
|
Estimated
|
Year
|
Contributions
|
2017
|
$
|
2
|
|
2018
|
2
|
|
2019
|
1
|
|
2020
|
—
|
|
DEFINED CONTRIBUTION PLANS
The
Company
sponsors the
SIP
, which is a qualified 401(k) Retirement Plan that covers substantially all
U.S.
-based employees who meet certain eligibility requirements. This plan permits both pre-tax and after-tax contributions, which are subject to limitations imposed by Internal Revenue Code (the "
Code
") regulations. The
Company
matches employees' contributions up to specified levels.
The
Company
also sponsors the
SSP
, which is a non-qualified defined contribution plan for employees who are actively enrolled in the
SIP
and whose after-tax contributions under the
SIP
are limited by the
Code
compensation limitations.
The
Company
's employer matching contributions to the
SIP
and
SSP
plans were approximately
$19 million
,
$17 million
and
$16 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively.
Additionally, current participants in the
SIP
and
SSP
are eligible for an enhanced defined contribution (the "
EDC
"). Contributions begin accruing for plan participants after a one-year waiting period for participant entry into the plan and vest after three years of service with the
Company
. The
Company
made contributions of
$18 million
,
$17 million
, and
$16 million
to the
EDC
for the plan years ended December 31,
2016
,
2015
and
2014
, respectively.
14
.
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.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
RECURRING FAIR VALUE MEASUREMENTS
The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
Interest rate contracts
|
—
|
|
|
39
|
|
|
—
|
|
Marketable securities - trading
|
35
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
35
|
|
|
$
|
60
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Interest rate contracts
|
—
|
|
|
8
|
|
|
—
|
|
Foreign exchange forward contracts
|
—
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 were classified as Level 1. The fair values of commodity contracts, interest rate contracts and foreign exchange forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the reporting date. Interest rate contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the
Company
's contracts and credit risk of the counterparties. The fair value of foreign exchange 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
December 31, 2016 and 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 fair value hierarchy during the
years ended December 31, 2016, 2015 and 2014
.
FAIR VALUE OF PENSION AND POSTRETIREMENT PLAN ASSETS
The fair value hierarchy discussed above is not only applicable to assets and liabilities that are included in our consolidated balance sheets, but is also applied to certain other assets that indirectly impact our consolidated financial statements. For example, our
Company
sponsors and/or contributes to a number of pension and postretirement medical plans. Assets contributed by the
Company
become the property of the individual plans. Even though the
Company
no longer has control over these assets,
DPS
is indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts the
Company
's future net periodic benefit cost, as well as amounts recognized in our consolidated balance sheets.
Refer to Note 13 for additional information
regarding the
Company
's pension and postretirement medical plans. The
Company
uses the fair value hierarchy to measure the fair value of assets held by our various pension and postretirement medical plans.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following tables present the major categories of plan assets and the respective fair value hierarchy for the pension plan assets as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2016
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
(in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
(1)
|
|
|
|
|
|
|
|
U.S. Large-Cap equities
(2)
|
29
|
|
|
—
|
|
|
29
|
|
|
—
|
|
International equities
(2)
|
13
|
|
|
—
|
|
|
13
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
International bonds
(2)
|
13
|
|
|
—
|
|
|
13
|
|
|
—
|
|
Fixed income commingled funds
(3)
|
118
|
|
|
—
|
|
|
118
|
|
|
—
|
|
Total assets
|
$
|
177
|
|
|
$
|
4
|
|
|
$
|
173
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2015
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
(in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
(1)
|
|
|
|
|
|
|
|
U.S. Large-Cap equities
(2)
|
27
|
|
|
—
|
|
|
27
|
|
|
—
|
|
International equities
(2)
|
13
|
|
|
—
|
|
|
13
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
Derivative financial instruments
(4)
|
19
|
|
|
—
|
|
|
19
|
|
|
—
|
|
U.S. Treasuries
|
12
|
|
|
12
|
|
|
—
|
|
|
—
|
|
U.S. Municipal bonds
(5)
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
U.S. Corporate bonds
(5)
|
86
|
|
|
—
|
|
|
86
|
|
|
—
|
|
International bonds
(2)
|
21
|
|
|
—
|
|
|
21
|
|
|
—
|
|
Total assets
|
188
|
|
|
17
|
|
|
171
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
Derivative financial instruments
(4)
|
19
|
|
|
—
|
|
|
19
|
|
|
—
|
|
Total liabilities
|
19
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total net assets
|
$
|
169
|
|
|
$
|
17
|
|
|
$
|
152
|
|
|
$
|
—
|
|
____________________________
|
|
(1)
|
Equity securities are comprised of actively managed
U.S.
index funds and Europe, Australia, Far East ("
EAFE
") index funds.
|
|
|
(2)
|
The NAV is based on the fair value of the underlying assets owned by the equity index fund or fixed income investment vehicle per share multiplied by the number of units held as of the measurement date and are classified as Level 2 assets.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
(3)
|
Fixed income commingled funds are comprised of a diversified portfolio of investment-grade corporate and government securities. Investments are provided by the investment managers using a unit price or NAV based on the fair value of the underlying investments of the funds.
|
|
|
(4)
|
Derivative financial instruments consist of U.S Treasury futures. The fair value of these futures is determined by using quoted market prices of similar instruments.
|
|
|
(5)
|
U.S.
Municipal and Corporate bonds are based on quoted bid prices for comparable securities in the marketplace.
|
The following tables present the major categories of plan assets and the respective fair value hierarchy for the postretirement medical plan assets as of
December 31, 2016 and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2016
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
(in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Equity securities
(1)
|
|
|
|
|
|
|
|
U.S. Large-Cap equities
(2)
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
International equities
(2)
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
Fixed income commingled funds
(3)
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Total assets
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2015
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
(in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
(1)
|
|
|
|
|
|
|
|
U.S. Large-Cap equities
(2)
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
U.S. Corporate bonds
(4)
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Total assets
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
—
|
|
____________________________
|
|
(1)
|
Equity securities are comprised of actively managed
U.S.
index funds and
EAFE
index funds.
|
|
|
(2)
|
The NAV is based on the fair value of the underlying assets owned by the equity index fund or fixed income investment vehicle per share multiplied by the number of units held as of the measurement date and are classified as Level 2 assets.
|
|
|
(3)
|
Fixed income commingled funds are comprised of a diversified portfolio of investment-grade corporate and government securities. Investments are provided by the investment managers using a unit price or NAV based on the fair value of the underlying investments of the funds.
|
|
|
(4)
|
U.S.
Corporate bonds are based on quoted bid prices for comparable securities in the marketplace.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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 Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
December 31, 2016
|
|
December 31, 2015
|
(in millions)
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
(1)
|
1
|
|
$
|
1,787
|
|
|
$
|
1,787
|
|
|
$
|
911
|
|
|
$
|
911
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt – 2016 Notes
(2)
|
2
|
|
—
|
|
|
—
|
|
|
500
|
|
|
500
|
|
Long-term debt – 2018 Notes
(2)
|
2
|
|
364
|
|
|
389
|
|
|
723
|
|
|
802
|
|
Long-term debt – 2019 Notes
(2)
|
2
|
|
249
|
|
|
254
|
|
|
250
|
|
|
248
|
|
Long-term debt – 2020 Notes
(2)
|
2
|
|
247
|
|
|
248
|
|
|
246
|
|
|
244
|
|
Long-term debt – 2021 Notes - A
(2)
|
2
|
|
249
|
|
|
256
|
|
|
250
|
|
|
253
|
|
Long-term debt – 2021 Notes - B
(2)
|
2
|
|
246
|
|
|
248
|
|
|
—
|
|
|
—
|
|
Long-term debt – 2022 Notes
(2)
|
2
|
|
273
|
|
|
247
|
|
|
265
|
|
|
241
|
|
Long-term debt – 2023 Notes
(2)
|
2
|
|
495
|
|
|
500
|
|
|
—
|
|
|
—
|
|
Long-term debt – 2025 Notes
(2)
|
2
|
|
495
|
|
|
498
|
|
|
494
|
|
|
491
|
|
Long-term debt – 2026 Notes
(2)
|
2
|
|
396
|
|
|
370
|
|
|
—
|
|
|
—
|
|
Long-term debt – 2027 Notes
(2)
|
2
|
|
397
|
|
|
398
|
|
|
—
|
|
|
—
|
|
Long-term debt – 2038 Notes
(2)
|
2
|
|
270
|
|
|
347
|
|
|
271
|
|
|
344
|
|
Long-term debt – 2045 Notes
(2)
|
2
|
|
247
|
|
|
253
|
|
|
247
|
|
|
244
|
|
Long-term debt – 2046 Notes
(2)
|
2
|
|
397
|
|
|
407
|
|
|
—
|
|
|
—
|
|
____________________________
|
|
(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 impact of interest rate swaps designated as fair value hedges and other hedge related adjustments.
Refer to Note 10 for additional information
regarding the notes subject to fair value hedges.
|
15
.
Stock-Based Compensation
Stock-based compensation expense is recorded in
SG&A
expenses in the
Consolidated
Statements of Income. The components of stock-based compensation expense for the
years ended December 31, 2016, 2015 and 2014
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Total stock-based compensation expense
|
$
|
45
|
|
|
$
|
44
|
|
|
$
|
48
|
|
Income tax benefit recognized in the income statement
|
(16
|
)
|
|
(15
|
)
|
|
(17
|
)
|
Stock-based compensation expense, net of tax
|
$
|
29
|
|
|
$
|
29
|
|
|
$
|
31
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DESCRIPTION OF STOCK-BASED COMPENSATION PLAN
Omnibus Stock Incentive Plan of 2009
During 2009, the
Company
adopted the Omnibus Stock Incentive Plan of 2009 (the "
DPS Stock Plan
") under which employees, consultants and non-employee directors may be granted stock options, stock appreciation rights, stock awards,
RSU
s or
PSU
s. This plan provides for the issuance of up to
20 million
shares of the
Company
's common stock. Subsequent to adoption, the
Company
's Compensation Committee granted
RSU
s,
PSU
s and options with the following vesting schedule detailed below:
|
|
|
|
|
Stock Award Type
|
|
Vesting Schedule
|
RSUs
|
|
Grants in 2014 and 2015
|
Vest after three years
|
|
|
Grants in 2016
|
Executive officers: vest after three years
All others: vest ratably on each anniversary date over three years
|
PSUs
|
|
|
Vest after three years
|
Stock options
|
|
|
Vest ratably on each anniversary date over three years
|
Each
RSU
is to be settled for one share of the
Company
's common stock on the respective vesting date of the
RSU
. Each PSU is to be settled for one share of the Company's common stock on the respective vesting date of the PSU, adjusted for internal return measurement results. PSU grants made during the years ended
December 31, 2016
and 2015 will also be adjusted for relative stock price performance on the respective vesting date of the PSU. No other types of stock-based awards have been granted under the
DPS Stock Plan
. Approximately
10 million
shares of the
Company
's common stock were available for future grant as of
December 31, 2016
.
The stock options issued under the
DPS Stock Plan
have a maximum option term of
10 years
.
STOCK OPTIONS
The tables below summarize information about the
Company
's stock options granted during the
years ended December 31, 2016, 2015 and 2014
.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model.
The risk-free interest rate used in the option valuation model is based on zero-coupon yields implied by
U.S.
Treasury issues with remaining terms similar to the expected term on the options. The expected term of the option represents the period of time that options granted are expected to be outstanding and is derived by analyzing historic exercise behavior. Expected volatility is based on implied volatilities from traded options on the
Company
's stock, historical volatility of the
Company
's stock and other factors. The
Company
's expected dividend yield is based on historical dividends declared.
The weighted average assumptions used to value grant options are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Fair value of options at grant date
|
|
$
|
9.92
|
|
|
$
|
9.22
|
|
|
$
|
5.80
|
|
Risk free interest rate
|
|
0.99
|
%
|
|
1.28
|
%
|
|
1.25
|
%
|
Expected term of options (in years)
|
|
3.6
|
|
|
3.9
|
|
|
4.4
|
|
Dividend yield
|
|
2.30
|
%
|
|
2.55
|
%
|
|
3.35
|
%
|
Expected volatility
|
|
18.22
|
%
|
|
18.98
|
%
|
|
20.03
|
%
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The table below summarizes stock option activity for the
year ended
December 31, 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
|
(286,399
|
)
|
|
49.63
|
|
|
|
|
12
|
|
Forfeited or expired
|
(8,656
|
)
|
|
81.01
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
1,342,921
|
|
|
70.83
|
|
|
7.93
|
|
27
|
|
Exercisable as of December 31, 2016
|
450,189
|
|
|
55.86
|
|
|
7.05
|
|
16
|
|
As of
December 31, 2016
, there were
1,336,744
stock options vested or expected to vest. The weighted average exercise price of stock options granted for the years ended
December 31, 2015
and
2014
was
$79.20
and
$51.68
, respectively. The aggregate intrinsic value of the stock options exercised for the years ended
December 31, 2015
and
2014
was
$27 million
and
$24 million
, respectively. As of
December 31, 2016
, there was
$5 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
0.77 years
.
RESTRICTED STOCK UNITS
The table below summarizes
RSU
activity for the
year ended
December 31, 2016
. The fair value of
RSU
s is determined based on the number of units granted and the grant date price of 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
|
358,572
|
|
|
91.92
|
|
|
|
|
|
Vested and released
|
(601,976
|
)
|
|
44.42
|
|
|
|
|
55
|
|
Forfeited
|
(35,768
|
)
|
|
72.25
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
1,218,244
|
|
|
71.08
|
|
|
0.80
|
|
110
|
|
The total fair value of
RSU
s vested for the
years ended December 31, 2016, 2015 and 2014
was
$27 million
,
$29 million
, and
$27 million
, respectively. The aggregate intrinsic value of the
RSU
s vested and released for the years ended
December 31, 2015
and
2014
was
$60 million
and
$38 million
, respectively. As of
December 31, 2016
, there was
$36 million
of unrecognized compensation cost related to unvested
RSU
s granted under the
DPS Stock Plan
that is expected to be recognized over a weighted average period of
0.79 years
.
During the
year ended
December 31, 2016
,
601,976
units subject to previously granted
RSU
s vested. A majority of these vested stock awards were net share settled. The
Company
withheld issuance of
192,645
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
$19 million
,
$22 million
, and
$14 million
for the
years ended December 31, 2016, 2015 and 2014
, respectively. These payments are reflected as a financing activity within the
Consolidated
Statements of Cash Flows. These payments were used for tax withholdings related to the net share settlements of
RSU
s 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 equity.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
PERFORMANCE SHARE UNITS
In 2011, the Compensation Committee of the
Board
approved a
PSU
plan. Each
PSU
is equivalent in value to one share of the
Company
's common stock.
PSU
s granted prior to January 1, 2015, will vest three years from the beginning date of a pre-determined performance period to the extent the
Company
has met two performance criteria during the performance period: (i) the percentage growth of net income and (ii) the percentage yield from operating free cash flow.
PSU
s granted after January 1, 2015, are subject to an additional market condition, which compares the
Company
's relative total shareholder return performance against the total shareholder return of a specified list of peer companies over the term of the award. The maximum payout percentage for all
PSU
s granted by the
Company
is
200%
.
The PSUs that are subject to the market condition are valued using a Monte Carlo simulation model, which requires certain assumptions, including the risk-free interest rate, expected volatility, and the expected term of the award. The risk-free interest rate used in the Monte Carlo simulation model is based on zero-coupon yields implied by
U.S.
Treasury issues with remaining terms similar to the performance period on the PSUs. The performance period of the PSUs represents the period of time between the PSU grant date and the end of the performance period. Expected volatility is based on historical data of the Company and peer companies over the most recent time period equal to the performance period.
For
PSU
grants during the years ended
December 31, 2016
and
2015
, the assumptions used in the Monte Carlo simulation are as follows:
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2016
|
|
2015
|
Risk-free interest rate
|
|
0.98
|
%
|
|
1.00
|
%
|
Expected volatility
|
|
17.29
|
%
|
|
16.29
|
%
|
Performance period (years)
|
|
2.8
|
|
|
2.8
|
|
The table below summarizes
PSU
activity for the
year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
106,462
|
|
|
64.83
|
|
|
|
|
|
Performance adjustment
(1)
|
172,500
|
|
|
43.82
|
|
|
|
|
|
Vested and released
|
(345,000
|
)
|
|
43.82
|
|
|
|
|
32
|
|
Forfeited
|
(2,718
|
)
|
|
64.16
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
374,618
|
|
|
64.86
|
|
|
0.89
|
|
34
|
|
____________________________
|
|
(1)
|
For
PSU
s which vested during the year ended
December 31, 2016
, the Company awarded additional PSUs, as actual results measured at the end of the performance period exceeded target performance levels.
|
As of
December 31, 2016
, there was
$8 million
of unrecognized compensation cost related to unvested
PSU
s granted under the
DPS Stock Plan
that is expected to be recognized over a weighted average period of
1.48 years
.
During the
year ended
December 31, 2016
,
345,000
units subject to previously granted
PSU
s vested. A majority of these vested
PSU
s were net share settled. The
Company
withheld issuance of
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.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Total payments for the employees' tax obligations to the relevant taxing authorities were
$12 million
,
$5 million
and
$2 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. These payments are reflected as a financing activity within the
Consolidated
Statements of Cash Flows. These payments were used for tax withholdings related to the net share settlements of
PSU
s 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 equity.
16
.
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
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions, except per share data)
|
|
2016
|
|
2015
|
|
2014
|
Basic EPS:
|
|
|
|
|
|
|
Net income
|
|
$
|
847
|
|
|
$
|
764
|
|
|
$
|
703
|
|
Weighted average common shares outstanding
|
|
185.4
|
|
|
190.9
|
|
|
195.8
|
|
Earnings per common share — basic
|
|
$
|
4.57
|
|
|
$
|
4.00
|
|
|
$
|
3.59
|
|
Diluted EPS:
|
|
|
|
|
|
|
Net income
|
|
$
|
847
|
|
|
$
|
764
|
|
|
$
|
703
|
|
Weighted average common shares outstanding
|
|
185.4
|
|
|
190.9
|
|
|
195.8
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock options
|
|
0.2
|
|
|
0.3
|
|
|
0.3
|
|
RSUs
|
|
0.7
|
|
|
0.9
|
|
|
1.2
|
|
PSUs
|
|
0.3
|
|
|
0.3
|
|
|
0.1
|
|
Weighted average common shares outstanding and common stock equivalents
|
|
186.6
|
|
|
192.4
|
|
|
197.4
|
|
Earnings per common share — diluted
|
|
$
|
4.54
|
|
|
$
|
3.97
|
|
|
$
|
3.56
|
|
Stock options,
RSU
s,
PSU
s and associated
DEUs
totaling
0.5 million
shares were excluded from the diluted weighted average shares outstanding for the year ended
December 31, 2016
, as they were not dilutive. Stock options,
RSU
s,
PSU
s and associated
DEUs
totaling
0.3 million
shares were excluded from the diluted weighted average shares outstanding for the years ended
December 31, 2015
and
2014
, 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
December 31, 2016
, there were
73,393
DEUs
, which will vest at the time that the underlying
RSU
and
PSU
vests.
Through 2015, the
Board
authorized a total aggregate share repurchase plan of
$4 billion
. An additional
$1 billion
was authorized by the
Board
in February 2016. The
Company
repurchased and retired
5.7 million
shares of common stock valued at approximately
$519 million
,
6.5 million
shares of common stock valued at approximately
$521 million
and
6.8 million
shares of common stock valued at approximately
$400 million
for the
years ended December 31, 2016, 2015 and 2014
, respectively. These amounts were recorded as a reduction of equity. As of
December 31, 2016
,
$1,132 million
remains available for share repurchase under the
Board
authorization.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17
.
Accumulated Other Comprehensive Loss
The following table provides a summary of changes in the balances of each component of
AOCL
, net of taxes, for the
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Net Change in Pension Liability
|
|
Net Change in 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
|
(64
|
)
|
|
—
|
|
|
(2
|
)
|
|
(66
|
)
|
Amounts reclassified from AOCL
|
—
|
|
|
4
|
|
|
4
|
|
|
8
|
|
Net current year OCI
|
(64
|
)
|
|
4
|
|
|
2
|
|
|
(58
|
)
|
Balance as of December 31, 2015
|
(125
|
)
|
|
(36
|
)
|
|
(34
|
)
|
|
(195
|
)
|
OCI before reclassifications
|
(39
|
)
|
|
(5
|
)
|
|
—
|
|
|
(44
|
)
|
Amounts reclassified from AOCL
|
—
|
|
|
4
|
|
|
6
|
|
|
10
|
|
Net current year OCI
|
(39
|
)
|
|
(1
|
)
|
|
6
|
|
|
(34
|
)
|
Balance as of December 31, 2016
|
$
|
(164
|
)
|
|
$
|
(37
|
)
|
|
$
|
(28
|
)
|
|
$
|
(229
|
)
|
The following table presents the amount of loss reclassified from
AOCL
into the
Consolidated
Statements of Income for the
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
Location of (Loss) Gain Reclassified from AOCL into Net Income
|
|
2016
|
|
2015
|
|
2014
|
(Loss) Gain on cash flow hedges:
|
|
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
$
|
(8
|
)
|
|
$
|
(8
|
)
|
|
$
|
(8
|
)
|
Foreign exchange forward contracts
|
Cost of sales
|
|
(1
|
)
|
|
2
|
|
|
1
|
|
Total
|
|
|
(9
|
)
|
|
(6
|
)
|
|
(7
|
)
|
Income tax expense
|
|
|
(3
|
)
|
|
(2
|
)
|
|
(3
|
)
|
Total
|
|
|
$
|
(6
|
)
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
Defined benefit pension and postretirement plan items:
|
|
|
|
|
|
|
|
Amortization of actuarial losses, net
|
Selling, general and administrative expenses
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
Settlement loss
|
Selling, general and administrative expenses
|
|
(2
|
)
|
|
(3
|
)
|
|
(16
|
)
|
Total
|
|
|
(6
|
)
|
|
(7
|
)
|
|
(19
|
)
|
Income tax expense
|
|
|
(2
|
)
|
|
(3
|
)
|
|
(7
|
)
|
Total
|
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
(12
|
)
|
Total reclassifications
|
|
|
$
|
(10
|
)
|
|
$
|
(8
|
)
|
|
$
|
(16
|
)
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18
.
Supplemental Cash Flow Information
The following table details supplemental cash flow disclosures of non-cash investing and financing activities for the
years ended December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Supplemental cash flow disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
Dividends declared but not yet paid
|
$
|
97
|
|
|
$
|
90
|
|
|
$
|
79
|
|
Capital expenditures included in accounts payable and other current liabilities
|
11
|
|
|
14
|
|
|
11
|
|
Holdback liability for acquisition of business
|
—
|
|
|
—
|
|
|
2
|
|
Capital lease additions
|
26
|
|
|
55
|
|
|
31
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
Interest paid
|
$
|
117
|
|
|
$
|
94
|
|
|
$
|
94
|
|
Income taxes paid
|
431
|
|
|
346
|
|
|
345
|
|
19
.
Leases
The
Company
has leases for certain facilities, fleet and equipment which expire at various dates through
2044
. Some lease agreements contain standard renewal provisions that allow us to renew the lease at rates equivalent to fair market value at the end of the lease term. Under lease agreements that contain escalating rent provisions, operating lease expense is recorded on a straight-line basis over the lease term. Under lease agreements that contain rent holidays, rent expense is recorded on a straight-line basis over the entire lease term, including the period covered by the rent holiday. Operating lease expense was
$55 million
,
$60 million
and
$69 million
for the
years ended December 31, 2016, 2015 and 2014
, respectively.
Future minimum lease payments under operating leases with initial or remaining noncancellable lease terms in excess of one year and capital leases as of
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Operating Leases
|
|
Capital Leases
|
2017
|
|
$
|
40
|
|
|
$
|
20
|
|
2018
|
|
33
|
|
|
19
|
|
2019
|
|
30
|
|
|
19
|
|
2020
|
|
25
|
|
|
18
|
|
2021
|
|
23
|
|
|
18
|
|
Thereafter
|
|
94
|
|
|
194
|
|
Total minimum lease payments
|
|
$
|
245
|
|
|
288
|
|
Less imputed interest
|
|
|
|
(135
|
)
|
Present value of minimum lease payments
|
|
|
|
$
|
153
|
|
20
.
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
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
December 31, 2016
, the
Company
has paid approximately
$950,000
since the notification for
DPS
' allocation of costs related to the study for this site.
21
.
Segments
As of
December 31, 2016
and
2015
and for the
years ended December 31, 2016, 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. Intersegment sales are recorded at cost and are eliminated in the Consolidated Statements of Operations. “Unallocated corporate costs” are excluded from the Company's measurement of segment performance and include stock-based compensation expense, unrealized commodity derivative gains and losses, and certain general corporate expenses.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Information about the
Company
's operations by operating segment as of
December 31, 2016 and 2015
and for the
years ended December 31, 2016, 2015 and 2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Segment Results – Net sales
|
|
|
|
|
|
Beverage Concentrates
|
$
|
1,284
|
|
|
$
|
1,241
|
|
|
$
|
1,228
|
|
Packaged Beverages
|
4,696
|
|
|
4,544
|
|
|
4,361
|
|
Latin America Beverages
|
460
|
|
|
497
|
|
|
532
|
|
Net sales
|
$
|
6,440
|
|
|
$
|
6,282
|
|
|
$
|
6,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Segment Results – SOP
|
|
|
|
|
|
Beverage Concentrates
|
$
|
834
|
|
|
$
|
807
|
|
|
$
|
790
|
|
Packaged Beverages
|
771
|
|
|
709
|
|
|
636
|
|
Latin America Beverages
|
78
|
|
|
88
|
|
|
78
|
|
Total SOP
|
1,683
|
|
|
1,604
|
|
|
1,504
|
|
Unallocated corporate costs
|
253
|
|
|
299
|
|
|
323
|
|
Other operating (income) expense, net
|
(3
|
)
|
|
7
|
|
|
1
|
|
Income from operations
|
1,433
|
|
|
1,298
|
|
|
1,180
|
|
Interest expense, net
|
144
|
|
|
115
|
|
|
107
|
|
Loss on early extinguishment of debt
|
31
|
|
|
—
|
|
|
—
|
|
Other income, net
|
(25
|
)
|
|
(1
|
)
|
|
—
|
|
Income before provision for income taxes and equity in (loss) earnings of unconsolidated subsidiaries
|
$
|
1,283
|
|
|
$
|
1,184
|
|
|
$
|
1,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Amortization expense
|
|
|
|
|
|
Beverage Concentrates
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
16
|
|
Packaged Beverages
|
4
|
|
|
7
|
|
|
7
|
|
Latin America Beverages
|
—
|
|
|
—
|
|
|
—
|
|
Segment total
|
17
|
|
|
19
|
|
|
23
|
|
Corporate and other
|
16
|
|
|
16
|
|
|
13
|
|
Total amortization expense
|
$
|
33
|
|
|
$
|
35
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Depreciation expense
|
|
|
|
|
|
Beverage Concentrates
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Packaged Beverages
|
158
|
|
|
161
|
|
|
165
|
|
Latin America Beverages
|
14
|
|
|
14
|
|
|
15
|
|
Segment total
|
180
|
|
|
182
|
|
|
187
|
|
Corporate and other
|
11
|
|
|
10
|
|
|
12
|
|
Total depreciation expense
|
$
|
191
|
|
|
$
|
192
|
|
|
$
|
199
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2016
|
|
2015
|
Identifiable operating assets
|
|
|
|
|
|
Beverage Concentrates
|
$
|
4,108
|
|
|
$
|
4,099
|
|
Packaged Beverages
|
3,474
|
|
|
3,429
|
|
Latin America Beverages
|
312
|
|
|
303
|
|
Segment total
|
7,894
|
|
|
7,831
|
|
Corporate and other
|
1,874
|
|
|
1,007
|
|
Total identifiable operating assets
|
9,768
|
|
|
8,838
|
|
Investments in unconsolidated subsidiaries
|
23
|
|
|
31
|
|
Total assets
|
$
|
9,791
|
|
|
$
|
8,869
|
|
GEOGRAPHIC DATA
The
Company
utilizes separate legal entities for transactions with customers outside of the United States. Information about the
Company
's operations by geographic region as of
December 31, 2016
and
2015
and for
the years ended
December 31, 2016
,
2015
and
2014
is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Net sales
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
5,768
|
|
|
$
|
5,575
|
|
|
$
|
5,361
|
|
International
|
672
|
|
|
707
|
|
|
760
|
|
Total net sales
|
$
|
6,440
|
|
|
$
|
6,282
|
|
|
$
|
6,121
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2016
|
|
2015
|
Property, plant and equipment, net
|
|
|
|
|
|
U.S.
|
$
|
1,007
|
|
|
$
|
1,041
|
|
International
|
131
|
|
|
115
|
|
Total property, plant and equipment, net
|
$
|
1,138
|
|
|
$
|
1,156
|
|
MAJOR CUSTOMER
Walmart represents one of the
Company
's major customers and accounted for more than
10%
of total net sales for the years ended
December 31, 2016
,
2015
and
2014
. For the years ended
December 31, 2016
,
2015
and
2014
,
DPS
recorded net sales to Walmart of
$779 million
,
$779 million
and
$740 million
, respectively. These represent direct sales from the
Company
to Walmart and were reported in
DPS
' Packaged Beverages and Latin America Beverages segments.
Additionally, customers in the
Company
's Beverage Concentrates segment buy concentrate from
DPS
which is used in finished goods sold by the
Company
's third party bottlers to Walmart. These indirect sales further increase the concentration of risk associated with
DPS
' consolidated net sales as it relates to Walmart.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
22
.
Guarantor and Non-Guarantor Financial Information
The
Company
's Notes are fully and unconditionally guaranteed by substantially all of the
Company
's existing and future direct and indirect domestic subsidiaries (except one immaterial subsidiary 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 for guarantor subsidiaries.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
|
|
For the Year Ended December 31, 2016
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Net sales
|
$
|
—
|
|
|
$
|
5,936
|
|
|
$
|
633
|
|
|
$
|
(129
|
)
|
|
$
|
6,440
|
|
Cost of sales
|
—
|
|
|
2,392
|
|
|
319
|
|
|
(129
|
)
|
|
2,582
|
|
Gross profit
|
—
|
|
|
3,544
|
|
|
314
|
|
|
—
|
|
|
3,858
|
|
Selling, general and administrative expenses
|
3
|
|
|
2,127
|
|
|
199
|
|
|
—
|
|
|
2,329
|
|
Depreciation and amortization
|
—
|
|
|
92
|
|
|
7
|
|
|
—
|
|
|
99
|
|
Other operating (income) expense, net
|
—
|
|
|
2
|
|
|
(5
|
)
|
|
—
|
|
|
(3
|
)
|
Income from operations
|
(3
|
)
|
|
1,323
|
|
|
113
|
|
|
—
|
|
|
1,433
|
|
Interest expense
|
242
|
|
|
69
|
|
|
—
|
|
|
(164
|
)
|
|
147
|
|
Interest income
|
(55
|
)
|
|
(105
|
)
|
|
(7
|
)
|
|
164
|
|
|
(3
|
)
|
Loss on early extinguishment of debt
|
31
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
Other income, net
|
(5
|
)
|
|
(27
|
)
|
|
7
|
|
|
—
|
|
|
(25
|
)
|
Income before provision for income taxes and equity in (loss) earnings of unconsolidated subsidiaries
|
(216
|
)
|
|
1,386
|
|
|
113
|
|
|
—
|
|
|
1,283
|
|
Provision for income taxes
|
(69
|
)
|
|
470
|
|
|
33
|
|
|
—
|
|
|
434
|
|
Income before equity in (loss) earnings of unconsolidated subsidiaries
|
(147
|
)
|
|
916
|
|
|
80
|
|
|
—
|
|
|
849
|
|
Equity in earnings of consolidated subsidiaries
|
994
|
|
|
81
|
|
|
—
|
|
|
(1,075
|
)
|
|
—
|
|
Equity in (loss) earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
|
(3
|
)
|
|
1
|
|
|
—
|
|
|
(2
|
)
|
Net income
|
$
|
847
|
|
|
$
|
994
|
|
|
$
|
81
|
|
|
$
|
(1,075
|
)
|
|
$
|
847
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
|
|
For the Year Ended December 31, 2015
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Net sales
|
$
|
—
|
|
|
$
|
5,668
|
|
|
$
|
633
|
|
|
$
|
(19
|
)
|
|
$
|
6,282
|
|
Cost of sales
|
—
|
|
|
2,280
|
|
|
298
|
|
|
(19
|
)
|
|
2,559
|
|
Gross profit
|
—
|
|
|
3,388
|
|
|
335
|
|
|
—
|
|
|
3,723
|
|
Selling, general and administrative expenses
|
—
|
|
|
2,105
|
|
|
208
|
|
|
—
|
|
|
2,313
|
|
Depreciation and amortization
|
—
|
|
|
99
|
|
|
6
|
|
|
—
|
|
|
105
|
|
Other operating (income) expense, net
|
—
|
|
|
(1
|
)
|
|
8
|
|
|
—
|
|
|
7
|
|
Income from operations
|
—
|
|
|
1,185
|
|
|
113
|
|
|
—
|
|
|
1,298
|
|
Interest expense
|
228
|
|
|
56
|
|
|
—
|
|
|
(167
|
)
|
|
117
|
|
Interest income
|
(42
|
)
|
|
(120
|
)
|
|
(7
|
)
|
|
167
|
|
|
(2
|
)
|
Other income, net
|
(1
|
)
|
|
(6
|
)
|
|
6
|
|
|
—
|
|
|
(1
|
)
|
Income before provision for income taxes and equity in (loss) earnings of unconsolidated subsidiaries
|
(185
|
)
|
|
1,255
|
|
|
114
|
|
|
—
|
|
|
1,184
|
|
Provision for income taxes
|
(85
|
)
|
|
472
|
|
|
33
|
|
|
—
|
|
|
420
|
|
Income before equity in (loss) earnings of unconsolidated subsidiaries
|
(100
|
)
|
|
783
|
|
|
81
|
|
|
—
|
|
|
764
|
|
Equity in earnings of consolidated subsidiaries
|
864
|
|
|
81
|
|
|
—
|
|
|
(945
|
)
|
|
—
|
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
$
|
764
|
|
|
$
|
864
|
|
|
$
|
81
|
|
|
$
|
(945
|
)
|
|
$
|
764
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
|
|
For the Year Ended December 31, 2014
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Net sales
|
$
|
—
|
|
|
$
|
5,474
|
|
|
$
|
681
|
|
|
$
|
(34
|
)
|
|
$
|
6,121
|
|
Cost of sales
|
—
|
|
|
2,191
|
|
|
334
|
|
|
(34
|
)
|
|
2,491
|
|
Gross profit
|
—
|
|
|
3,283
|
|
|
347
|
|
|
—
|
|
|
3,630
|
|
Selling, general and administrative expenses
|
1
|
|
|
2,106
|
|
|
227
|
|
|
—
|
|
|
2,334
|
|
Depreciation and amortization
|
—
|
|
|
107
|
|
|
8
|
|
|
—
|
|
|
115
|
|
Other operating (income) expense, net
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Income from operations
|
(1
|
)
|
|
1,069
|
|
|
112
|
|
|
—
|
|
|
1,180
|
|
Interest expense
|
104
|
|
|
51
|
|
|
—
|
|
|
(46
|
)
|
|
109
|
|
Interest income
|
(40
|
)
|
|
—
|
|
|
(8
|
)
|
|
46
|
|
|
(2
|
)
|
Other income, net
|
(2
|
)
|
|
(3
|
)
|
|
5
|
|
|
—
|
|
|
—
|
|
Income before provision for income taxes and equity in (loss) earnings of unconsolidated subsidiaries
|
(63
|
)
|
|
1,021
|
|
|
115
|
|
|
—
|
|
|
1,073
|
|
Provision for income taxes
|
(38
|
)
|
|
383
|
|
|
26
|
|
|
—
|
|
|
371
|
|
Income before equity in (loss) earnings of unconsolidated subsidiaries
|
(25
|
)
|
|
638
|
|
|
89
|
|
|
—
|
|
|
702
|
|
Equity in earnings of consolidated subsidiaries
|
728
|
|
|
90
|
|
|
—
|
|
|
(818
|
)
|
|
—
|
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Net income
|
$
|
703
|
|
|
$
|
728
|
|
|
$
|
90
|
|
|
$
|
(818
|
)
|
|
$
|
703
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
For the Year Ended December 31, 2016
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Net income
|
$
|
847
|
|
|
$
|
994
|
|
|
$
|
81
|
|
|
$
|
(1,075
|
)
|
|
$
|
847
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income impact from consolidated subsidiaries
|
(40
|
)
|
|
(29
|
)
|
|
—
|
|
|
69
|
|
|
—
|
|
Foreign currency translation adjustments
|
(1
|
)
|
|
(11
|
)
|
|
(27
|
)
|
|
—
|
|
|
(39
|
)
|
Net change in pension liability, net of tax
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Net change in cash flow hedges, net of tax
|
7
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
6
|
|
Total other comprehensive (loss) income, net of tax
|
(34
|
)
|
|
(40
|
)
|
|
(29
|
)
|
|
69
|
|
|
(34
|
)
|
Comprehensive income (loss)
|
$
|
813
|
|
|
$
|
954
|
|
|
$
|
52
|
|
|
$
|
(1,006
|
)
|
|
$
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
For the Year Ended December 31, 2015
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Net income
|
$
|
764
|
|
|
$
|
864
|
|
|
$
|
81
|
|
|
$
|
(945
|
)
|
|
$
|
764
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income impact from consolidated subsidiaries
|
(67
|
)
|
|
(100
|
)
|
|
—
|
|
|
167
|
|
|
—
|
|
Foreign currency translation adjustments
|
7
|
|
|
31
|
|
|
(102
|
)
|
|
—
|
|
|
(64
|
)
|
Net change in pension liability, net of tax
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
4
|
|
Net change in cash flow hedges, net of tax
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total other comprehensive (loss) income, net of tax
|
(58
|
)
|
|
(67
|
)
|
|
(100
|
)
|
|
167
|
|
|
(58
|
)
|
Comprehensive income (loss)
|
$
|
706
|
|
|
$
|
797
|
|
|
$
|
(19
|
)
|
|
$
|
(778
|
)
|
|
$
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
For the Year Ended December 31, 2014
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Net income
|
$
|
703
|
|
|
$
|
728
|
|
|
$
|
90
|
|
|
$
|
(818
|
)
|
|
$
|
703
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income impact from consolidated subsidiaries
|
(57
|
)
|
|
(66
|
)
|
|
—
|
|
|
123
|
|
|
—
|
|
Foreign currency translation adjustments
|
4
|
|
|
15
|
|
|
(63
|
)
|
|
—
|
|
|
(44
|
)
|
Net change in pension liability, net of tax
|
—
|
|
|
(6
|
)
|
|
(1
|
)
|
|
—
|
|
|
(7
|
)
|
Net change in cash flow hedges, net of tax
|
4
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
2
|
|
Total other comprehensive (loss) income, net of tax
|
(49
|
)
|
|
(57
|
)
|
|
(66
|
)
|
|
123
|
|
|
(49
|
)
|
Comprehensive income (loss)
|
$
|
654
|
|
|
$
|
671
|
|
|
$
|
24
|
|
|
$
|
(695
|
)
|
|
$
|
654
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheets
|
|
As of December 31, 2016
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
1,736
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
1,787
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
Trade, net
|
—
|
|
|
540
|
|
|
55
|
|
|
—
|
|
|
595
|
|
Other
|
3
|
|
|
39
|
|
|
9
|
|
|
—
|
|
|
51
|
|
Related party receivable
|
15
|
|
|
37
|
|
|
—
|
|
|
(52
|
)
|
|
—
|
|
Inventories
|
—
|
|
|
178
|
|
|
24
|
|
|
—
|
|
|
202
|
|
Prepaid expenses and other current assets
|
379
|
|
|
84
|
|
|
7
|
|
|
(369
|
)
|
|
101
|
|
Total current assets
|
397
|
|
|
2,614
|
|
|
146
|
|
|
(421
|
)
|
|
2,736
|
|
Property, plant and equipment, net
|
—
|
|
|
1,007
|
|
|
131
|
|
|
—
|
|
|
1,138
|
|
Investments in consolidated subsidiaries
|
8,067
|
|
|
302
|
|
|
—
|
|
|
(8,369
|
)
|
|
—
|
|
Investments in unconsolidated subsidiaries
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Goodwill
|
—
|
|
|
2,972
|
|
|
21
|
|
|
—
|
|
|
2,993
|
|
Other intangible assets, net
|
—
|
|
|
2,609
|
|
|
47
|
|
|
—
|
|
|
2,656
|
|
Long-term receivable, related parties
|
3,209
|
|
|
5,077
|
|
|
—
|
|
|
(8,286
|
)
|
|
—
|
|
Other non-current assets
|
64
|
|
|
107
|
|
|
12
|
|
|
—
|
|
|
183
|
|
Non-current deferred tax assets
|
20
|
|
|
—
|
|
|
62
|
|
|
(20
|
)
|
|
62
|
|
Total assets
|
$
|
11,757
|
|
|
$
|
14,711
|
|
|
$
|
419
|
|
|
$
|
(17,096
|
)
|
|
$
|
9,791
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
276
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
303
|
|
Related party payable
|
31
|
|
|
14
|
|
|
7
|
|
|
(52
|
)
|
|
—
|
|
Deferred revenue
|
—
|
|
|
63
|
|
|
1
|
|
|
—
|
|
|
64
|
|
Short-term borrowings and current portion of long-term obligations
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
Income taxes payable
|
—
|
|
|
372
|
|
|
1
|
|
|
(369
|
)
|
|
4
|
|
Other current liabilities
|
128
|
|
|
502
|
|
|
40
|
|
|
—
|
|
|
670
|
|
Total current liabilities
|
159
|
|
|
1,237
|
|
|
76
|
|
|
(421
|
)
|
|
1,051
|
|
Long-term obligations to third parties
|
4,325
|
|
|
143
|
|
|
—
|
|
|
—
|
|
|
4,468
|
|
Long-term obligations to related parties
|
5,077
|
|
|
3,209
|
|
|
—
|
|
|
(8,286
|
)
|
|
—
|
|
Non-current deferred tax liabilities
|
(1
|
)
|
|
833
|
|
|
—
|
|
|
(20
|
)
|
|
812
|
|
Non-current deferred revenue
|
—
|
|
|
1,091
|
|
|
26
|
|
|
—
|
|
|
1,117
|
|
Other non-current liabilities
|
63
|
|
|
131
|
|
|
15
|
|
|
—
|
|
|
209
|
|
Total liabilities
|
9,623
|
|
|
6,644
|
|
|
117
|
|
|
(8,727
|
)
|
|
7,657
|
|
Total stockholders' equity
|
2,134
|
|
|
8,067
|
|
|
302
|
|
|
(8,369
|
)
|
|
2,134
|
|
Total liabilities and stockholders' equity
|
$
|
11,757
|
|
|
$
|
14,711
|
|
|
$
|
419
|
|
|
$
|
(17,096
|
)
|
|
$
|
9,791
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheets
|
|
As of December 31, 2015
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
859
|
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
911
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
Trade, net
|
—
|
|
|
516
|
|
|
54
|
|
|
—
|
|
|
570
|
|
Other
|
3
|
|
|
40
|
|
|
15
|
|
|
—
|
|
|
58
|
|
Related party receivable
|
11
|
|
|
25
|
|
|
—
|
|
|
(36
|
)
|
|
—
|
|
Inventories
|
—
|
|
|
173
|
|
|
36
|
|
|
—
|
|
|
209
|
|
Prepaid and other current assets
|
300
|
|
|
55
|
|
|
5
|
|
|
(291
|
)
|
|
69
|
|
Total current assets
|
314
|
|
|
1,668
|
|
|
162
|
|
|
(327
|
)
|
|
1,817
|
|
Property, plant and equipment, net
|
—
|
|
|
1,041
|
|
|
115
|
|
|
—
|
|
|
1,156
|
|
Investments in consolidated subsidiaries
|
7,062
|
|
|
583
|
|
|
—
|
|
|
(7,645
|
)
|
|
—
|
|
Investments in unconsolidated subsidiaries
|
—
|
|
|
20
|
|
|
11
|
|
|
—
|
|
|
31
|
|
Goodwill
|
—
|
|
|
2,972
|
|
|
16
|
|
|
—
|
|
|
2,988
|
|
Other intangible assets, net
|
—
|
|
|
2,610
|
|
|
53
|
|
|
—
|
|
|
2,663
|
|
Long-term receivable, related parties
|
3,159
|
|
|
4,989
|
|
|
283
|
|
|
(8,431
|
)
|
|
—
|
|
Other non-current assets
|
58
|
|
|
90
|
|
|
2
|
|
|
—
|
|
|
150
|
|
Non-current deferred tax assets
|
20
|
|
|
—
|
|
|
65
|
|
|
(21
|
)
|
|
64
|
|
Total assets
|
$
|
10,613
|
|
|
$
|
13,973
|
|
|
$
|
707
|
|
|
$
|
(16,424
|
)
|
|
$
|
8,869
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
252
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
277
|
|
Related party payable
|
18
|
|
|
11
|
|
|
7
|
|
|
(36
|
)
|
|
—
|
|
Deferred revenue
|
—
|
|
|
63
|
|
|
1
|
|
|
—
|
|
|
64
|
|
Short-term borrowings and current portion of long-term obligations
|
500
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
507
|
|
Income taxes payable
|
—
|
|
|
306
|
|
|
12
|
|
|
(291
|
)
|
|
27
|
|
Other current liabilities
|
126
|
|
|
539
|
|
|
43
|
|
|
—
|
|
|
708
|
|
Total current liabilities
|
644
|
|
|
1,178
|
|
|
88
|
|
|
(327
|
)
|
|
1,583
|
|
Long-term obligations to third parties
|
2,746
|
|
|
129
|
|
|
—
|
|
|
—
|
|
|
2,875
|
|
Long-term obligations to related parties
|
4,989
|
|
|
3,442
|
|
|
—
|
|
|
(8,431
|
)
|
|
—
|
|
Non-current deferred tax liabilities
|
—
|
|
|
808
|
|
|
—
|
|
|
(21
|
)
|
|
787
|
|
Non-current deferred revenue
|
—
|
|
|
1,154
|
|
|
27
|
|
|
—
|
|
|
1,181
|
|
Other non-current liabilities
|
51
|
|
|
200
|
|
|
9
|
|
|
—
|
|
|
260
|
|
Total liabilities
|
8,430
|
|
|
6,911
|
|
|
124
|
|
|
(8,779
|
)
|
|
6,686
|
|
Total stockholders' equity
|
2,183
|
|
|
7,062
|
|
|
583
|
|
|
(7,645
|
)
|
|
2,183
|
|
Total liabilities and stockholders' equity
|
$
|
10,613
|
|
|
$
|
13,973
|
|
|
$
|
707
|
|
|
$
|
(16,424
|
)
|
|
$
|
8,869
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
For the Year Ended December 31, 2016
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
$
|
(197
|
)
|
|
$
|
1,085
|
|
|
$
|
74
|
|
|
$
|
(23
|
)
|
|
$
|
939
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisition of business
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
—
|
|
|
(15
|
)
|
Cash acquired in step acquisition of unconsolidated subsidiaries
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
17
|
|
Purchase of property, plant and equipment
|
—
|
|
|
(131
|
)
|
|
(49
|
)
|
|
—
|
|
|
(180
|
)
|
Purchase of intangible assets
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
Investment in unconsolidated subsidiaries
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
Purchase of cost method investments
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Proceeds from disposals of property, plant and equipment
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Issuance of related party notes receivable
|
—
|
|
|
(88
|
)
|
|
—
|
|
|
88
|
|
|
—
|
|
Other, net
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
Net cash (used in) provided by investing activities
|
(8
|
)
|
|
(221
|
)
|
|
(48
|
)
|
|
88
|
|
|
(189
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of related party debt
|
88
|
|
|
—
|
|
|
—
|
|
|
(88
|
)
|
|
—
|
|
Proceeds from issuance of senior unsecured notes
|
1,950
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,950
|
|
Repayment of senior unsecured notes
|
(891
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(891
|
)
|
Repurchase of shares of common stock
|
(519
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(519
|
)
|
Dividends paid
|
(386
|
)
|
|
—
|
|
|
(23
|
)
|
|
23
|
|
|
(386
|
)
|
Tax withholdings related to net share settlements of certain stock awards
|
(31
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31
|
)
|
Proceeds from stock options exercised
|
14
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
Excess tax benefit on stock-based compensation
|
—
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
22
|
|
Deferred financing charges
|
(19
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
Capital lease payments
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
Other, net
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Net cash (used in) provided by financing activities
|
205
|
|
|
13
|
|
|
(23
|
)
|
|
(65
|
)
|
|
130
|
|
Cash and cash equivalents — net change from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating, investing and financing activities
|
—
|
|
|
877
|
|
|
3
|
|
|
—
|
|
|
880
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Cash and cash equivalents at beginning of period
|
—
|
|
|
859
|
|
|
52
|
|
|
—
|
|
|
911
|
|
Cash and cash equivalents at end of period
|
$
|
—
|
|
|
$
|
1,736
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
1,787
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
For the Year Ended December 31, 2015
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
$
|
(209
|
)
|
|
$
|
1,105
|
|
|
$
|
95
|
|
|
$
|
—
|
|
|
$
|
991
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
—
|
|
|
(133
|
)
|
|
(46
|
)
|
|
—
|
|
|
(179
|
)
|
Purchase of intangible assets
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Investments in unconsolidated subsidiaries
|
—
|
|
|
(20
|
)
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
Purchase of cost method investments
|
—
|
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
Proceeds from disposals of property, plant and equipment
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Issuance of related party notes receivable
|
—
|
|
|
(340
|
)
|
|
(39
|
)
|
|
379
|
|
|
—
|
|
Other, net
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Net cash (used in) provided by investing activities
|
1
|
|
|
(489
|
)
|
|
(85
|
)
|
|
379
|
|
|
(194
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of related party debt
|
340
|
|
|
39
|
|
|
—
|
|
|
(379
|
)
|
|
—
|
|
Proceeds from issuance of senior unsecured notes
|
750
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
750
|
|
Repurchase of shares of common stock
|
(521
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(521
|
)
|
Dividends paid
|
(355
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(355
|
)
|
Tax withholdings related to net share settlements of certain stock awards
|
(27
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
Proceeds from stock options exercised
|
30
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
Excess tax benefit on stock-based compensation
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Deferred financing charges paid
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
Capital lease payments
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Other, net
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Net cash (used in) provided by financing activities
|
208
|
|
|
57
|
|
|
—
|
|
|
(379
|
)
|
|
(114
|
)
|
Cash and cash equivalents — net change from:
|
|
|
|
|
|
|
|
|
|
Operating, investing and financing activities
|
—
|
|
|
673
|
|
|
10
|
|
|
—
|
|
|
683
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
(9
|
)
|
Cash and cash equivalents at beginning of period
|
—
|
|
|
186
|
|
|
51
|
|
|
—
|
|
|
237
|
|
Cash and cash equivalents at end of period
|
$
|
—
|
|
|
$
|
859
|
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
911
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
For the Year Ended December 31, 2014
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
$
|
(122
|
)
|
|
$
|
1,055
|
|
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
1,022
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisition of business
|
—
|
|
|
(19
|
)
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
Purchase of property, plant and equipment
|
—
|
|
|
(130
|
)
|
|
(40
|
)
|
|
—
|
|
|
(170
|
)
|
Purchase of intangible assets
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Return of capital
|
—
|
|
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Proceeds from disposals of property, plant and equipment
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Issuance of related party notes receivable
|
—
|
|
|
(882
|
)
|
|
(55
|
)
|
|
937
|
|
|
—
|
|
Other, net
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Net cash (used in) provided by investing activities
|
(3
|
)
|
|
(1,022
|
)
|
|
(97
|
)
|
|
937
|
|
|
(185
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of related party debt
|
882
|
|
|
55
|
|
|
—
|
|
|
(937
|
)
|
|
—
|
|
Repurchase of shares of common stock
|
(400
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(400
|
)
|
Dividends paid
|
(317
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(317
|
)
|
Tax withholdings related to net share settlements of certain stock awards
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16
|
)
|
Net issuance of commercial paper
|
(65
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(65
|
)
|
Proceeds from stock options exercised
|
41
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41
|
|
Excess tax benefit on stock-based compensation
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Capital lease payments
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Net cash (used in) provided by financing activities
|
125
|
|
|
65
|
|
|
—
|
|
|
(937
|
)
|
|
(747
|
)
|
Cash and cash equivalents — net change from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating, investing and financing activities
|
—
|
|
|
98
|
|
|
(8
|
)
|
|
—
|
|
|
90
|
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
Cash and cash equivalents at beginning of year
|
—
|
|
|
88
|
|
|
65
|
|
|
—
|
|
|
153
|
|
Cash and cash equivalents at end of year
|
$
|
—
|
|
|
$
|
186
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
237
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
23
.
Selected Quarterly Financial Data (unaudited)
The following table summarizes the
Company
's information on net sales, gross profit, net income, earnings per share and other quarterly financial data by quarter for the years ended
December 31, 2016 and 2015
. This data, with the exception of the common stock prices, was derived from the
Company
's unaudited consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
For the Year Ended December 31,
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,487
|
|
|
$
|
1,695
|
|
|
$
|
1,680
|
|
|
$
|
1,578
|
|
Gross profit
|
885
|
|
|
1,025
|
|
|
997
|
|
|
951
|
|
Net income
|
182
|
|
|
260
|
|
|
240
|
|
|
165
|
|
Earnings per common share — basic
|
$
|
0.97
|
|
|
$
|
1.40
|
|
|
$
|
1.30
|
|
|
$
|
0.90
|
|
Earnings per common share — diluted
|
0.96
|
|
|
1.39
|
|
|
1.29
|
|
|
0.90
|
|
Weighted average common shares outstanding — basic
|
187.6
|
|
|
185.7
|
|
|
184.8
|
|
|
183.6
|
|
Weighted average common shares outstanding — diluted
|
189.0
|
|
|
186.5
|
|
|
185.7
|
|
|
184.7
|
|
Dividend declared per share
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
Common stock price
|
|
|
|
|
|
|
|
High
|
$
|
95.87
|
|
|
$
|
96.65
|
|
|
$
|
98.80
|
|
|
$
|
91.14
|
|
Low
|
87.18
|
|
|
86.03
|
|
|
89.45
|
|
|
81.05
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,451
|
|
|
$
|
1,655
|
|
|
$
|
1,630
|
|
|
$
|
1,546
|
|
Gross profit
|
849
|
|
|
981
|
|
|
957
|
|
|
936
|
|
Net income
|
157
|
|
|
220
|
|
|
202
|
|
|
185
|
|
Earnings per common share — basic
|
$
|
0.82
|
|
|
$
|
1.15
|
|
|
$
|
1.06
|
|
|
$
|
0.98
|
|
Earnings per common share — diluted
|
0.81
|
|
|
1.14
|
|
|
1.05
|
|
|
0.97
|
|
Weighted average common shares outstanding — basic
|
193.0
|
|
|
191.4
|
|
|
190.4
|
|
|
188.7
|
|
Weighted average common shares outstanding — diluted
|
194.6
|
|
|
192.4
|
|
|
191.5
|
|
|
190.2
|
|
Dividend declared per share
|
$
|
0.48
|
|
|
$
|
0.48
|
|
|
$
|
0.48
|
|
|
$
|
0.48
|
|
Common stock price
|
|
|
|
|
|
|
|
High
|
$
|
81.45
|
|
|
$
|
79.98
|
|
|
$
|
83.57
|
|
|
$
|
95.26
|
|
Low
|
70.78
|
|
|
72.58
|
|
|
72.00
|
|
|
78.01
|
|
24
.
Subsequent Events
COMPLETION OF BAI BRANDS MERGER AND TERMINATION OF BRIDGE FACILITY
On
January 31, 2017
, the Company funded the Bai Brands Merger with the net proceeds from the Acquisition Notes and cash on hand. In order to complete the Bai Brands Merger, the Company paid
$1,548 million
, net of the Company's previous ownership interest, in exchange for the remaining ownership interests and seller transaction costs. Additionally,
$103 million
was held back and placed in escrow.
As a result of the Bai Brands Merger, our existing
2.63%
equity interest in Bai Brands was remeasured to fair value of
$43 million
, which resulted in a gain of
$28 million
which will be recognized in the first quarter of 2017 and included in other operating (income) expense, net.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Due to the limited time since the date of the Bai Brands Merger, it is impracticable for the Company to make certain business combination disclosures at this time as the Company is still gathering information necessary to provide those disclosures. The Company is unable to present (i) the allocation of the preliminary purchase price to the fair value of assets acquired and liabilities assumed and (ii) supplemental pro forma financial information related to the Bai Brands Merger. The Company plans to provide this information in its quarterly report on Form 10-Q for the quarter ending March 31, 2017.
Two transactions will be recognized separately from the acquisition of assets and assumptions of liabilities in the Bai Brands Merger:
|
|
•
|
The Company paid certain seller transaction costs, which included
$2 million
to reimburse Bai Brands for payments made on behalf of the Company for buyer acquisition-related costs, which will be recorded as SG&A expenses. The remainder of the seller transaction costs paid by the Company will be accounted for by the Company as part of the consideration transferred.
|
|
|
•
|
Bai Brands had an executory contract as of
January 31, 2017
, which compensated certain counterparties with Profit Interest Units from Bai Brands (the “Predecessor PIUs”). The Predecessor PIUs were based upon the counterparties completing service requirements and various performance criteria. As a result of the Bai Brands Merger, these Predecessor PIUs have fully vested and were converted into cash as of
January 31, 2017
based upon the consideration paid by the Company to acquire Bai Brands. The cash was placed in escrow and will be released from escrow to the counterparties on certain anniversary dates as long as the counterparties are not in breach of the executory contract. Although none of the costs of these benefits have been paid by the Company, DPSG will record SG&A expenses for the deferred compensation amounts payable to these counterparties by Bai Brands. As of
January 31, 2017
, the total unrecognized compensation cost is
$13 million
and the expected period over which these costs are expected to be recognized is
21
months.
|
As a result of these transactions, the Company’s preliminary purchase price will be
$1,649 million
, net of the Company's previous ownership interest,
of which we expect a significant portion of the consideration will be allocated to goodwill and intangible assets. The components of the preliminary purchase price are
presented below:
|
|
|
|
|
|
As of January 31, 2017
|
(in millions)
|
Preliminary Purchase Price
|
Cash paid to consummate Bai Brands Merger, net of the Company's previous ownership interest
|
$
|
1,548
|
|
Holdback placed in escrow
|
103
|
|
Less: Seller transaction costs reimbursed to Bai Brands for payments made on behalf of the Company for its acquisition-related costs
|
(2
|
)
|
Preliminary Purchase Price - Bai Brands
|
$
|
1,649
|
|
The
$103 million
holdback placed in escrow is made up of two components:
|
|
•
|
$90 million
, which will be held in escrow following the completion of the Bai Brands Merger to secure indemnification obligations of the sellers relating to the accuracy of representations and warranties and a working capital adjustment 90 days after the acquisition date.
$80 million
, less any working capital adjustment 90 days after the acquisition date, will be released 12 months after the acquisition date. The remaining
$10 million
will be released to the sellers 38 months from the date the applicable one-month 2017 tax return is filed with the Internal Revenue Service, subject to certain administrative conditions, and
|
|
|
•
|
$13 million
of unrecognized compensation associated with the Predecessor PIUs related to the performance of certain counterparties, which will be released over the next
21
months.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The acquisition consideration held in escrow does not meet the definition of contingent consideration as provided under U.S. GAAP. The amount held in escrow was included in the preliminary purchase price as representations and warranties were expected to be valid as of the acquisition date. The escrow will be included in restricted cash along with a corresponding amount in the liability section of the Consolidated Balance Sheet, which will be allocated between other current liabilities and other non-current liabilities.
On
January 31, 2017
, in accordance with its terms, the remaining commitment under the Bridge Facility was automatically terminated upon the Company's funding of the Bai Brands Merger with the net proceeds from the Acquisition Notes and cash on hand.
FILING OF POST-EFFECTIVE AMENDMENT NO. 1 TO THE SHELF REGISTRATION STATEMENT
On
February 7, 2017
, as a result of the Bai Brands Merger, the Company filed a post-effective amendment to the Company's existing shelf registration statement in order to add Bai Brands and 184 Innovations, Inc. as subsidiaries of the Company, as co-registrants that are, or may potentially be, guarantors of all of the debt securities with respect to which offers and sales are registered under the shelf registration statement.