DPS-10Q-09.30.14

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to     

           
Commission file number 001-33829
Delaware
 
98-0517725
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
identification number)
 
 
 
5301 Legacy Drive, Plano, Texas
 
75024
(Address of principal executive offices)
 
(Zip code)
(972) 673-7000
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes     R  No     o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes     R   No     o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer R
 
Accelerated Filer o
 
Non-Accelerated Filer  o
 
Smaller Reporting Company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes     o   No    R
As of October 21, 2014, there were 194,409,479 shares of the registrant's common stock, par value $0.01 per share, outstanding.
 


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


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

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

 
$
1,543

 
$
4,612

 
$
4,534

Cost of sales
658

 
650

 
1,877

 
1,916

Gross profit
925

 
893

 
2,735

 
2,618

Selling, general and administrative expenses
581

 
563

 
1,727

 
1,745

Depreciation and amortization
28

 
28

 
86

 
86

Other operating (income) expense, net
—

 
2

 
(2
)
 
5

Income from operations
316

 
300

 
924

 
782

Interest expense
27

 
29

 
80

 
94

Interest income
—

 
—

 
(1
)
 
(1
)
Other expense, net
4

 
428

 
2

 
384

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

 
(157
)
 
843

 
305

Provision (benefit) for income taxes
97

 
(364
)
 
291

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

 
207

 
552

 
467

Equity in earnings of unconsolidated subsidiaries, net of tax
—

 
—

 
1

 
1

Net income
$
188

 
$
207

 
$
553

 
$
468

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.97

 
$
1.02

 
$
2.81

 
$
2.29

Diluted
0.96

 
1.01

 
2.79

 
2.28

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
194.8

 
203.3

 
196.4

 
204.0

Diluted
196.2

 
204.7

 
197.8

 
205.5

Cash dividends declared per common share
$
0.41

 
$
0.38

 
$
1.23

 
$
1.14

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


1
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DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2014 and 2013
(Unaudited, in millions)

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

 
$
208

 
$
542

 
$
475

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


2
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DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2014 and December 31, 2013
(Unaudited, in millions, except share and per share data)
 
September 30,
 
December 31,
 
2014
 
2013
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
266

 
$
153

Accounts receivable:
 
 
 
Trade, net
546

 
564

Other
63

 
58

Inventories
191

 
200

Deferred tax assets
57

 
66

Prepaid expenses and other current assets
118

 
78

Total current assets
1,241

 
1,119

Property, plant and equipment, net
1,108

 
1,173

Investments in unconsolidated subsidiaries
15

 
15

Goodwill
2,987

 
2,988

Other intangible assets, net
2,688

 
2,694

Other non-current assets
145

 
127

Non-current deferred tax assets
77

 
85

Total assets
$
8,261

 
$
8,201

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

 
$
271

Deferred revenue
64

 
65

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

 
66

Income taxes payable
25

 
33

Other current liabilities
614

 
595

Total current liabilities
1,024

 
1,030

Long-term obligations
2,539

 
2,508

Non-current deferred tax liabilities
784

 
755

Non-current deferred revenue
1,268

 
1,318

Other non-current liabilities
283

 
313

Total liabilities
5,898

 
5,924

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued
—

 
—

Common stock, $0.01 par value, 800,000,000 shares authorized, 194,473,910 and 197,979,971 shares issued and outstanding for 2014 and 2013, respectively
2

 
2

Additional paid-in capital
758

 
970

Retained earnings
1,702

 
1,393

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

 
2,277

Total liabilities and stockholders' equity
$
8,261

 
$
8,201

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


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

 
$
468

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

 
146

Amortization expense
26

 
28

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

 
28

Deferred income taxes
33

 
147

Other, net
(20
)
 
16

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

 
21

Other accounts receivable
(6
)
 
(6
)
Inventories
8

 
1

Other current and non-current assets
(49
)
 
436

Other current and non-current liabilities
24

 
(601
)
Trade accounts payable
49

 
(1
)
Income taxes payable
1

 
(18
)
Net cash provided by operating activities
769

 
616

Investing activities:
 
 
 
Acquisition of business
—

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

 
1

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

 
(250
)
Repayment of commercial paper
(65
)
 
—

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

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

 
13

Excess tax benefit on stock-based compensation
9

 
6

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

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

 
366

Cash and cash equivalents at end of period
$
266

 
$
119

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

4
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DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2014
(Unaudited, in millions, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Common Stock
 
Additional
 
 
 
Other
 
 
 
Issued
 
Paid-In
 
Retained
 
Comprehensive
 
Total
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Equity
Balance as of January 1, 2014
198.0

 
$
2

 
$
970

 
$
1,393

 
$
(88
)
 
$
2,277

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

 
—

 
—

 
—

 
—

 
—

Net income
—

 
—

 
—

 
553

 
—

 
553

Other comprehensive income
—

 
—

 
—

 
—

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

 
—

 
3

 
(244
)
 
—

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

 
—

 
61

 
—

 
—

 
61

Common stock repurchases
(5.0
)
 
—

 
(276
)
 
—

 
—

 
(276
)
Balance as of September 30, 2014
194.5

 
$
2

 
$
758

 
$
1,702

 
$
(99
)
 
$
2,363

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


5
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
General
References in this Quarterly Report on Form 10-Q to "DPS" or "the Company" refer to Dr Pepper Snapple Group, Inc. and all entities included in the unaudited condensed consolidated financial statements. Cadbury plc and Cadbury Schweppes plc are hereafter collectively referred to as "Cadbury" unless otherwise indicated. Kraft Foods Inc. acquired Cadbury on February 2, 2010 and on October 1, 2012, Kraft Foods Inc. spun-off its North American grocery business to its shareholders and changed its name to Mondelēz International, Inc. ("Mondelēz").
This Quarterly Report on Form 10-Q refers to some of DPS' owned or licensed trademarks, trade names and service marks, which are referred to as the Company's brands. All of the product names included herein are either DPS' registered trademarks or those of the Company's licensors.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
PRINCIPLES OF CONSOLIDATION
DPS consolidates all wholly-owned subsidiaries. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes DPS' proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.
The Company is also required to consolidate entities that are variable interest entities (“VIEs”) of which DPS is the primary beneficiary. Judgments are made in assessing whether the Company is the primary beneficiary, including determination of the activities that most significantly impact the VIE’s economic performance. During the three months ended September 30, 2014, the Company provided 100% financing to a VIE as part of a short term leasing structure that is set to expire no later than January 2015, for which DPS is the primary beneficiary. As a result, DPS has consolidated that entity. The Company’s financing of the VIE, which totaled $21 million as of September 30, 2014, included a transfer of cash and assignment of the rights to deposits previously made with a manufacturer in the prior year. The Company's financing of the VIE, which eliminates in consolidation, was used by the VIE to purchase certain property, plant and equipment. The assets and liabilities of the VIE were not significant to the Company’s consolidated financial statements.
The Company eliminates from its financial results all intercompany transactions between entities included in the consolidated financial statements and the intercompany transactions with its equity method investees.

6
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


USE OF ESTIMATES
The process of preparing DPS' unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. These estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates:
•goodwill and other indefinite-lived intangible assets;
•customer incentives and marketing programs;
•revenue recognition;
•pension and postretirement benefits;
•multi-employer pension plan withdrawal liability;
•risk management programs; and
•income taxes.
These critical accounting estimates are discussed in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2013.
RECLASSIFICATIONS
Changes have been made to the December 31, 2013 presentation of other non-current liabilities disclosed in Note 7 to conform to the current period's presentation. These changes had no impact to total other non-current liabilities as of December 31, 2013.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) ("ASU 2014-08"). The amendments in ASU 2014-08 provide guidance for the recognition and disclosure of discontinued operations. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company does not anticipate a material impact to the Company's financial position, results of operations or cash flows as a result of this change.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. ASU 2014-09 provides alternative methods of initial adoption and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is not permitted. The Company is currently evaluating the impact that this standard will have on the consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), to provide guidance on management's responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and to provide related disclosure requirements. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company will not be impacted by this standard.

7
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


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

 
$
86

Spare parts
18

 
22

Work in process
5

 
4

Finished goods
140

 
122

Inventories at first in first out cost
227

 
234

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

 
$
200


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

8
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


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

 
$
1,220

 
$
180

 
$
31

 
$
3,163

Accumulated impairment losses
—

 
—

 
(180
)
 
—

 
(180
)
 
1,732

 
1,220

 
—

 
31

 
2,983

Acquisition activity(2)
—

 
—

 
5

 
—

 
5

Balance as of December 31, 2013
 
 
 
 
 
 
 
 
 
Goodwill
1,732

 
1,220

 
185

 
31

 
3,168

Accumulated impairment losses
—

 
—

 
(180
)
 
—

 
(180
)
 
1,732

 
1,220

 
5

 
31

 
2,988

Foreign currency impact
—

 
—

 
—

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

 
1,220

 
185

 
30

 
3,167

Accumulated impairment losses
—

 
—

 
(180
)
 
—

 
(180
)
 
$
1,732

 
$
1,220

 
$
5

 
$
30

 
$
2,987

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

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


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

 
$
—

 
$
2,649

 
$
2,652

 
$
—

 
$
2,652

Distribution rights
24

 
—

 
24

 
24

 
—

 
24

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Brands
29

 
(27
)
 
2

 
29

 
(27
)
 
2

Distribution rights
13

 
(4
)
 
9

 
12

 
(3
)
 
9

Customer relationships
76

 
(72
)
 
4

 
76

 
(69
)
 
7

Bottler agreements
19

 
(19
)
 
—

 
19

 
(19
)
 
—

Total
$
2,810

 
$
(122
)
 
$
2,688

 
$
2,812

 
$
(118
)
 
$
2,694

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

2015
6

2016
3

2017
1

2018
1

The Company conducts impairment tests on goodwill and all indefinite-lived intangible assets annually or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. DPS did not identify any circumstances that indicated that the carrying amount of any goodwill or any indefinite-lived intangible asset may not be recoverable as of September 30, 2014.

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


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

 
$
24

Derivative instruments
16

 
21

Current assets held for sale
10


—

Other
51

 
33

Total prepaid expenses and other current assets
$
118

 
$
78

Other current liabilities:
 
 
 
Customer rebates and incentives
$
219

 
$
214

Accrued compensation
105

 
107

Insurance liability
47

 
47

Interest accrual and interest rate swap liability
40

 
26

Dividends payable
80

 
75

Other
123

 
126

Total other current liabilities
$
614

 
$
595

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

 
$
2,453

Capital lease obligations(2)
59

 
56

Subtotal
2,541

 
2,509

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

 
$
2,508

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

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


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

 
$
65

Current portion of long-term obligations
2

 
1

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

 
$
66

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

 
$
500

 
$
500

2018 Notes
 
May 1, 2018
 
6.82%
 
724

 
724

 
724

2019 Notes
 
January 15, 2019
 
2.60%
 
250

 
249

 
248

2020 Notes
 
January 15, 2020
 
2.00%
 
250

 
243

 
241

2021 Notes
 
November 15, 2021
 
3.20%
 
250

 
246

 
241

2022 Notes
 
November 15, 2022
 
2.70%
 
250

 
256

 
247

2038 Notes
 
May 1, 2038
 
7.45%
 
250

 
264

 
252

 
 
 
 
 
 
$
2,474

 
$
2,482

 
$
2,453

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

 
$
499

Letters of credit
1

 
74

Swingline advances
—

 
50

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

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


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

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


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

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


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

 
$
17

Foreign exchange forward contracts
Prepaid expenses and other current assets
 
1

 
3

Interest rate contracts
Other non-current assets
 
11

 
—

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

 
1

Commodity contracts
Other non-current assets
 
1

 
—

Total assets
 
 
$
28

 
$
21

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

 
$
34

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

 
13

Commodity contracts
Other non-current liabilities
 
1

 
—

Total liabilities
 
 
$
18

 
$
47

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

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


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

$
—

 
$
(2
)
 
Interest expense
Foreign exchange forward contracts
—

 
—

 
Cost of sales
Total
$
—

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

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

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

$
—

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

 
$
(6
)
 
Interest expense
Foreign exchange forward contracts
2

 
(1
)
 
Cost of sales
Total
$
2

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

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


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

 
Interest expense
Total
 
$
4

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

 
Interest expense
Total
 
$
12

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

 
Interest expense
Total
 
$
2

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

 
Interest expense
Total
 
$
7

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



17
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


IMPACT OF ECONOMIC HEDGES
The following table presents the impact of derivative instruments not designated as hedging instruments under U.S. GAAP to the unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013 (in millions):
 
 
Amount of Gain (Loss)
 
Location of Gain (Loss)
 
 
Recognized in Income
 
Recognized in Income
For the three months ended September 30, 2014:
 
 
 
 
Commodity contracts(1)
 
$
(3
)
 
Cost of sales
Commodity contracts(1)
 
(6
)
 
SG&A expenses
Total
 
$
(9
)
 
 
 
 
 
 
 
For the nine months ended September 30, 2014:
 
 
 
 
Commodity contracts(1)
 
$
6

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

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

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

 
SG&A expenses
Total
 
$
(17
)
 
 
____________________________
(1)
Commodity contracts include both realized and unrealized gains and losses.
Refer to Note 11 for additional information on the valuation of derivative instruments. The Company has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically, DPS has not experienced credit losses as a result of counterparty nonperformance. The Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines and monitors the market position of the programs at least on a quarterly basis.

18
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


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

 
$
11

Customer incentive programs
59

 
59

Marketable securities - trading
24

 
21

Derivative instruments
12

 
—

Assets held for sale
—

 
1

Other
40

 
35

Total other non-current assets
$
145

 
$
127

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

 
$
47

Long-term pension and post-retirement liability
24

 
26

Multi-employer pension plan withdrawal liability
57

 
56

Insurance liability
88

 
89

Derivative instruments
15

 
34

Deferred compensation liability
24

 
21

Other
37

 
40

Total other non-current liabilities
$
283

 
$
313

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


19
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


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

 
$
430

 
$
—

 
$
387

Other expense (income)
4

 
(2
)
 
2

 
(3
)
Other expense, net
$
4

 
$
428

 
$
2

 
$
384

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

 
$
1

 
$
2

 
$
2

Interest cost
3

 
3

 
10

 
9

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

 
1

 
2

 
4

Settlement loss
—

 
1

 
—

 
3

Net periodic benefit costs
$
1

 
$
3

 
$
3

 
$
7

The Company contributed $1 million to its pension plans during the nine months ended September 30, 2014. There were no contributions made to its pension plans during the three months ended September 30, 2014.
11. Fair Value
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. The three-level hierarchy for disclosure of fair value measurements is as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Valuations with one or more unobservable significant inputs that reflect the reporting entity's own assumptions.

20
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


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

 
$
2

 
$
—

Interest rate contracts
—

 
25

 
—

Foreign exchange forward contracts
—

 
1

 
—

Marketable securities - trading
24

 
—

 
—

Total assets
$
24

 
$
28

 
$
—

 
 
 
 
 
 
Commodity contracts
$
—

 
$
4

 
$
—

Interest rate contracts
—

 
14

 
—

Total liabilities
$
—

 
$
18

 
$
—

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

 
$
1

 
$
—

Interest rate contracts
—

 
17

 
—

Foreign exchange forward contracts
—

 
3

 
—

Marketable securities - trading
21

 
—

 
—

Total assets
$
21

 
$
21

 
$
—

 
 
 
 
 
 
Commodity contracts
$
—

 
$
13

 
$
—

Interest rate contracts
—

 
34

 
—

Total liabilities
$
—

 
$
47

 
$
—

The fair values of marketable securities are determined using quoted market prices from daily exchange traded markets based on the closing price as of the balance sheet date and are classified as Level 1. The fair values of commodity forward and future contracts, interest rate swap contracts and foreign currency forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity forward and future contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the balance sheet date. Interest rate swap contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the Company's contracts and credit risk of the counterparties. The fair value of foreign currency forward contracts are valued using quoted forward foreign exchange prices at the reporting date. Therefore, the Company has categorized these contracts as Level 2.
As of September 30, 2014 and December 31, 2013, the Company did not have any assets or liabilities measured on a recurring basis without observable market values that would require a high level of judgment to determine fair value (Level 3).

21
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


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

 
$
514

 
$
500

 
$
519

Long-term debt – 2018 Notes
724

 
843

 
724

 
856

Long-term debt – 2019 Notes(1)
249

 
254

 
248

 
252

Long-term debt – 2020 Notes(1)
243

 
243

 
241

 
236

Long-term debt – 2021 Notes(1)
246

 
254

 
241

 
241

Long-term debt – 2022 Notes(1)
256

 
240

 
247

 
226

Long-term debt – 2038 Notes(1)
264

 
352

 
252

 
317

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

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

 
$
9

 
$
35

 
$
28

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

 
$
6

 
$
23

 
$
19


22
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


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

 
$
37.59

 
7.65
 
$
23

Granted
667,139

 
51.68

 
 
 
 
Exercised
(919,264
)
 
34.79

 
 
 
17

Forfeited or expired
—

 
—

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

 
44.31

 
8.24
 
36

Exercisable as of September 30, 2014
523,136

 
38.17

 
7.06
 
14

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

 
$
39.15

 
1.12
 
$
104

Granted
588,144

 
51.74

 
 
 
 
Vested and released
(727,923
)
 
36.51

 
 
 
38

Forfeited
(55,483
)
 
43.40

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

 
43.83

 
1.31
 
125

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

23
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


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

 
$
39.88

 
1.26
 
$
21

Granted
154,157

 
51.88

 
 
 
 
Vested and released
(104,165
)
 
36.42

 
 
 
5

Forfeited
(23,014
)
 
36.42

 
 
 
 
Outstanding as of September 30, 2014
449,844

 
44.97

 
1.32
 
29

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

 
$
207

 
$
553

 
$
468

Weighted average common shares outstanding
194.8

 
203.3

 
196.4

 
204.0

Earnings per common share — basic
$
0.97

 
$
1.02

 
$
2.81

 
$
2.29

Diluted EPS:
 
 
 
 
 
 
 
Net income
$
188

 
$
207

 
$
553

 
$
468

Weighted average common shares outstanding
194.8

 
203.3

 
196.4

 
204.0

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

 
1.4

 
1.4

 
1.5

Weighted average common shares outstanding and common stock equivalents
196.2

 
204.7

 
197.8

 
205.5

Earnings per common share — diluted
$
0.96

 
$
1.01

 
$
2.79

 
$
2.28


24
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


Stock options, RSUs, PSUs and dividend equivalent units totaling 0.4 million shares were excluded from the diluted weighted average shares outstanding for the nine months ended September 30, 2014, as they were not dilutive. There were no anti-dilutive stock options, RSUs, PSUs or dividend equivalent units excluded from the diluted weighted average shares outstanding for the three months ended September 30, 2014. Stock options, RSUs, PSUs and dividend equivalent units totaling 0.4 million and 0.5 million shares were excluded from the diluted weighted average shares outstanding for each of the three and nine months ended September 30, 2013, 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 dividend equivalent units. Because the dividend equivalent units are forfeitable, they are defined as non-participating securities. As of September 30, 2014, there were 121,626 dividend equivalent units, which will vest at the time that the underlying RSU and PSU vests.
During 2009, 2010 and 2011, the Board authorized a total aggregate share repurchase plan of $3 billion. The Company repurchased and retired 1.1 million shares of common stock valued at approximately $70 million and 5.0 million shares of common stock valued at approximately $276 million for the three and nine months ended September 30, 2014, respectively. The Company repurchased and retired 2.6 million shares of common stock valued at approximately $117 million and 5.4 million shares of common stock valued at approximately $243 million for the three and nine months ended September 30, 2013, respectively. These amounts were recorded as a reduction of equity, primarily additional paid-in capital in the unaudited Condensed Consolidated Statement of Equity. As of September 30, 2014, $296 million remains available for share repurchase under the Board authorization.
14. 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 three months ended September 30, 2014 (in millions):
 
Foreign Currency Translation
 
Change in Pension Liability
 
Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance as of July 1, 2014
$
(16
)
 
$
(32
)
 
$
(37
)
 
$
(85
)
OCI before reclassifications
(16
)
 
—

 
—

 
(16
)
Amounts reclassified from AOCL
—

 
—

 
2

 
2

Net current year OCI
(16
)
 
—

 
2

 
(14
)
Balance as of September 30, 2014
$
(32
)
 
$
(32
)
 
$
(35
)
 
$
(99
)
The following table provides a summary of changes in the balances of each component of AOCL, net of taxes, for the nine months ended September 30, 2014 and the year ended December 31, 2013 (in millions):
 
Foreign Currency Translation
 
Change in Pension Liability
 
Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance as of January 1, 2013
$
(8
)
 
$
(56
)
 
$
(46
)
 
$
(110
)
OCI before reclassifications
(9
)
 
19

 
3

 
13

Amounts reclassified from AOCL
—

 
4

 
5

 
9

Net current year OCI
(9
)
 
23

 
8

 
22

Balance as of December 31, 2013
(17
)
 
(33
)
 
(38
)
 
(88
)
OCI before reclassifications
(15
)
 
—

 
(1
)
 
(16
)
Amounts reclassified from AOCL
—

 
1

 
4

 
5

Net current year OCI
(15
)
 
1

 
3

 
(11
)
Balance as of September 30, 2014
$
(32
)
 
$
(32
)
 
$
(35
)
 
$
(99
)

25
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


The following table presents the amount of loss reclassified from AOCL into the unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013 (in millions):
 
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
Location of Loss Reclassified from AOCL into Income
 
2014
 
2013
 
2014
 
2013
Loss on cash flow hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
Interest expense
 
$
(2
)
 
$
(2
)
 
$
(6
)
 
$
(6
)
Foreign exchange forward contracts
Cost of sales
 
—

 
(1
)
 
1

 
(1
)
Total
 
 
(2
)
 
(3
)
 
(5
)
 
(7
)
Income tax expense
 
 
—

 
(2
)
 
(1
)
 
(4
)
Total
 
 
$
(2
)
 
$
(1
)
 
$
(4
)
 
$
(3
)
 
 
 
 
 
 
 
 
 
 
Defined benefit pension and postretirement plan items:
 
 
 
 
 
 
 
 
 
Amortization of prior service costs
Selling, general and administrative expenses
 
$
—

 
$
—

 
$
—

 
$
1

Amortization of actuarial losses, net
Selling, general and administrative expenses
 
(1
)
 
(1
)
 
(2
)
 
(4
)
Settlement loss
Selling, general and administrative expenses
 
—

 
(1
)
 
—

 
(3
)
Total
 
 
(1
)
 
(2
)
 
(2
)
 
(6
)
Income tax expense
 
 
(1
)
 
(1
)
 
(1
)
 
(2
)
Total
 
 
$
—

 
$
(1
)
 
$
(1
)
 
$
(4
)
Total reclassifications
 
 
$
(2
)
 
$
(2
)
 
$
(5
)
 
$
(7
)
15. Supplemental Cash Flow Information
The following table details supplemental cash flow disclosures of non-cash investing and financing activities for the nine months ended September 30, 2014 and 2013 (in millions): 
 
For the Nine Months Ended September 30,
 
2014
 
2013
Supplemental cash flow disclosures of non-cash investing and financing activities:
 
 
 
Dividends declared but not yet paid
$
80

 
$
77

Capital expenditures included in accounts payable and other current liabilities
17

 
16

Stock issued for acquisition of business
—

 
13

Capital lease additions
3

 
1

Supplemental cash flow disclosures:
 
 
 
Interest paid
$
60

 
$
69

Income taxes paid
258

 
231


26
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


16. Commitments and Contingencies
LEGAL MATTERS
The Company is occasionally subject to litigation or other legal proceedings. The Company does not believe that the outcome of these, or any other, pending legal matters, individually or collectively, will have a material adverse effect on the results of operations, financial condition or liquidity of the Company.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company operates many manufacturing, bottling and distribution facilities. In these and other aspects of the Company's business, it is subject to a variety of federal, state and local environmental, health and safety laws and regulations. The Company maintains environmental, health and safety policies and a quality, environmental, health and safety program designed to ensure compliance with applicable laws and regulations. However, the nature of the Company's business exposes it to the risk of claims with respect to environmental, health and safety matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims.
The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as the Superfund law, as well as similar state laws, generally impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. In October 2008, DPS was notified by the Environmental Protection Agency that it is a potentially responsible party for study and cleanup costs at a Superfund site in New Jersey. Investigation and remediation costs are yet to be determined, therefore no reasonable estimate exists on which to base a loss accrual. Through September 30, 2014, the Company has paid approximately $650,000 since the notification for DPS' allocation of costs related to the study for this site.
17. Segments
As of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013, 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.

27
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


Information about the Company's operations by operating segment for the three and nine months ended September 30, 2014 and 2013 is as follows (in millions):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Segment Results – Net sales

 

 
 
 
 
Beverage Concentrates
$
306

 
$
309

 
$
914

 
$
908

Packaged Beverages
1,134

 
1,114

 
3,294

 
3,280

Latin America Beverages
143

 
120

 
404

 
346

Net sales
$
1,583

 
$
1,543

 
$
4,612

 
$
4,534

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Segment Results – SOP
 
 
 
 
 
 
 
Beverage Concentrates
$
200

 
$
201

 
$
588

 
$
560

Packaged Beverages
170

 
159

 
478

 
418

Latin America Beverages
22

 
17

 
59

 
45

Total SOP
392

 
377

 
1,125

 
1,023

Unallocated corporate costs
76

 
75

 
203

 
236

Other operating (income) expense, net
—

 
2

 
(2
)
 
5

Income from operations
316

 
300

 
924

 
782

Interest expense, net
27

 
29

 
79

 
93

Other expense, net
4

 
428

 
2

 
384

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

 
$
(157
)
 
$
843

 
$
305

The Company presents segment information in accordance with U.S. GAAP, which establishes reporting and disclosure standards for an enterprise's operating segments. Operating segments are defined as components of an enterprise that are businesses, for which separate financial information is available, and for which the financial information is regularly reviewed by the Company's leadership team.
18. Guarantor and Non-Guarantor Financial Information
The Company's 2016, 2018, 2019, 2020, 2021, 2022 and 2038 Notes (collectively, the "Notes") are fully and unconditionally guaranteed by substantially all of the Company's existing and future direct and indirect domestic subsidiaries (except two immaterial subsidiaries associated with charitable purposes) (the "Guarantors"), as defined in the indentures governing the Notes. The Guarantors are 100% owned either directly or indirectly by the Company and jointly and severally guarantee, subject to the release provisions described below, the Company's obligations under the Notes. None of the Company's subsidiaries organized outside of the U.S. or immaterial subsidiaries used for charitable purposes (collectively, the "Non-Guarantors") guarantee the Notes. The subsidiary guarantees with respect to the Notes are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of other indebtedness of the Company, the Company's exercise of its legal defeasance option with respect to the Notes and the discharge of the Company's obligations under the applicable indenture.
The following schedules present the financial information for the three and nine months ended September 30, 2014 and 2013, and as of September 30, 2014 and December 31, 2013, 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 (in millions).

28
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


 
Condensed Consolidating Statements of Income
 
For the Three Months Ended September 30, 2014
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Net sales
$
—

 
$
1,408

 
$
185

 
$
(10
)
 
$
1,583

Cost of sales
—

 
576

 
92

 
(10
)
 
658

Gross profit
—

 
832

 
93

 
—

 
925

Selling, general and administrative expenses
—

 
521

 
60

 
—

 
581

Depreciation and amortization
—

 
26

 
2

 
—

 
28

Other operating (income) expense, net
—

 
—

 
—

 
—

 
—

Income from operations
—

 
285

 
31

 
—

 
316

Interest expense
26

 
14

 
—

 
(13
)
 
27

Interest income
(11
)
 
—

 
(2
)
 
13

 
—

Other expense (income), net
1

 
3

 
—

 
—

 
4

(Loss) income before (benefit) provision for income taxes and equity in earnings of subsidiaries
(16
)
 
268

 
33

 
—

 
285

(Benefit) provision for income taxes
(6
)
 
97

 
6

 
—

 
97

Income (loss) before equity in earnings of subsidiaries
(10
)
 
171

 
27

 
—

 
188

Equity in earnings of consolidated subsidiaries
198

 
27

 
—

 
(225
)
 
—

Equity in earnings of unconsolidated subsidiaries, net of tax
—

 
—

 
—

 
—

 
—

Net income
$
188

 
$
198

 
$
27

 
$
(225
)
 
$
188


29
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


 
Condensed Consolidating Statements of Income
 
For the Three Months Ended September 30, 2013
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Net sales
$
—

 
$
1,392

 
$
160

 
$
(9
)
 
$
1,543

Cost of sales
—

 
583

 
76

 
(9
)
 
650

Gross profit
—

 
809

 
84

 
—

 
893

Selling, general and administrative expenses
2

 
505

 
56

 
—

 
563

Depreciation and amortization
—

 
27

 
1

 
—

 
28

Other operating (income) expense, net
—

 
2

 
—

 
—

 
2

Income from operations
(2
)
 
275

 
27

 
—

 
300

Interest expense
27

 
22

 
—

 
(20
)
 
29

Interest income
(19
)
 
—

 
(1
)
 
20

 
—

Other expense (income), net

428

 
(1
)
 
1

 
—

 
428

Income (loss) before (benefit) provision for income taxes and equity in earnings of subsidiaries
(438
)
 
254

 
27

 
—

 
(157
)
(Benefit) provision for income taxes
(3
)
 
(373
)
 
12

 
—

 
(364
)
Income (loss) before equity in earnings of subsidiaries
(435
)
 
627

 
15

 
—

 
207

Equity in earnings of consolidated subsidiaries
642

 
15

 
—

 
(657
)
 
—

Equity in earnings of unconsolidated subsidiaries, net of tax
—

 
—

 
—

 
—

 
—

Net income
$
207

 
$
642

 
$
15

 
$
(657
)
 
$
207


30
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)



 
Condensed Consolidating Statements of Income
 
For the Nine Months Ended September 30, 2014
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Net sales
$
—

 
$
4,123

 
$
515

 
$
(26
)
 
$
4,612

Cost of sales
—

 
1,648

 
255

 
(26
)
 
1,877

Gross profit
—

 
2,475

 
260

 
—

 
2,735

Selling, general and administrative expenses
1

 
1,552

 
174

 
—

 
1,727

Depreciation and amortization
—

 
80

 
6

 
—

 
86

Other operating (income) expense, net
—

 
(2
)
 
—

 
—

 
(2
)
Income from operations
(1
)
 
845

 
80

 
—

 
924

Interest expense
77

 
38

 
—

 
(35
)
 
80

Interest income
(30
)
 
—

 
(6
)
 
35

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

 
3

 
—

 
2

Income before provision for income taxes and equity in earnings of subsidiaries
(47
)
 
807

 
83

 
—

 
843

Provision for income taxes
(18
)
 
291

 
18

 
—

 
291

Income (loss) before equity in earnings of subsidiaries
(29
)
 
516

 
65

 
—

 
552

Equity in earnings of consolidated subsidiaries
582

 
66

 
—

 
(648
)
 
—

Equity in earnings of unconsolidated subsidiaries, net of tax
—

 
—

 
1

 
—

 
1

Net income
$
553

 
$
582

 
$
66

 
$
(648
)
 
$
553





31
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


 
Condensed Consolidating Statements of Income
 
For the Nine Months Ended September 30, 2013
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Net sales
$
—

 
$
4,091

 
$
468

 
$
(25
)
 
$
4,534

Cost of sales
—

 
1,720

 
221

 
(25
)
 
1,916

Gross profit
—

 
2,371

 
247

 
—

 
2,618

Selling, general and administrative expenses
2

 
1,575

 
168

 
—

 
1,745

Depreciation and amortization
—

 
80

 
6

 
—

 
86

Other operating (income) expense, net
—

 
5

 
—

 
—

 
5

Income from operations
(2
)
 
711

 
73

 
—

 
782

Interest expense
90

 
66

 
—

 
(62
)
 
94

Interest income
(58
)
 
—

 
(5
)
 
62

 
(1
)
Other expense (income), net

384

 
(4
)
 
4

 
—

 
384

Income (loss) before (benefit) provision for income taxes and equity in earnings of subsidiaries
(418
)
 
649

 
74

 
—

 
305

(Benefit) provision for income taxes
(11
)
 
(224
)
 
73

 
—

 
(162
)
Income (loss) before equity in earnings of subsidiaries
(407
)
 
873

 
1

 
—

 
467

Equity in earnings of consolidated subsidiaries
875

 
2

 
—

 
(877
)
 
—

Equity in earnings of unconsolidated subsidiaries, net of tax
—

 
—

 
1

 
—

 
1

Net income
$
468

 
$
875

 
$
2

 
$
(877
)
 
$
468



32
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


 
Condensed Consolidating Statements of Comprehensive Income
 
For the Three Months Ended September 30, 2014
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Comprehensive income (loss)
$
174

 
$
180

 
$
1

 
$
(181
)
 
$
174


 
Condensed Consolidating Statements of Comprehensive Income
 
For the Three Months Ended September 30, 2013
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Comprehensive income (loss)
$
208

 
$
644

 
$
19

 
$
(663
)
 
$
208


 
Condensed Consolidating Statements of Comprehensive Income
 
For the Nine Months Ended September 30, 2014
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Comprehensive income (loss)
$
542

 
$
565

 
$
39

 
$
(604
)
 
$
542


 
Condensed Consolidating Statements of Comprehensive Income
 
For the Nine Months Ended September 30, 2013
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Comprehensive income (loss)
$
475

 
$
874

 
$
(13
)
 
$
(861
)
 
$
475




33
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


 
Condensed Consolidating Balance Sheets
 
As of September 30, 2014
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
172

 
$
94

 
$
—

 
$
266

Accounts receivable:
 
 
 
 
 
 
 
 
 
Trade, net
—

 
484

 
62

 
—

 
546

Other
7

 
40

 
16

 
—

 
63

Related party receivable
10

 
9

 
—

 
(19
)
 
—

Inventories
—

 
164

 
27

 
—

 
191

Deferred tax assets
—

 
54

 
6

 
(3
)
 
57

Prepaid expenses and other current assets
199

 
100

 
5

 
(186
)
 
118

Total current assets
216

 
1,023

 
210

 
(208
)
 
1,241

Property, plant and equipment, net
—

 
1,015

 
93

 
—

 
1,108

Investments in consolidated subsidiaries
6,065

 
627

 
—

 
(6,692
)
 
—

Investments in unconsolidated subsidiaries
1

 
—

 
14

 
—

 
15

Goodwill
—

 
2,965

 
22

 
—

 
2,987

Other intangible assets, net
—

 
2,613

 
75

 
—

 
2,688

Long-term receivable, related parties
3,108

 
4,410

 
288

 
(7,806
)
 
—

Other non-current assets
45

 
96

 
4

 
—

 
145

Non-current deferred tax assets
24

 
—

 
77

 
(24
)
 
77

Total assets
$
9,459

 
$
12,749

 
$
783

 
$
(14,730
)
 
$
8,261

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
287

 
$
32

 
$
—

 
$
319

Related party payable
—

 
10

 
9

 
(19
)
 
—

Deferred revenue
—

 
62

 
2

 
—

 
64

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

 
2

 
—

 
—

 
2

Income taxes payable
—

 
208

 
3

 
(186
)
 
25

Other current liabilities
129

 
428

 
60

 
(3
)
 
614

Total current liabilities
129

 
997

 
106

 
(208
)
 
1,024

Long-term obligations to third parties
2,482

 
57

 
—

 
—

 
2,539

Long-term obligations to related parties
4,410

 
3,396

 
—

 
(7,806
)
 
—

Non-current deferred tax liabilities
—

 
807

 
1

 
(24
)
 
784

Non-current deferred revenue
—

 
1,232

 
36

 
—

 
1,268

Other non-current liabilities
75

 
195

 
13

 
—

 
283

Total liabilities
7,096

 
6,684

 
156

 
(8,038
)
 
5,898

Total stockholders' equity
2,363

 
6,065

 
627

 
(6,692
)
 
2,363

Total liabilities and stockholders' equity
$
9,459

 
$
12,749

 
$
783

 
$
(14,730
)
 
$
8,261



34
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


 
Condensed Consolidating Balance Sheets
 
As of December 31, 2013
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
88

 
$
65

 
$
—

 
$
153

Accounts receivable:
 
 
 
 
 
 
 
 
 
Trade, net
—

 
502

 
62

 
—

 
564

Other
2

 
43

 
13

 
—

 
58

Related party receivable
12

 
7

 
—

 
(19
)
 
—

Inventories
—

 
172

 
28

 
—

 
200

Deferred tax assets
—

 
63

 
6

 
(3
)
 
66

Prepaid and other current assets
184

 
58

 
4

 
(168
)
 
78

Total current assets
198

 
933

 
178

 
(190
)
 
1,119

Property, plant and equipment, net
—

 
1,081

 
92

 
—

 
1,173

Investments in consolidated subsidiaries
5,438

 
590

 
—

 
(6,028
)
 
—

Investments in unconsolidated subsidiaries
1

 
—

 
14

 
—

 
15

Goodwill
—

 
2,966

 
22

 
—

 
2,988

Other intangible assets, net
—

 
2,616

 
78

 
—

 
2,694

Long-term receivable, related parties
3,077

 
3,766

 
259

 
(7,102
)
 
—

Other non-current assets
32

 
95

 
—

 
—

 
127

Non-current deferred tax assets
27

 
—

 
85

 
(27
)
 
85

Total assets
$
8,773

 
$
12,047

 
$
728

 
$
(13,347
)
 
$
8,201

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
247

 
$
24

 
$
—

 
$
271

Related party payable
—

 
12

 
7

 
(19
)
 
—

Deferred revenue
—

 
63

 
2

 
—

 
65

Short-term borrowings and current portion of long-term obligations
65

 
1

 
—

 
—

 
66

Income taxes payable
—

 
194

 
7

 
(168
)
 
33

Other current liabilities
110

 
448

 
40

 
(3
)
 
595

Total current liabilities
175

 
965

 
80

 
(190
)
 
1,030

Long-term obligations to third parties
2,453

 
55

 
—

 
—

 
2,508

Long-term obligations to related parties
3,766

 
3,336

 
—

 
(7,102
)
 
—

Non-current deferred tax liabilities
—

 
781

 
1

 
(27
)
 
755

Non-current deferred revenue
—

 
1,278

 
40

 
—

 
1,318

Other non-current liabilities
102

 
194

 
17

 
—

 
313

Total liabilities
6,496

 
6,609

 
138

 
(7,319
)
 
5,924

Total stockholders' equity
2,277

 
5,438

 
590

 
(6,028
)
 
2,277

Total liabilities and stockholders' equity
$
8,773

 
$
12,047

 
$
728

 
$
(13,347
)
 
$
8,201



35
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


 
Condensed Consolidating Statements of Cash Flows
 
For the Nine Months Ended September 30, 2014
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Operating activities:
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(79
)
 
$
761

 
$
87

 
$
—

 
$
769

Investing activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment
—

 
(87
)
 
(16
)
 
—

 
(103
)
Purchase of intangible assets
—

 
(1
)
 
—

 
—

 
(1
)
Return of capital
—

 
2

 
(2
)
 
—

 
—

Proceeds from disposals of property, plant and equipment
—

 
7

 
—

 
—

 
7

Issuance of related party notes receivable
—

 
(644
)
 
(37
)
 
681

 
—

Other, net
(3
)
 
—

 
—

 
—

 
(3
)
Net cash (used in) provided by investing activities
(3
)
 
(723
)
 
(55
)
 
681

 
(100
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of related party debt
644

 
37

 
—

 
(681
)
 
—

Repayment of commercial paper
(65
)
 
—

 
—

 
—

 
(65
)
Repurchase of shares of common stock
(276
)
 
—

 
—

 
—

 
(276
)
Dividends paid
(237
)
 
—

 
—

 
—

 
(237
)
Tax withholdings related to net share settlements of certain stock awards
(16
)
 
—

 
—

 
—

 
(16
)
Proceeds from stock options exercised
32

 
—

 
—

 
—

 
32

Excess tax benefit on stock-based compensation
—

 
9

 
—

 
—

 
9

Net cash (used in) provided by financing activities
82

 
46

 
—

 
(681
)
 
(553
)
Cash and cash equivalents — net change from:
 

 
 

 
 

 
 

 
 

Operating, investing and financing activities
—

 
84

 
32

 
—

 
116

Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(3
)
 
—

 
(3
)
Cash and cash equivalents at beginning of year
—

 
88

 
65

 
—

 
153

Cash and cash equivalents at end of period
$
—

 
$
172

 
$
94

 
$
—

 
$
266



36
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)


 
Condensed Consolidating Statements of Cash Flows
 
For the Nine Months Ended September 30, 2013
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Operating activities:
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(60
)
 
$
611

 
$
65

 
$
—

 
$
616

Investing activities:
 
 
 
 
 
 
 
 
 
Acquisition of business
—

 
(10
)
 
—

 
—

 
(10
)
Purchase of property, plant and equipment
—

 
(95
)
 
(16
)
 
—

 
(111
)
Purchase of intangible assets
—

 
(5
)
 
—

 
—

 
(5
)
Proceeds from disposals of property, plant and equipment
—

 
1

 
—

 
—

 
1

Issuance of related party notes receivable
—

 
(551
)
 
(80
)
 
631

 
—

Repayment of related party notes receivable
250

 
—

 
—

 
(250
)
 
—

Other, net
(3
)
 
—

 
—

 
—

 
(3
)
Net cash (used in) provided by investing activities
247

 
(660
)
 
(96
)
 
381

 
(128
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of related party debt
551

 
80

 
—

 
(631
)
 
—

Repayment of related party debt
—

 
(250
)
 
—

 
250

 
—

Repayment of senior unsecured notes
(250
)
 
—

 
—

 
—

 
(250
)
Repurchase of shares of common stock
(243
)
 
—

 
—

 
—

 
(243
)
Cash paid for shares not yet received
(20
)
 
—

 
—

 
—

 
(20
)
Dividends paid
(225
)
 
—

 
—

 
—

 
(225
)
Tax withholdings related to net share settlements of certain stock awards
(13
)
 
—

 
—

 
—

 
(13
)
Proceeds from stock options exercised
13

 
—

 
—

 
—

 
13

Excess tax benefit on stock-based compensation
—

 
6

 
—

 
—

 
6

Net cash (used in) provided by financing activities
(187
)
 
(164
)
 
—

 
(381
)
 
(732
)
Cash and cash equivalents — net change from:
 
 
 
 
 
 
 
 
 
Operating, investing and financing activities
—

 
(213
)
 
(31
)
 
—

 
(244
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(3
)
 
—

 
(3
)
Cash and cash equivalents at beginning of year
—

 
257

 
109

 
—

 
366

Cash and cash equivalents at end of period
$
—

 
$
44

 
$
75

 
$
—

 
$
119





37
Table of Contents


ITEM 2. 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 notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2013.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, labor matters and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend" or the negative of these terms or similar expressions in this Quarterly Report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them, after the date of this Quarterly Report on Form 10-Q, except to the extent required by applicable securities laws.
This Quarterly Report on Form 10-Q contains the names of some of our owned or licensed trademarks, trade names and service marks, which we refer to as our brands. All of the product names included in this Quarterly Report on Form 10-Q are either our registered trademarks or those of our licensors.
Cadbury plc and Cadbury Schweppes plc are hereafter collectively referred to as "Cadbury", unless otherwise indicated. Kraft Foods Inc. acquired Cadbury on February 2, 2010.
On October 1, 2012, Kraft Foods, Inc. spun-off its North American grocery business to its shareholders and changed its name to Mondelēz International, Inc. ("Mondelēz").
OVERVIEW
We are a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States ("U.S."), Canada and Mexico with a diverse portfolio of flavored carbonated soft drinks ("CSDs") and non-carbonated beverages ("NCBs"), including ready-to-drink teas, juices, juice drinks and mixers. Our brand portfolio includes popular CSD brands such as Dr Pepper, Sunkist soda, 7UP, A&W, Canada Dry, Crush, Squirt, Peñafiel and Schweppes, and NCB brands such as Snapple, Mott's, Hawaiian Punch, Clamato, Rose's and Mr & Mrs T mixers. Our largest brand, Dr Pepper, is a leading flavored CSD in the U.S. according to The Nielsen Company. 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 Direct Store Delivery ("DSD") system and our Warehouse Direct ("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.
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 and religious festivals as well as weather fluctuations.
BEVERAGE CONCENTRATES
Our Beverage Concentrates segment is principally a brand ownership business. In this segment we manufacture and sell beverage concentrates in the U.S. and Canada. Most of the brands in this segment are CSD brands. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, 7UP, Sunkist soda, A&W, Sun Drop, RC Cola, Diet Rite, Squirt, Country Time, Vernors and the concentrate form of Hawaiian Punch.
Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri.

38
Table of Contents


The beverage concentrates are shipped to third party bottlers, as well as to our own manufacturing systems, who combine them with carbonation, water, sweeteners and other ingredients, package it in PET containers, glass bottles and aluminum cans, and sell it as a finished beverage to retailers. Beverage concentrates are also manufactured into syrup, which is shipped to fountain customers, such as fast food restaurants, who mix the syrup with water and carbonation to create a finished beverage at the point of sale to consumers. Dr Pepper represents most of our fountain channel volume. Concentrate prices historically have been reviewed and adjusted at least on an annual basis.
Our Beverage Concentrates brands are sold by bottlers, including our own Packaged Beverages segment, through all major retail channels, including supermarkets, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.
PACKAGED BEVERAGES
Our Packaged Beverages segment is principally a brand ownership, manufacturing and distribution business. In this segment, we primarily manufacture and distribute packaged beverages and other products, including our brands, third party owned brands and certain private label beverages, in the U.S. and Canada. Key NCB brands in this segment include Snapple, Hawaiian Punch, Mott's, Yoo-Hoo, Clamato, Deja Blue, Mistic, Nantucket Nectars, ReaLemon, Mr and Mrs T mixers, Rose's and Country Time. Key CSD brands in this segment include 7UP, Dr Pepper, A&W, Sunkist soda, Canada Dry, Squirt, RC Cola, Sun Drop, Diet Rite, IBC and Vernors. Additionally, we distribute third party brands such as Big Red, AriZona tea, FIJI mineral water, Neuro beverages, Vita Coco coconut water, Bai 5, Sparkling Fruit2O and Hydrive energy drinks. We also derive a portion of our sales from bottling beverages and other products for private label owners or others for a fee. Although the majority of our Packaged Beverages' net sales relate to our brands, we also provide a route-to-market for third party brand owners seeking effective distribution for their new and emerging brands. These brands give us exposure in certain markets to fast growing segments of the beverage industry with minimal capital investment. 
Our Packaged Beverages' products are manufactured in multiple facilities across the U.S. and are sold or distributed to retailers and their warehouses by our own distribution network or by third party distributors. The raw materials used to manufacture our products include aluminum cans and ends, glass bottles, PET bottles and caps, paper products, sweeteners, juices, water and other ingredients.
We sell our Packaged Beverages' products both through our DSD system, supported by a fleet of approximately 6,000 trucks and 12,000 employees, including sales representatives, merchandisers, drivers and warehouse workers, as well as through our WD system, both of which include the sales to all major retail channels, including supermarkets, fountain, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.
LATIN AMERICA BEVERAGES
Our Latin America Beverages segment is a brand ownership, manufacturing and distribution business. This segment participates mainly in the carbonated mineral water, flavored CSD, bottled water and vegetable juice categories, with particular strength in carbonated mineral water and grapefruit flavored CSDs. Key brands include Peñafiel, Squirt, Clamato and Aguafiel.
In Mexico, we manufacture and distribute our products through our bottling operations and third party bottlers and distributors. In the Caribbean, we distribute our products through third party bottlers and distributors. In Mexico, we also participate in a joint venture to manufacture Aguafiel brand water with Acqua Minerale San Benedetto. We provide expertise in the Mexican beverage market and Acqua Minerale San Benedetto provides expertise in water production and new packaging technologies.
We sell our finished beverages through all major Mexican retail channels, including the "mom and pop" stores, supermarkets, hypermarkets, convenience stores and on premise channels.
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.

39
Table of Contents


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 Sales Volume
In our Packaged Beverages segment, 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.
EXECUTIVE SUMMARY - FINANCIAL OVERVIEW AND RECENT DEVELOPMENTS
•
Net sales totaled $1,583 million for the three months ended September 30, 2014, an increase of $40 million, or 3%, from the three months ended September 30, 2013.
•
Net income for the three months ended September 30, 2014 was $188 million, compared to $207 million for the three months ended September 30, 2013, a decrease of $19 million, or 9%.
•
Earnings for the three months ended September 30, 2013 included a $33 million non-cash increase in net income associated with the conclusion of an Internal Revenue Service ("IRS") audit, which increased diluted earnings per share by $0.16 during the three months ended September 30, 2013.
•
Diluted earnings per share was $0.96 for the three months ended September 30, 2014 and $1.01 for the year ago period, a decrease of $0.05, or approximately 5%.
•
During the third quarter of 2014, our Board of Directors (our "Board") declared a dividend of $0.41 per share on outstanding common stock, which was paid on October 3, 2014 to shareholders of record on September 15, 2014.
•
During the three and nine months ended September 30, 2014, we repurchased 1.1 million shares and 5.0 million shares, respectively, of our common stock valued at approximately $70 million and $276 million, respectively.
RESULTS OF OPERATIONS
We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees.
References in the financial tables to percentage changes that are not meaningful are denoted by "NM."

40
Table of Contents


Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
Consolidated Operations
The following table sets forth our unaudited consolidated results of operations for the three months ended September 30, 2014 and 2013 (dollars in millions):
 
For the Three Months Ended September 30,
 
 
 
2014
 
2013
 
Percentage
 
Dollars
 
Percent
 
Dollars
 
Percent
 
Change
Net sales
$
1,583

 
100.0
%
 
$
1,543

 
100.0
 %
 
3
 %
Cost of sales
658

 
41.6

 
650

 
42.1

 
 
Gross profit
925

 
58.4

 
893

 
57.9

 
4

Selling, general and administrative expenses
581

 
36.7

 
563

 
36.5

 
3

Depreciation and amortization
28

 
1.8

 
28

 
1.9

 
 
Other operating (income) expense, net
—

 
—

 
2

 
0.1

 
 
Income from operations
316

 
19.9

 
300

 
19.4

 
5

Interest expense
27

 
1.7

 
29

 
1.9

 
(7
)
Interest income
—

 
—

 
—

 
—

 
 
Other expense, net
4

 
0.2

 
428

 
27.7

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

 
18.0

 
(157
)
 
(10.2
)
 


Provision (benefit) for income taxes
97

 
6.1

 
(364
)
 
(23.6
)
 
 
Income before equity in earnings of unconsolidated subsidiaries
188

 
11.9

 
207

 
13.4

 
 
Equity in earnings of unconsolidated subsidiaries, net of tax
—

 
—

 
—

 
—

 
 
Net income
$
188

 
11.9
%
 
$
207

 
13.4
 %
 
(9
)%
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
$
0.97

 
NM

 
$
1.02

 
NM

 
(5
)%
Diluted
0.96

 
NM

 
1.01

 
NM

 
(5
)%
Volume (BCS). Volume (BCS) increased 1% for the three months ended September 30, 2014 compared with the three months ended September 30, 2013. In the U.S. and Canada, volume was flat, and in Mexico and the Caribbean, volume increased 10%, compared with the year ago period. Branded CSD and NCB volume both increased 1%.
In branded CSDs, the primary drivers of the increase were growth in Peñafiel and our Core 4 brands, as defined below, which was partially offset by declines in Dr Pepper. Peñafiel grew 25% in our LAB segment as a result of product and package innovation. Canada Dry, 7UP, A&W and Sunkist soda (our "Core 4 brands") increased 3% compared to the year ago period, driven by an 8% increase in Canada Dry and a 1% increase in Sunkist soda. 7UP and A&W were flat for the period. Dr Pepper decreased 2% driven primarily by declines in our diet products. Other drivers of the increase included 8% growth in Schweppes reflecting distribution gains in our seltzer water and growth in the ginger ale category. Squirt and RC Cola grew 4% and 1%, respectively. These gains were partially offset by a 5% decrease in our other CSD brands in total and a 3% decline in Crush.
In branded NCBs, Clamato grew 7% driven by increased promotional activity. Our water category increased 3% driven by new distribution arrangements for Bai 5 and Sparkling Fruit2O and distribution gains in Vita Coco. Snapple grew 2% due to the increase in our Snapple Premium products, primarily driven by increased promotional activity, which was partially offset by our de-emphasis on our value products. These increases were partially offset by a 2% decrease in Hawaiian Punch as a result of category declines and increased competitive activity, while Mott's declined 1%, driven by decreases in apple sauce. Our other NCB brands in total were flat for the period.

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Net Sales. Net sales increased $40 million, or approximately 3%, for the three months ended September 30, 2014 compared with the three months ended September 30, 2013. The drivers of the increase in net sales were favorable segment mix, favorable product and package mix, higher pricing driven by the impact of the Mexican sugar tax and an increase in contract manufacturing. These drivers were partially offset by increased promotional activity and $5 million in unfavorable foreign currency translation.
Gross Profit. Gross profit increased $32 million for the three months ended September 30, 2014 compared with the three months ended September 30, 2013. Gross margin of 58.4% for the three months ended September 30, 2014, was higher than the 57.9% gross margin for the three months ended September 30, 2013. The primary driver of the favorable change in gross margin was lower commodity costs, led by sweeteners and packaging, net of the change in our last in first out ("LIFO") inventory provision, which increased our gross margin by 1.4% for the three months ended September 30, 2014. Ongoing productivity improvements further increased our gross margin by 0.7%. These drivers were partially offset by unfavorable product, package and segment mix, which reduced our gross margin by 0.9%, and the net impact of the Mexican sugar tax, which reduced our gross margin by 0.4%. Additionally, increases in other manufacturing costs, driven by a $5 million charge for an adjustment to our spare parts inventories for individual small dollar parts, which lowered our gross margin by 0.3%.
The unfavorable comparison in our LIFO inventory provision was the result of no change in the provision for the three months ended September 30, 2014 versus a $7 million decrease in the provision for the three months ended September 30, 2013, driven primarily by apple prices.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased $18 million, or approximately 3%, for the three months ended September 30, 2014 compared with the prior period. The increase was primarily the result of increased incentive compensation costs, higher logistics costs from our third party carriers driven by tighter than expected overall transportation system capacity and the unfavorable mark-to-market activity on commodity derivative contracts. These increases were partially offset by the impact of certain items recorded in the prior year:
•
$7 million charge for workforce reduction costs related to certain restructuring activities, largely offset by
•
$6 million reduction in our legal provision associated with the American Bottling Group ("ABC") litigation.
Income from Operations. Income from operations increased $16 million to $316 million for the three months ended September 30, 2014 due primarily to the increase in gross profit partially offset by an increase in SG&A expenses.
Interest Expense. Interest expense decreased $2 million, or approximately 7%, for the three months ended September 30, 2014, compared with the year ago period primarily due to the favorable impact of our fair value hedges.
Other Expense, Net and Provision (Benefit) for Income Taxes. Through the second quarter of 2013, we recorded indemnification income from Mondelēz under the Tax Sharing and Indemnification Agreement (the "Tax Indemnity Agreement") as other expense, net in the unaudited Condensed Consolidated Statements of Income. Due to the completion of the IRS audit for our 2006-2008 federal income tax returns in August 2013, we recognized an income tax benefit of $463 million primarily related to decreasing our liability for unrecognized tax benefits and $430 million of other expense, net, as we no longer anticipate collecting amounts from Mondelēz.

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The following table excludes these amounts discussed above from our other expense, net, income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries and provision for income taxes lines within our unaudited Condensed Consolidated Statements of Income. We have presented this table as we believe the effects of those items on these lines and on our effective tax rate for the three months ended September 30, 2013 are not meaningful as reported.
 
For the Three Months Ended September 30, 2013
 
 
(in millions)
As reported
 
Completion of IRS audit in August 2013
 
As reported excluding tax and indemnity item
 
For the Three Months Ended September 30, 2014
Other expense, net
$
428

 
$
(430
)
 
$
(2
)
 
$
4

Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries
(157
)
 
430

 
273

 
285

Provision (benefit) for income taxes
(364
)
 
463

 
99

 
97

 
 
 
 
 
 
 
 
Effective tax rate
231.8
%
 
 
 
36.3
%
 
34.0
%
Additionally, for the three months ended September 30, 2014, the current year provision for income taxes included an income tax benefit of $4 million due to the resolution of a tax audit in a foreign jurisdiction, which decreased the effective tax rate 1.4%.

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Results of Operations by Segment
We report our business in three segments: Beverage Concentrates, Packaged Beverages and Latin America Beverages. The key financial measures management uses to assess the performance of our segments are net sales and segment operating profit ("SOP"). The following tables set forth net sales and SOP for our segments for the three months ended September 30, 2014 and 2013, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") (in millions):
 
For the Three Months Ended September 30,
 
2014
 
2013
Segment Results — Net sales
 
 
 
Beverage Concentrates
$
306

 
$
309

Packaged Beverages
1,134

 
1,114

Latin America Beverages
143

 
120

Net sales
$
1,583

 
$
1,543

 
 
 
 
 
For the Three Months Ended September 30,
 
2014
 
2013
Segment Results — SOP
 
 
 
Beverage Concentrates
$
200

 
$
201

Packaged Beverages
170

 
159

Latin America Beverages
22

 
17

Total SOP
392

 
377

Unallocated corporate costs
76

 
75

Other operating expense, net
—

 
2

Income from operations
316

 
300

Interest expense, net
27

 
29

Other (income) expense, net
4

 
428

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

 
$
(157
)

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the three months ended September 30, 2014 and 2013 (in millions):
 
For the Three Months Ended September 30,
 
 
 
2014
 
2013
 
Change
Net sales
$
306

 
$
309

 
$
(3
)
SOP
200

 
201

 
(1
)
Net Sales. Net sales decreased $3 million for the three months ended September 30, 2014, compared with the three months ended September 30, 2013. The change was due to a 3% decrease in concentrate case sales partially offset by an increase in concentrate prices.
SOP. SOP decreased $1 million for the three months ended September 30, 2014, compared with the three months ended September 30, 2013, as decreases in net sales were almost completely offset by favorability in cost of sales. Costs of sales declined as a result of lower commodity costs, led by sweeteners, ongoing productivity improvements and lower costs associated with the decreased sales volume. SG&A expenses were flat in the current period as $2 million in planned lower marketing investments were fully offset by higher people costs and an increase in other operating costs.

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Volume (BCS). Volume (BCS) decreased 1% for the three months ended September 30, 2014, compared with the three months ended September 30, 2013. Dr Pepper decreased 2%, driven primarily by declines in our diet products, while our other brands decreased 12%, led by Welch's. These decreases were partially offset by growth in our Core 4 brands and Schweppes. Our Core 4 brands increased 3% compared to the prior year as a result of a 6% increase in Canada Dry and 5% increase in Sunkist soda partially offset by a 3% decrease in 7UP and a 1% decline in A&W. Schweppes had an 8% increase driven by distribution gains in our seltzer water and growth in the ginger ale category. Crush was flat for the current period.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the three months ended September 30, 2014 and 2013 (in millions):
 
For the Three Months Ended September 30,
 
 
 
2014
 
2013
 
Change
Net sales
$
1,134

 
$
1,114

 
$
20

SOP
170

 
159

 
11

Volume. Branded CSD volumes increased 1% for the three months ended September 30, 2014 compared with the three months ended September 30, 2013. Volume for our Core 4 brands increased 1% compared to the prior year period, led by an 11% increase in Canada Dry, partially offset by a 1% decline in both Sunkist soda and 7UP. A&W was flat for the period. RC Cola and Squirt increased 9% and 8%, respectively, for the current period. These increases were offset by a 2% decrease in Dr Pepper, driven primarily by declines in our diet products. Our other CSD brands were flat for the current period.
Branded NCB volumes increased 2%, driven primarily by Snapple and our water category. Snapple grew 4% due to the increase in our Snapple Premium products, primarily driven by increased promotional activity, which was partially offset by our de-emphasis on our value products. Our water category increased 8% driven by new distribution arrangements for Bai 5 and Sparkling Fruit2O and distribution gains in Vita Coco. Clamato increased 7% as a result of increased promotional activity. These increases were partially offset by 1% declines in both Mott's, driven by declines in apple sauce, and Hawaiian Punch. Our other NCB brands were flat for the current period.
Contract manufacturing increased 6% for the three months ended September 30, 2014 compared with the three months ended September 30, 2013.
Net Sales. Net sales increased $20 million for the three months ended September 30, 2014, compared with the three months ended September 30, 2013. Net sales increased due to higher branded sales volumes, favorable product mix and an increase in contract manufacturing. These increases, were partially offset by increased promotional activity, which drove the higher branded sales volumes.
SOP. SOP increased $11 million for the three months ended September 30, 2014, compared with the three months ended September 30, 2013 as increases in net sales were partially offset by increases in SG&A expenses. Cost of sales remained flat as favorable commodity costs, net of the $7 million unfavorable LIFO comparison, and ongoing productivity improvements were fully offset by unfavorable product mix, increased costs associated with increased sales volumes and higher other manufacturing costs. The increase in SG&A expenses were primarily driven by the unfavorable comparison due to the $6 million decrease to the legal provision associated with the ABC litigation in the prior year and and higher logistics costs from our third party carriers driven by tighter than expected overall transportation system capacity.
The LIFO comparison was the result of no change in the provision for the three months ended September 30, 2014 versus a $7 million decrease in the provision for the three months ended September 30, 2013, driven primarily by apple prices.

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LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the three months ended September 30, 2014 and 2013 (in millions):
 
For the Three Months Ended September 30,
 
 
 
2014
 
2013
 
Change
Net sales
$
143

 
$
120

 
$
23

SOP
22

 
17

 
5

Volume. Sales volume increased 10% for the three months ended September 30, 2014, as compared with the three months ended September 30, 2013. The increase in volume was primarily driven by a 25% increase in Peñafiel as a result of product innovation. Squirt grew 2% while our other brands in total increased 8%. 7UP increased 44% in the Caribbean as sales volume in the prior year was significantly lower due to shipment timing, combined with increased promotional activity in the current period. Clamato grew 2% as a result of increased promotional activity. These increases were partially offset by a 21% decline in Crush as a result of the Mexican sugar tax and a 4% reduction in Aguafiel.
Net Sales. Net sales increased $23 million, or 19%, for the three months ended September 30, 2014, compared with the three months ended September 30, 2013. Net sales increased as a result of increased sales volume, higher pricing driven by the impact of the Mexican sugar tax and favorable product mix, partially offset by $2 million of unfavorable foreign currency translation.
SOP. SOP increased $5 million, or 29%, for the three months ended September 30, 2014, compared with the three months ended September 30, 2013, driven by increases in net sales, partially offset by increases in cost of sales and SG&A expenses. Cost of sales grew in the current year as a result of the Mexican sugar tax and higher costs associated with increased sales volumes, partially offset by ongoing productivity improvements. SG&A expenses increased primarily due to higher logistics costs and increased people costs.

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Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Consolidated Operations
The following table sets forth our unaudited consolidated results of operations for the nine months ended September 30, 2014 and 2013 (dollars in millions, except per share data):
 
For the Nine Months Ended September 30,
 
 
 
2014
 
2013
 
Percentage
 
Dollars
 
Percent
 
Dollars
 
Percent
 
Change
Net sales
$
4,612

 
100.0
 %
 
$
4,534

 
100.0
 %
 
2
 %
Cost of sales
1,877

 
40.7

 
1,916

 
42.3

 


Gross profit
2,735

 
59.3

 
2,618

 
57.7

 
4

Selling, general and administrative expenses
1,727

 
37.4

 
1,745

 
38.5

 
(1
)
Depreciation and amortization
86

 
1.9

 
86

 
1.9

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

 
5

 
0.1

 
 
Income from operations
924

 
20.0

 
782

 
17.2

 
18

Interest expense
80

 
1.7

 
94

 
2.1

 
(15
)
Interest income
(1
)
 
—

 
(1
)
 
—

 
 
Other expense, net
2

 
—

 
384

 
8.4

 
 
Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries
843

 
18.3

 
305

 
6.7

 
 
Provision (benefit) for income taxes
291

 
6.3

 
(162
)
 
(3.6
)
 
 
Income before equity in earnings of unconsolidated subsidiaries
552

 
12.0

 
467

 
10.3

 
 
Equity in earnings of unconsolidated subsidiaries, net of tax
1

 
—

 
1

 
—

 
 
Net income
$
553

 
12.0
 %
 
$
468

 
10.3
 %
 
18
 %
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
$
2.81

 
NM

 
$
2.29

 
NM

 
23
 %
Diluted
$
2.79

 
NM

 
$
2.28

 
NM

 
22
 %
Volume (BCS). Volume (BCS) was flat for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013. In the U.S. and Canada, volume declined 1%, and in Mexico and the Caribbean, volume increased 7%, compared with the year ago period. Branded CSD volume increased 1% while branded NCB volume declined 2%.
In branded CSDs, Peñafiel grew 23% in our Latin America Beverages segment as a result of product and package innovation. Our Core 4 brands increased 2% compared to the year ago period, driven by a 7% increase in Canada Dry partially offset by a 1% decline in A&W. Sunkist soda and 7UP were both flat for the period. Schweppes grew 10% reflecting distribution gains in our seltzer water and growth in the ginger ale category. These gains were fully offset by a 2% decrease in Dr Pepper, driven primarily by declines in our diet products, and a 6% decrease in our other CSD brands in total. Squirt and RC Cola declined 1% and 2%, respectively. Crush was flat for the current period.
In branded NCBs, decreases were driven by an 8% decrease in Hawaiian Punch as a result of category declines and increased competitive activity, a 2% decline in our other NCB brands in total, and a 1% decrease in Mott's as a result of declines in apple sauce. The decline was partially offset by a 6% increase in Clamato, driven by increased promotional activity, and 3% growth in our water category primarily driven by new distribution arrangements for Bai 5 and Sparkling Fruit2O and distribution gains in Vita Coco. Snapple was flat for the current period as growth in our Snapple Premium products was fully offset by our de-emphasis on our value products.

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Net Sales. Net sales increased $78 million, or approximately 2%, for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013. The primary drivers of the increase were favorable product and package mix, higher pricing driven by the Mexican sugar tax, increased branded sales volume and an increase in contract manufacturing. These drivers were partially offset by $23 million in unfavorable foreign currency translation and higher discounts, driven primarily by the unfavorable comparison of the annual true-up of our estimated customer incentive liability.
Gross Profit. Gross profit increased $117 million for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013. Gross margin was 59.3% for the nine months ended September 30, 2014 compared to the gross margin of 57.7% for the nine months ended September 30, 2013. The primary driver of the favorable change in gross margin was lower commodity costs, led by sweeteners and apples, net of the change in our LIFO inventory provision, which increased gross margin by 1.5% for the nine months ended September 30, 2014. Ongoing productivity improvements and the favorable comparison in our mark-to-market activity on commodity derivative contracts increased our gross margin by 0.7% and 0.6%, respectively. These drivers were partially offset by unfavorable product and package mix and the net impact of the Mexican sugar tax, which each reduced our gross margin by 0.4%, and the true-up of our estimated customer incentive liability, which reduced our gross margin by 0.2%.
The favorable mark-to-market activity on commodity derivative contracts for the nine months ended September 30, 2014 was $15 million in unrealized gains versus $11 million in unrealized losses in the year ago period. The unfavorable comparison in our LIFO inventory provision was the result of a $2 million increase in the provision for the nine months ended September 30, 2014 versus a $24 million decrease in the provision for the nine months ended September 30, 2013 driven primarily by apple prices.
Selling, General and Administrative Expenses. SG&A expenses decreased $18 million, or approximately 1%, for the nine months ended September 30, 2014 compared with the prior period. The decrease was primarily driven by a planned reduction of $29 million for our marketing investments and the favorable comparison of the $7 million in workforce reduction costs related to certain restructuring activities in the prior year, partially offset by higher logistics costs from our third party carriers partially driven by tighter than expected overall system capacity.
Income from Operations. Income from operations increased $142 million to $924 million for the nine months ended September 30, 2014 due primarily to the increase in gross profit and a decrease in SG&A expenses.
Interest Expense. Interest expense decreased $14 million, or approximately 15%, for the nine months ended September 30, 2014, compared with the year ago period primarily due to the favorable impact of our fair value hedges and the repayment of our 6.12% senior unsecured notes in May 2013 (the "2013 Notes").
Other Expense, Net and Provision (Benefit) for Income Taxes. Through the second quarter of 2013, we recorded indemnification income from Mondelēz under the Tax Indemnity Agreement as other expense, net in the unaudited Condensed Consolidated Statements of Income. Due to the completion of the IRS audit for our 2006-2008 federal income tax returns in August 2013, we recognized an income tax benefit of $463 million primarily related to decreasing our liability for unrecognized tax benefits and $430 million of other expense, net, as we no longer anticipate collecting amounts from Mondelēz. In June 2013, a bill was enacted by the Canadian government, which reduced amounts amortized for income tax purposes. We recognized $38 million of indemnity income due to the reduction of our long-term liability to Mondelēz and $50 million of income tax expense for the reduction of our tax assets.

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Table of Contents


The following table excludes these amounts discussed above from our other expense, net, income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries and provision (benefit) for income taxes lines within our unaudited Condensed Consolidated Statements of Income. We have presented this table as we believe the effects of those items on these lines and on our effective tax rate for the nine months ended September 30, 2013 are not meaningful as reported.
 
For the Nine Months Ended September 30, 2013
 
 
(in millions)
As reported
 
Completion of the IRS audit in August 2013
 
Enactment of the Canadian bill in June 2013
 
As reported excluding tax and indemnity item
 
For the Nine Months Ended September 30, 2014
Other expense, net
$
384

 
$
(430
)
 
$
38

 
$
(8
)
 
$
2

Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries
305

 
430

 
(38
)
 
$
697

 
843

Provision (benefit) for income taxes
(162
)
 
463

 
(50
)
 
$
251

 
291

 
 
 
 
 
 
 
 
 
 
Effective tax rate
(53.1
)%
 
 
 
 
 
36.0
%
 
34.5
%
Additionally, for the nine months ended September 30, 2014, the current year provision for income taxes included an income tax benefit of $4 million due to the resolution of a tax audit in a foreign jurisdiction, which decreased the effective tax rate 0.5%.

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Table of Contents


Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the nine months ended September 30, 2014 and 2013, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP (in millions):
 
For the Nine Months Ended
 
September 30,
 
2014
 
2013
Segment Results — Net sales
 
 
 
Beverage Concentrates
$
914

 
$
908

Packaged Beverages
3,294

 
3,280

Latin America Beverages
404

 
346

Net sales
$
4,612

 
$
4,534

 
 
 
 
 
For the Nine Months Ended
 
September 30,
 
2014
 
2013
Segment Results — SOP
 
 
 
Beverage Concentrates
$
588

 
$
560

Packaged Beverages
478

 
418

Latin America Beverages
59

 
45

Total SOP
1,125

 
1,023

Unallocated corporate costs
203

 
236

Other operating (income) expense, net
(2
)
 
5

Income from operations
924

 
782

Interest expense, net
79

 
93

Other expense, net
2

 
384

Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
$
843

 
$
305

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the nine months ended September 30, 2014 and 2013 (in millions):
 
For the Nine Months Ended
 
 
 
September 30,
 
 
 
2014
 
2013
 
Change
Net sales
$
914

 
$
908

 
$
6

SOP
588

 
560

 
28

Net Sales. Net sales increased $6 million for the nine months ended September 30, 2014, compared with the nine months ended September 30, 2013. The change was due to an increase in concentrate prices and favorable mix, partially offset by higher discounts. The higher discounts were primarily driven by the annual true-up of our estimated customer incentive liability.
SOP. SOP increased $28 million for the nine months ended September 30, 2014, compared with the nine months ended September 30, 2013, primarily driven by decreases in SG&A expenses, increases in net sales and favorability in cost of sales. The decrease in cost of sales was primarily driven by lower commodity costs, led by sweeteners, and ongoing productivity improvements. The decrease in SG&A expenses was the result of $23 million in planned lower marketing investments.

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Volume (BCS). Volume (BCS) decreased 1% for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013. Dr Pepper decreased 2%, driven primarily by declines in our diet products, while our other brands decreased 9%, led by Welch's. These decreases were partially offset by growth in Schweppes, our Core 4 brands and Crush. Schweppes had an 10% increase driven by distribution gains in our seltzer water and growth in the ginger ale category. Our Core 4 brands increased 2% compared to the prior year as a result of a 5% increase in Canada Dry and 4% increase in Sunkist soda partially offset by a 3% decrease in 7UP and a 2% decline in A&W. Crush grew 3% for the current period.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the nine months ended September 30, 2014 and 2013 (in millions):
 
For the Nine Months Ended
 
 
 
September 30,
 
 
 
2014
 
2013
 
Change
Net sales
$
3,294

 
$
3,280

 
$
14

SOP
478

 
418

 
60

Volume. Branded CSD volumes increased 1% for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013. Volume for our Core 4 brands increased 1% compared to the prior year period, led by a 10% increase in Canada Dry, partially offset by a 3% decline in Sunkist soda and a 1% decrease in 7UP. A&W volumes were flat for the current period. Squirt increased 7% compared to the prior year period due to higher promotional activity and package innovation. RC Cola increased 4%. These increases were offset by a 2% decrease in Dr Pepper, driven primarily by declines in our diet products, and a 1% decline in our other CSD brands.
Branded NCB volumes decreased 1%, driven primarily by a 7% decline in Hawaiian Punch as a result of category declines and increased competitive activity. Our other NCB brands decreased 4%, while Mott's decreased 2% due to declines in apple sauce. These decreases were partially offset by a 10% increase in our water category and a 6% increase in Clamato as a result of increased promotional activity. Growth in our water category was primarily driven by new distribution arrangements for Bai 5 and Sparkling Fruit2O and distribution gains in Vita Coco. Snapple volumes were flat for the current period as growth in our Snapple Premium products was fully offset by our de-emphasis on our value products.
Contract manufacturing increased 9% for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013.
Net Sales. Net sales increased $14 million for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013. Net sales increased due to favorable product mix and an increase in contract manufacturing, partially offset by increased promotional activity, declines in our branded sales volumes and unfavorable foreign currency translation.
SOP. SOP increased $60 million for the nine months ended September 30, 2014, compared with the nine months ended September 30, 2013 as a result of decreases in cost of sales and increases in net sales. Cost of sales declined as favorable commodity costs, net of the $26 million unfavorable LIFO comparison, and ongoing productivity improvements were partially offset by increased costs associated with product and package mix. SG&A expenses decreased slightly for the current year. Significant drivers within SG&A expenses included:
•
lower people costs, which included the favorable impact of the restructuring activities recognized in the prior year;
•
planned lower marketing investments;
•
higher logistics costs from our third party carriers driven by tighter than expected overall transportation system capacity; and
•
$6 million reduction in our legal provision associated with the ABC litigation in the prior year.
The unfavorable comparison in our LIFO inventory provision was the result of a $2 million increase in the provision for the nine months ended September 30, 2014 versus a $24 million decrease in the provision for the nine months ended September 30, 2013 driven primarily by apple prices.

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LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the nine months ended September 30, 2014 and 2013 (in millions):
 
For the Nine Months Ended
 
 
 
September 30,
 
 
 
2014
 
2013
 
Change
Net sales
$
404

 
$
346

 
$
58

SOP
59

 
45

 
14

Volume. Sales volume increased 6% for the nine months ended September 30, 2014 as compared with the nine months ended September 30, 2013. The increase in sales volume was primarily driven by a 23% increase in Peñafiel as a result of product innovation. 7UP grew by 44% in the Caribbean as sales volume in the prior year was significantly lower due to shipment timing, combined with increased promotional activity in the current period. Clamato grew 6% due to increased promotional activity while our other brands in total increased 2%. Squirt and Crush declined 5% and 19%, respectively, as a result of the Mexican sugar tax. Aguafiel decreased 5%.
Net Sales. Net sales increased $58 million for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013. Net sales increased as a result of higher pricing driven by the impact of the Mexican sugar tax, increased sales volume and favorable product mix, partially offset by $12 million of unfavorable foreign currency translation and higher discounts due to increased promotional activity.
SOP. SOP increased $14 million for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013, driven by increases in net sales, partially offset by increases in cost of sales and SG&A expenses. Cost of sales grew in the current year as a result of the Mexican sugar tax and higher costs associated with increased sales volumes, partially offset by ongoing productivity improvements. SG&A expenses increased primarily due to higher logistics costs and increased people costs, partially offset by favorable foreign currency translation.
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 identified the items described below as our critical accounting estimates:
•
goodwill and other indefinite-lived intangible assets;
•
customer incentives and marketing programs;
•
revenue recognition;
•
pension and post-retirement benefits;
•
multi-employer pension plan withdrawal liability;
•
risk management programs; and
•
income taxes.
These critical accounting estimates are discussed in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2013.

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LIQUIDITY AND CAPITAL RESOURCES
Trends and Uncertainties Affecting Liquidity
Customer and consumer demand for the Company's products may be impacted by various risk factors discussed under "Risk Factors" in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2013, including recession or other economic downturn in the U.S., Canada, Mexico or the Caribbean, which could result in a reduction in our sales volume. Similarly, disruptions in financial and credit markets may impact the Company's ability to manage normal commercial relationships with its 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 trends and uncertainties may also impact liquidity:
•
continued capital expenditures to upgrade our existing plants and fleet of distribution trucks, make investments in IT systems and replace and expand our cold drink equipment;
•
continued payment of dividends;
•
seasonality of our operating cash flows could impact short-term liquidity;
•
our ability to issue unsecured commercial paper notes ("Commercial Paper") on a private placement basis;
•
our continued repurchases of our outstanding common stock pursuant to our repurchase programs; and
•
acquisitions of regional bottling companies, distributors and distribution rights to further extend our geographic coverage or access to new products.
Financing Arrangements
The following descriptions represent our available financing arrangements as of September 30, 2014. As of September 30, 2014, we were in compliance with all covenant requirements for our senior unsecured notes, unsecured credit agreement and commercial paper program.
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 for general corporate purposes as Commercial Paper is now a more significant part of our overall cash management strategy. 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. As of September 30, 2014, we had no Commercial Paper outstanding. As of December 31, 2013, we had $65 million of Commercial Paper outstanding with maturities of 90 days or less.
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.

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The following table provides amounts utilized and available under the Revolver and each sublimit arrangement type as of September 30, 2014 (in millions):
 
Amount Utilized
 
Balances Available
Revolver
$
—

 
$
499

Letters of credit
1

 
74

Swingline advances
—

 
50

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 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.
An unused commitment 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.
Shelf Registration Statement
On February 7, 2013, our Board authorized us to issue up to $1,500 million of securities from time to time. Subsequently, we filed a "well-known seasoned issuer" shelf registration statement with the Securities and Exchange Commission, effective May 23, 2013, which registers an indeterminable amount of securities for future sales. As of September 30, 2014, we had not issued any securities under this shelf registration statement.
Letters of Credit Facilities
We currently have letters of credit facilities available in addition to the portion of the Revolver reserved for issuance of letters of credit. Under these incremental letters of credit facilities, $140 million is available for the issuance of letters of credit, $63 million of which was utilized as of September 30, 2014 and $77 million of which remains available for use.
Debt Ratings
As of September 30, 2014, our debt ratings were Baa1 with a stable outlook from Moody's and BBB+ with a stable outlook from S&P. Our commercial paper ratings were P-2/A-2 from Moody's and S&P, respectively.
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.
Cash Management
We fund our liquidity needs from cash flow from operations, cash on hand or amounts available under our financing arrangements, as Commercial Paper is now a more significant part of our overall cash management strategy.
Capital Expenditures
Capital expenditures were $103 million for the nine months ended September 30, 2014. Capital expenditures primarily related to machinery and equipment, distribution fleet, IT investments and replacement of existing cold drink equipment. In 2014, we expect to incur annual capital expenditures, net of proceeds from disposals, in an amount approximately 3% of our net sales, which we expect to fund through cash provided by operating activities.

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Acquisitions
We may make future acquisitions, such as acquisitions of regional bottling companies, distributors and/or distribution rights to further extend our portfolio and geographic coverage. Any acquisitions may require additional funding for future capital expenditures and possibly restructuring expenses.
Liquidity
Based on our current and anticipated level of operations, we believe that our operating cash flows 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 cash on hand or amounts available under our financing arrangements, if necessary.
The following table summarizes our cash activity for the nine months ended September 30, 2014 and 2013 (in millions):
 
For the Nine Months Ended
 
September 30,
 
2014
 
2013
Net cash provided by operating activities
$
769

 
$
616

Net cash used in investing activities
(100
)
 
(128
)
Net cash used in financing activities
(553
)
 
(732
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities increased $153 million for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, primarily due to the increase in net income and favorable working capital comparisons to the prior year.
NET CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities for the nine months ended September 30, 2014, consisted primarily of purchases of property, plant and equipment of $103 million. The decline in the cash used for investing activities was driven by the favorable comparison in the acquisition of DP/7UP Bottling Company of the West in the prior year and the timing of our capital expenditures.
NET CASH USED IN FINANCING ACTIVITIES
Cash used in financing activities for the nine months ended September 30, 2014, consisted primarily of dividend payments of $237 million and stock repurchases of $276 million. Net cash used in financing activities for the nine months ended September 30, 2013 primarily consisted of the $250 million repayment of the 2013 Notes, stock repurchases of $243 million and dividend payments of $225 million.
Cash and Cash Equivalents
As a result of the above items, cash and cash equivalents increased $113 million since December 31, 2013 to $266 million as of September 30, 2014 primarily driven by higher operating cash flows and lower capital expenditures, partially offset by increased returns to our shareholders.
Our cash balances are used to fund working capital requirements, scheduled debt and interest payments, capital expenditures, income tax obligations, dividend payments and repurchases of our common stock. Cash generated by our foreign operations is generally repatriated to the U.S. periodically as working capital funding requirements in those jurisdictions allow. Foreign cash balances were $94 million and $65 million as of September 30, 2014 and December 31, 2013, respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.
Dividends
Our Board declared dividends aggregating $0.41 and $1.23 per share on outstanding common stock during the three and nine months ended September 30, 2014, respectively, and $0.38 and $1.14 per share on outstanding common stock during the three and nine months ended September 30, 2013, respectively.

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Common Stock Repurchases
As previously disclosed, the Board has authorized the Company to repurchase an aggregate amount of up to $3,000 million of the Company's outstanding common stock. For the nine months ended September 30, 2014 and 2013, the Company repurchased and retired 5.0 million and 5.4 million shares of common stock, respectively, valued at approximately $276 million and $243 million, respectively. Refer to Part II, Item 2 of this Quarterly Report on Form 10-Q 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 will be sufficient to meet our anticipated obligations. To the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may utilize cash on hand or amounts available under our financing arrangements, if necessary.
The following table summarizes our contractual obligations and contingencies as of September 30, 2014 (in millions):
 
 
 
Payments Due in Year
 
Total
 
2014
 
2015
 
2016
 
2017
 
2018
 
After 2018
Purchase obligations (1)
$
788

 
$
206

 
$
314

 
$
120

 
$
49

 
$
43

 
$
56

Interest Payment
821

 
34

 
95

 
95

 
95

 
72

 
430

Total
$
1,609

 
$
240

 
$
409

 
$
215

 
$
144

 
$
115

 
$
486

____________________________
(1)
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.
Through September 30, 2014, there have been no other material changes to the amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
OFF-BALANCE SHEET ARRANGEMENTS
We currently participate in four 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 5 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information regarding outstanding letters of credit.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 of the Notes to our Unaudited Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency exchange rates, interest rates and commodity prices. From time to time, we may enter into derivatives or other financial instruments to hedge or mitigate commercial risks. We do not enter into derivative instruments for speculation, investing or trading.
Foreign Exchange Risk
The majority of our net sales, expenses and capital purchases are transacted in U.S. dollars. However, we have some exposure with respect to foreign exchange rate fluctuations. Our primary exposure to foreign exchange rates is the Canadian dollar and Mexican peso against the U.S. dollar. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred. As of September 30, 2014, the impact to our income from operations of a 10% change (up or down) in exchange rates is estimated to be an increase or decrease of approximately $23 million on an annual basis.
We use derivative instruments such as foreign exchange forward contracts to manage a portion of our exposure to changes in foreign exchange rates. As of September 30, 2014, we had derivative contracts outstanding with a notional value of $11 million maturing at various dates through December 15, 2014.
Interest Rate Risk
We centrally manage our debt portfolio through the use of interest rate swaps and monitor our mix of fixed-rate and variable rate debt. As of September 30, 2014, the carrying value of our fixed-rate debt, excluding capital leases, was $2,482 million, $720 million of which is designated as fair value hedges and exposed to variability in interest rates.
The following table is an estimate of the impact to the fair value hedges that could result from hypothetical interest rate changes during the term of the financial instruments, based on debt levels as of September 30, 2014:
Sensitivity Analysis
Hypothetical Change in Interest Rates
 
Annual Impact to Interest Expense
 
Change in Fair Value (2)
1-percent decrease(1)
 
$
—

 
$58 million increase
1-percent increase
 
$7 million increase

 
$56 million decrease
____________________________
(1)
We pay an average floating rate, which fluctuates periodically, based on LIBOR and a credit spread, as a result of designated fair value hedges on certain debt instruments. See Note 5 of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information. Our weighted average LIBOR rate as of September 30, 2014 was 0.27%. As LIBOR has not historically fallen below 0.15%, our estimate of the annual impact to interest expense reflects this assumption if our hypothetical change in the interest rate fell below the historical threshold.
(2) The change in fair value would impact the carrying value of our unsecured senior notes with an equal offset to our derivative instrument positions. See Notes 4 and 7 of the Notes to our Unaudited Condensed Consolidated Financial Statements for quantification of those positions.
Commodity Risks
We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. Our principal commodities risks relate to our purchases of PET, diesel fuel, corn (for high fructose corn syrup), aluminum, sucrose, apple juice concentrate, apples and natural gas (for use in processing and packaging).
We utilize commodities forward and future contracts and supplier pricing agreements to hedge the risk of adverse movements in commodity prices for limited time periods for certain commodities. The fair market value of these contracts as of September 30, 2014 was a net liability of $2 million.
As of September 30, 2014, the impact of a 10% change (up or down) in market prices for these commodities where the risk of adverse movements has not been hedged is estimated to be an increase or decrease of approximately $3 million to our income from operations for the remainder of 2014.

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ITEM 4. Controls and Procedures
Based on evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, as of September 30, 2014, our disclosure controls and procedures are effective to (i) provide reasonable assurance that information required to be disclosed in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms, and (ii) ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
We are occasionally subject to litigation or other legal proceedings relating to our business. See Note 16 of the Notes to our Unaudited Condensed Consolidated Financial Statements for more information related to commitments and contingencies, which is incorporated herein by reference.
ITEM 1A. Risk Factors
There have been no material changes that we are aware of from the risk factors set forth in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
We repurchased approximately 1.1 million shares of our common stock, valued at approximately $70 million, in the third quarter of 2014. Our share repurchase activity, on a monthly basis, for the quarter ended September 30, 2014 was as follows (in thousands, except per share data):
Period
 
Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs
July 1, 2014 – July 31, 2014
 
812

 
$
58.83

 
812

 
$
318,148

August 1, 2014 – August 31, 2014
 
308

 
59.98

 
308

 
299,688

September 1, 2014 – September 30, 2014
 
57

 
62.60

 
57

 
296,099

For the quarter ended September 30, 2014
 
1,177

 
59.32

 
1,177

 
 
____________________________
(1)
As previously disclosed, the Board has authorized us to repurchase an aggregate amount of up to $3,000 million of our outstanding common stock. This column discloses the number of shares repurchased pursuant to these programs during the indicated time periods. As of September 30, 2014, there was a remaining balance of $296 million authorized for repurchase that had not been utilized.


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ITEM 6. Exhibits
2.1
Separation and Distribution Agreement between Cadbury Schweppes plc and Dr Pepper Snapple Group, Inc. and, solely for certain provisions set forth therein, Cadbury plc, dated as of May 1, 2008 (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (filed on May 5, 2008) and incorporated herein by reference).
3.1
Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference).
3.2
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 17, 2012 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (filed July 26, 2012) and incorporated herein by reference).
3.3
Amended and Restated By-Laws of Dr Pepper Snapple Group, Inc. effective as of September 17, 2014 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (filed September 17, 2014) and incorporated herein by reference).
4.1
Indenture, dated April 30, 2008, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.2
Form of 6.12% Senior Notes due 2013 (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.3
Form of 6.82% Senior Notes due 2018 (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.4
Form of 7.45% Senior Notes due 2038 (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.5
Registration Rights Agreement, dated April 30, 2008, between Dr Pepper Snapple Group, Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, UBS Securities LLC, BNP Paribas Securities Corp., Mitsubishi UFJ Securities International plc, Scotia Capital (USA) Inc., SunTrust Robinson Humphrey, Inc., Wachovia Capital Markets, LLC and TD Securities (USA) LLC (filed as Exhibit 4.5 to the Company's Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference).
4.6
Registration Rights Agreement Joinder, dated May 7, 2008, by the subsidiary guarantors named therein (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference).
4.7
Supplemental Indenture, dated May 7, 2008, among Dr Pepper Snapple Group, Inc., the subsidiary guarantors named therein and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference).
4.8
Second Supplemental Indenture dated March 17, 2009, to be effective as of December 31, 2008, among Splash Transport, Inc., as a subsidiary guarantor, Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company's Annual Report on Form 10-K (filed on March 26, 2009) and incorporated herein by reference).
4.9
Third Supplemental Indenture, dated October 19, 2009, among 234DP Aviation, LLC, as a subsidiary guarantor; Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q (filed November 5, 2009) and incorporated herein by reference).
4.10
Indenture, dated as of December 15, 2009, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference).
4.11
First Supplemental Indenture, dated as of December 21, 2009, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference).
4.12
2.35% Senior Notes due 2012 (in global form), dated December 21, 2009, in the principal amount of $450 million (filed as Exhibit 4.4 to the Company's Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference.
4.13
Second Supplemental Indenture, dated as of January 11, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on January 11, 2011) and incorporated herein by reference).
4.14
2.90% Senior Note due 2016 (in global form), dated January 11, 2011, in the principal amount of $500 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on January 11, 2011) and incorporated herein by reference).
4.15
Third Supplemental Indenture, dated as of November 15, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).

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4.16
2.60% Senior Note due 2019 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).
4.17
3.20% Senior Note due 2021 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).
4.18
Fourth Supplemental Indenture, dated as of November 20, 2012, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference).
4.19
2.00% Senior Note due 2020 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference).
4.20
2.70% Senior Note due 2022 (in global form), dated November 20, 2012, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 20, 2012) and incorporated herein by reference).
12.1*
Computation of Ratio of Earnings to Fixed Charges.
31.1*
Certification of Chief Executive Officer of Dr Pepper Snapple Group, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act.
31.2*
Certification of Chief Financial Officer of Dr Pepper Snapple Group, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act.
32.1**
Certification of Chief Executive Officer of Dr Pepper Snapple Group, Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
32.2**
Certification of Chief Financial Officer of Dr Pepper Snapple Group, Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
101*
The following financial information from Dr Pepper Snapple Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013, (iii) Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, (v) Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 2014 and 2013, and (vi) the Notes to Condensed Consolidated Financial Statements.

* Filed herewith.
** Furnished herewith.

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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Dr Pepper Snapple Group, Inc.
 
 
 
 
 
 
 
By:
/s/ Martin M. Ellen
 
 
 
 
 
 
Name:
 
Martin M. Ellen
 
 
Title:
 
Executive Vice President and Chief Financial
 
 
 
 
Officer of Dr Pepper Snapple Group, Inc.
 
Date: October 23, 2014
 
 
 
 


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