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Keurig Dr Pepper Inc. - Quarter Report: 2015 June (Form 10-Q)


 
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 June 30, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to     

           
Commission file number 001-33829
Delaware
 
98-0517725
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
identification number)
 
 
 
5301 Legacy Drive, Plano, Texas
 
75024
(Address of principal executive offices)
 
(Zip code)
(972) 673-7000
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes     R  No     o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes     R   No     o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer R
 
Accelerated Filer o
 
Non-Accelerated Filer  o
 
Smaller Reporting Company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes     o   No    R
As of July 20, 2015, there were 190,886,056 shares of the registrant's common stock, par value $0.01 per share, outstanding.
 



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


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DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 2015 and 2014
(Unaudited, in millions, except per share data)

PART I - FINANCIAL INFORMATION
ITEM 1.
Financial Statements (Unaudited)
 
For the
 
For the
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
1,655

 
$
1,631

 
$
3,106

 
$
3,029

Cost of sales
674

 
665

 
1,276

 
1,219

Gross profit
981

 
966

 
1,830

 
1,810

Selling, general and administrative expenses
586

 
592

 
1,138

 
1,146

Depreciation and amortization
26

 
29

 
53

 
58

Other operating income, net

 
(3
)
 

 
(2
)
Income from operations
369

 
348

 
639

 
608

Interest expense
28

 
27

 
55

 
53

Interest income
(1
)
 

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

 
(1
)
 

 
(2
)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
341

 
322

 
585

 
558

Provision for income taxes
121

 
113

 
208

 
194

Income before equity in earnings of unconsolidated subsidiaries
220

 
209

 
377

 
364

Equity in earnings of unconsolidated subsidiaries, net of tax

 
1

 

 
1

Net income
$
220

 
$
210

 
$
377

 
$
365

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.15

 
$
1.07

 
$
1.96

 
$
1.85

Diluted
1.14

 
1.06

 
1.95

 
1.84

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
191.4

 
196.6

 
192.2

 
197.3

Diluted
192.4

 
197.8

 
193.5

 
198.6

Cash dividends declared per common share
$
0.48

 
$
0.41

 
$
0.96

 
$
0.82

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 COMPREHENSIVE INCOME
For the Three and Six Months Ended June 30, 2015 and 2014
(Unaudited, in millions)

 
For the
 
For the
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Comprehensive income
$
233

 
$
216

 
$
365

 
$
368

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 BALANCE SHEETS
As of June 30, 2015 and December 31, 2014
(Unaudited, in millions, except share and per share data)
 
June 30,
 
December 31,
 
2015
 
2014
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
127

 
$
237

Accounts receivable:
 
 
 
Trade, net
630

 
556

Other
63

 
61

Inventories
217

 
204

Deferred tax assets
63

 
67

Prepaid expenses and other current assets
159

 
86

Total current assets
1,259

 
1,211

Property, plant and equipment, net
1,095

 
1,141

Investments in unconsolidated subsidiaries
13

 
14

Goodwill
2,989

 
2,990

Other intangible assets, net
2,679

 
2,684

Other non-current assets
165

 
159

Non-current deferred tax assets
67

 
74

Total assets
$
8,267

 
$
8,273

Liabilities and Stockholders' Equity
Current liabilities:
 
 
 
Accounts payable
$
305

 
$
289

Deferred revenue
64

 
64

Short-term borrowings and current portion of long-term obligations
505

 
3

Income taxes payable
58

 
10

Other current liabilities
631

 
672

Total current liabilities
1,563

 
1,038

Long-term obligations
2,097

 
2,588

Non-current deferred tax liabilities
831

 
801

Non-current deferred revenue
1,216

 
1,250

Other non-current liabilities
298

 
302

Total liabilities
6,005

 
5,979

Commitments and contingencies

 

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

 

Common stock, $0.01 par value, 800,000,000 shares authorized, 190,925,830 and 192,957,696 shares issued and outstanding for 2015 and 2014, respectively
2

 
2

Additional paid-in capital
447

 
658

Retained earnings
1,962

 
1,771

Accumulated other comprehensive loss
(149
)
 
(137
)
Total stockholders' equity
2,262

 
2,294

Total liabilities and stockholders' equity
$
8,267

 
$
8,273

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 Six Months Ended June 30, 2015 and 2014
(Unaudited, in millions)
 
For the
 
Six Months Ended
 
June 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
377

 
$
365

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
96

 
99

Amortization expense
16

 
18

Amortization of deferred revenue
(32
)
 
(32
)
Employee stock-based compensation expense
21

 
22

Deferred income taxes
19

 
22

Other, net
(21
)
 
(23
)
Changes in assets and liabilities, net of effects of acquisition:
 
 
 
Trade accounts receivable
(78
)
 
(25
)
Other accounts receivable
(2
)
 
5

Inventories
(16
)
 
(13
)
Other current and non-current assets
(77
)
 
(53
)
Other current and non-current liabilities
(41
)
 
(24
)
Trade accounts payable
18

 
48

Income taxes payable
69

 
29

Net cash provided by operating activities
349

 
438

Investing activities:
 
 
 
Purchase of property, plant and equipment
(42
)
 
(71
)
Purchase of intangible assets
(1
)
 
(1
)
Purchase of cost method investment
(15
)
 

Proceeds from disposals of property, plant and equipment
11

 
7

Other, net

 
(3
)
Net cash used in investing activities
(47
)
 
(68
)
Financing activities:
 
 
 
Net issuance of commercial paper

 
5

Repurchase of shares of common stock
(251
)
 
(206
)
Cash paid for shares not yet received

 
(50
)
Dividends paid
(172
)
 
(157
)
Tax withholdings related to net share settlements of certain stock awards
(27
)
 
(16
)
Proceeds from stock options exercised
22

 
28

Excess tax benefit on stock-based compensation
20

 
8

Other, net
(1
)
 

Net cash used in financing activities
(409
)
 
(388
)
Cash and cash equivalents — net change from:
 
 
 
Operating, investing and financing activities
(107
)
 
(18
)
Effect of exchange rate changes on cash and cash equivalents
(3
)
 

Cash and cash equivalents at beginning of period
237

 
153

Cash and cash equivalents at end of period
$
127

 
$
135

See Note 14 for supplemental cash flow information.
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 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2015
(Unaudited, in millions, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Common Stock
 
Additional
 
 
 
Other
 
 
 
Issued
 
Paid-In
 
Retained
 
Comprehensive
 
Total
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Equity
Balance as of January 1, 2015
193.0

 
$
2

 
$
658

 
$
1,771

 
$
(137
)
 
$
2,294

Shares issued under employee stock-based compensation plans and other
1.2

 

 

 

 

 

Net income

 

 

 
377

 

 
377

Other comprehensive loss

 

 

 

 
(12
)
 
(12
)
Dividends declared, $0.96 per share

 

 
3

 
(186
)
 

 
(183
)
Stock options exercised and stock-based compensation, net of tax of ($20)

 

 
37

 

 

 
37

Common stock repurchases
(3.2
)
 

 
(251
)
 

 

 
(251
)
Balance as of June 30, 2015
191.0

 
$
2

 
$
447

 
$
1,962

 
$
(149
)
 
$
2,262

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

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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.
This Quarterly Report on Form 10-Q refers to some of DPS' owned or licensed trademarks, trade names and service marks, which are referred to as the Company's brands. All of the product names included herein are either DPS' registered trademarks or those of the Company's licensors.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
PRINCIPLES OF CONSOLIDATION
DPS consolidates all wholly-owned subsidiaries. The Company uses the equity method to account for investments in companies if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes DPS' proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.
The Company is also required to consolidate entities that are variable interest entities (“VIEs”) of which DPS is the primary beneficiary. Judgments are made in assessing whether the Company is the primary beneficiary, including determination of the activities that most significantly impact the VIE’s economic performance. During the year ended December 31, 2014, the Company provided 100% financing to a VIE as part of a short term leasing structure for which DPS is the primary beneficiary. As a result, DPS has consolidated that entity. The Company’s financing of the VIE, which totaled $21 million as of December 31, 2014, included a transfer of cash and assignment of the rights to deposits previously made with a manufacturer in prior years. The Company's financing of the VIE, which eliminates in consolidation, was used by the VIE to purchase certain property, plant and equipment. During the quarter ended June 30, 2015, the leasing arrangement with the VIE was terminated through the Company assuming ownership of the property, plant and equipment purchased by the VIE as repayment of the Company's financing of the VIE. No gain or loss was recorded as a result of the termination.
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.

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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;
revenue recognition;
pension and postretirement benefits;
multi-employer pension plan withdrawal liability;
risk management programs; and
income taxes.
These critical accounting estimates are discussed in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2014.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. ASU 2014-09 provides alternative methods of initial adoption. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date. The FASB will formally issue this ASU during the third quarter of 2015. The Company is currently evaluating the impact that these standards will have on the consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"), in order to simplify the presentation of debt issuance costs. The ASU requires debt issuance costs to be presented on the balance sheet as a direct deduction from the related debt liability rather than an asset. ASU 2015-03 is effective for public companies for annual periods beginning after December 15, 2015, and interim periods thereafter, with early adoption permitted. The guidance also requires retrospective application to all prior periods presented. The Company will early adopt as of December 31, 2015 and does not anticipate a significant impact to the Company's financial position as a result of this change.

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


2.
Inventories
Inventories consisted of the following:
 
June 30,
 
December 31,
(in millions)
2015
 
2014
Raw materials
$
78

 
$
92

Spare parts
18

 
18

Work in process
5

 
5

Finished goods
150

 
126

Inventories at first in first out cost
251

 
241

Reduction to last in first out ("LIFO") cost
(34
)
 
(37
)
Inventories
$
217

 
$
204


Approximately $163 million and $151 million of the Company's inventory was accounted for under the LIFO method of accounting as of June 30, 2015 and December 31, 2014, respectively. The reduction to LIFO cost reflects the excess of the current cost of LIFO inventories as of June 30, 2015 and December 31, 2014, over the amount at which these inventories were valued on the unaudited Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2015, a LIFO inventory liquidation increased the Company's gross profit by $3 million. For the three and six months ended June 30, 2014, there was no LIFO inventory liquidation.



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


3.
Goodwill and Other Intangible Assets
GOODWILL
Changes in the carrying amount of goodwill by reporting unit are as follows:
(in millions)
Beverage Concentrates
 
WD Reporting Unit(1)
 
DSD Reporting Unit(1)
 
Latin America Beverages
 
Total
Balance as of January 1, 2014
 
 
 
 
 
 
 
 
 
Goodwill
$
1,732

 
$
1,220

 
$
185

 
$
31

 
$
3,168

Accumulated impairment losses

 

 
(180
)
 

 
(180
)
 
1,732

 
1,220

 
5

 
31

 
2,988

Foreign currency impact

 

 

 
(3
)
 
(3
)
Acquisition activity(2)

 
2

 
3

 

 
5

Balance as of December 31, 2014
 
 
 
 
 
 
 
 
 
Goodwill
1,732

 
1,222

 
188

 
28

 
3,170

Accumulated impairment losses

 

 
(180
)
 

 
(180
)
 
1,732

 
1,222

 
8

 
28

 
2,990

Foreign currency impact

 

 

 
(2
)
 
(2
)
Acquisition activity(2)

 

 
1

 

 
1

Balance as of June 30, 2015
 
 
 
 
 
 
 
 
 
Goodwill
1,732

 
1,222

 
189

 
26

 
3,169

Accumulated impairment losses

 

 
(180
)
 

 
(180
)
 
$
1,732

 
$
1,222

 
$
9

 
$
26

 
$
2,989

____________________________
(1)
The Packaged Beverages segment is comprised of two reporting units, the Direct Store Delivery ("DSD") system and the Warehouse Direct ("WD") system.
(2)
The acquisition activity represents the goodwill associated with the purchase of Davis Beverage Group, Inc. and Davis Bottling Co, Inc. in 2014.


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


INTANGIBLE ASSETS OTHER THAN GOODWILL
The net carrying amounts of intangible assets other than goodwill are as follows:
 
June 30, 2015
 
December 31, 2014
 
Gross
 
Accumulated
 
Net
 
Gross
 
Accumulated
 
Net
(in millions)
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
Brands(1)
$
2,640

 
$

 
$
2,640

 
$
2,643

 
$

 
$
2,643

Distribution rights
27

 

 
27

 
27

 

 
27

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Brands
29

 
(28
)
 
1

 
29

 
(28
)
 
1

Distribution rights
14

 
(5
)
 
9

 
13

 
(4
)
 
9

Customer relationships
76

 
(74
)
 
2

 
76

 
(72
)
 
4

Bottler agreements
19

 
(19
)
 

 
19

 
(19
)
 

Total
$
2,805

 
$
(126
)
 
$
2,679

 
$
2,807

 
$
(123
)
 
$
2,684

____________________________
(1)
For the six months ended June 30, 2015, brands with indefinite lives decreased due to a $3 million change in foreign currency translation.
As of June 30, 2015, 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 $3 million for the three and six months ended June 30, 2015, respectively, and $1 million and $2 million for the three and six months ended June 30, 2014, respectively.
Amortization expense of these intangible assets over the remainder of 2015 and the next four years is expected to be the following (in millions):
Year
Aggregate Amortization Expense
July 1, 2015 through December 31, 2015
$
3

2016
3

2017
1

2018
1

2019
1

IMPAIRMENT TESTING
The Company conducts impairment tests on goodwill and all indefinite-lived intangible assets annually or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. DPS did not identify any circumstances that indicated that the carrying amount of any goodwill or any indefinite-lived intangible asset may not be recoverable as of June 30, 2015.

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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:
 
June 30,
 
December 31,
(in millions)
2015
 
2014
Prepaid expenses and other current assets:
 
 
 
Customer incentive programs
$
57

 
$
18

Derivative instruments
24

 
11

Current assets held for sale
3


12

Other
75

 
45

Total prepaid expenses and other current assets
$
159

 
$
86

Other current liabilities:
 
 
 
Customer rebates and incentives
$
246

 
$
248

Accrued compensation
87

 
127

Insurance liability
47

 
46

Interest accrual
26

 
26

Dividends payable
92

 
79

Derivative instruments
18

 
18

Other
115

 
128

Total other current liabilities
$
631

 
$
672

5.
Debt
The following table summarizes the Company's long-term obligations:
 
June 30,
 
December 31,
(in millions)
2015
 
2014
Senior unsecured notes(1)
$
2,499

 
$
2,505

Capital lease obligations
103

 
86

Subtotal
2,602

 
2,591

Less - current portion
(505
)
 
(3
)
Long-term obligations
$
2,097

 
$
2,588

____________________________
(1)
The carrying amount includes the unamortized net discount on debt issuances and adjustments of $28 million and $34 million as of June 30, 2015 and December 31, 2014, respectively, related to the change in the fair value of interest rate swaps designated as fair value hedges. See Note 6 for further information regarding derivatives.


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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:
 
June 30,
 
December 31,
(in millions)
2015
 
2014
Commercial paper
$

 
$

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

 

Capital lease obligations
5

 
3

Short-term borrowings and current portion of long-term obligations
$
505

 
$
3

SENIOR UNSECURED NOTES 
The Company's senior unsecured notes consisted of the following:
(in millions)
 
 
 
 
 
Principal Amount
 
Carrying Amount
 
 
 
 
 
 
June 30,
 
June 30,
 
December 31,
Issuance
 
Maturity Date
 
Rate
 
2015
 
2015
 
2014
2016 Notes
 
January 15, 2016
 
2.90%
 
$
500

 
$
500

 
$
500

2018 Notes
 
May 1, 2018
 
6.82%
 
724

 
724

 
724

2019 Notes
 
January 15, 2019
 
2.60%
 
250

 
250

 
250

2020 Notes
 
January 15, 2020
 
2.00%
 
250

 
246

 
245

2021 Notes
 
November 15, 2021
 
3.20%
 
250

 
249

 
249

2022 Notes
 
November 15, 2022
 
2.70%
 
250

 
264

 
265

2038 Notes
 
May 1, 2038
 
7.45%
 
250

 
266

 
272

 
 
 
 
 
 
$
2,474

 
$
2,499

 
$
2,505

COMMERCIAL PAPER PROGRAM
On December 10, 2010, the Company entered into a commercial paper program under which the Company may issue unsecured commercial paper notes (the "Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of $500 million. The program is supported by a $500 million revolving line of credit (the "Revolver"). Outstanding Commercial Paper reduces the amount of borrowing capacity available under the Revolver and outstanding amounts under the Revolver reduce the Commercial Paper availability. As of June 30, 2015 and December 31, 2014, the Company had no outstanding Commercial Paper.
UNSECURED CREDIT AGREEMENT
The following table provides amounts utilized and available under the Revolver and each sublimit arrangement type as of June 30, 2015:
(in millions)
Amount Utilized
 
Balances Available
Revolver
$

 
$
499

Letters of credit
1

 
74

Swingline advances

 
50

As of June 30, 2015, the Company was in compliance with all financial covenant requirements relating to its unsecured credit agreement.

12

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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 ("SEC"), effective May 23, 2013, which registered an indeterminable amount of securities for future sales. As of June 30, 2015, the Company had not issued any securities under this shelf registration statement.
LETTERS OF CREDIT FACILITIES
In addition to the portion of the Revolver reserved for issuance of letters of credit, the Company has incremental letters of credit facilities. Under these facilities, $140 million is available for the issuance of letters of credit, $61 million of which was utilized as of June 30, 2015 and $79 million of which remains available for use.
6. Derivatives
DPS is exposed to market risks arising from adverse changes in:
interest rates;
foreign exchange rates; and
commodity prices affecting the cost of raw materials and fuels, which are recorded in cost of sales and selling, general and administrative ("SG&A") expenses, respectively.
The Company manages these risks through a variety of strategies, including the use of interest rate contracts, foreign exchange forward contracts, commodity forward and future contracts and supplier pricing agreements. DPS does not hold or issue derivative financial instruments for trading or speculative purposes.
The Company formally designates and accounts for certain interest rate contracts and foreign exchange forward contracts that meet established accounting criteria under U.S. GAAP as either fair value or cash flow hedges. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is recorded, net of applicable taxes, in Accumulated Other Comprehensive Loss ("AOCL"), a component of Stockholders' Equity in the unaudited Condensed Consolidated Balance Sheets. When net income is affected by the variability of the underlying transaction, the applicable offsetting amount of the gain or loss from the derivative instrument deferred in AOCL is reclassified to net income and is reported as a component of the unaudited Condensed Consolidated Statements of Income. For derivative instruments that are designated and qualify as fair value hedges, the effective change in the fair value of the instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized immediately in current-period earnings. For derivatives that are not designated or are de-designated as a hedging instrument, the gain or loss on the instrument is recognized in earnings in the period of change.
Certain interest rate contracts qualify for the "shortcut" method of accounting for hedges under U.S. GAAP. Under the shortcut method, the hedges are assumed to be perfectly effective and no ineffectiveness is recorded in earnings. For all other designated hedges, the Company assesses whether the derivative instrument is effective in offsetting the changes in fair value or variability of cash flows at the inception of the derivative contract. DPS measures hedge ineffectiveness on a quarterly basis throughout the designated period. Changes in the fair value of the derivative instrument that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period are recorded in earnings each period.
If a fair value or cash flow hedge were to cease to qualify for hedge accounting, or were terminated, the derivatives would continue to be carried on the balance sheet at fair value until settled and hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCL would be reclassified to earnings at that time.

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


INTEREST RATES 
Cash Flow Hedges
During the fourth quarter of 2014, in order to hedge the variability in cash flows from interest rate changes associated with the Company's planned issuances of long-term debt, the Company entered into a forward starting swap agreement with an aggregate notional value of $125 million in order to fix the rate for a portion of a future 30 year unsecured debt issuance before the due date of the 2016 Notes. In January and March of 2015, the Company entered into three forward starting swap agreements to fix the rate for an additional portion of the expected future issuance with an aggregate notional value of $100 million. The forward starting swaps are expected to be unwound at the planned issuance of the debt.
The effective portion of changes in the fair value of the derivative that is designated as a cash flow hedge is being recorded in AOCL and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Ineffectiveness, if any, related to the Company's changes in estimates about the debt issuance related to the forward starting swap would be recognized directly in earnings as a component of interest expense during the period incurred. During the three and six months ended June 30, 2015, the Company realized no ineffectiveness as a result of this hedging relationship.
Fair Value Hedges
The Company is exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates and manages these risks through the use of receive-fixed, pay-variable interest rate swaps.
HEDGE OF 2038 NOTES
In December 2010, the Company entered into an interest rate swap having a notional amount of $100 million and maturing in May 2038 in order to effectively convert a portion of the 2038 Notes from fixed-rate debt to floating-rate debt and designated it as a fair value hedge. The assessment of hedge effectiveness is made by comparing the cumulative change in the fair value of the hedged item attributable to changes in the benchmark interest rate with the cumulative changes in the fair value of the interest rate swap, with any ineffectiveness recorded in earnings as interest expense during the period incurred. In February 2015, the swap agreement was modified and transferred to another counterparty through a novation transaction. As a result, the Company de-designated the original hedging relationship. Under the original hedging relationship, the $25 million recorded as an increase to debt due to the changes in fair market value of the debt will be amortized into earnings over the remaining term of the 2038 Notes.
In February 2015, the Company then designated the new interest rate swap contract as a fair value hedge with a notional amount of $100 million and maturing in May 2038 in order to effectively convert a portion of the 2038 Notes from fixed-rate debt to floating-rate debt. The Company uses regression analysis to assess the prospective and retrospective effectiveness of the hedge relationships and any ineffectiveness is recognized in interest expense during the period incurred.
As of June 30, 2015 and December 31, 2014, the impact of these fair value hedges on the 2038 Notes increased the carrying value by $16 million and $23 million, respectively.
HEDGE OF 2019 AND 2021 NOTES
In November 2011, the Company entered into four interest rate swaps having an aggregate notional amount of $250 million and durations ranging from seven to ten years in order to convert fixed-rate, long-term debt to floating rate debt. These swaps were entered into upon the issuance of the 2019 and 2021 Notes, and were accounted for as fair value hedges and qualified for the shortcut method of accounting under U.S. GAAP. As of June 30, 2015, the fair value hedge had no impact on the carrying value of the 2019 and 2021 Notes. As of December 31, 2014, the impact of the fair value hedge on the 2019 and 2021 Notes decreased the carrying value by $1 million.
HEDGE OF 2020 NOTES
In November 2012, the Company entered into five interest rate swaps having an aggregate notional amount of $120 million and maturing in January 2020 in order to effectively convert fixed-rate, long-term debt to floating rate debt. These swaps were entered into upon the issuance of the 2020 Notes, and were accounted for as fair value hedges and qualified for the shortcut method of accounting under U.S. GAAP. As of June 30, 2015 and December 31, 2014, the impact of the fair value hedge on the 2020 Notes decreased the carrying value by $2 million and $4 million, respectively.

14

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


HEDGE OF 2022 NOTES
In December 2013, the Company entered into four interest rate swaps having an aggregate notional amount of $250 million and maturing in November 2022 in order to effectively convert all of the 2022 Notes from fixed-rate debt to floating-rate debt and designated them as fair value hedges. The assessment of hedge effectiveness is made by comparing the cumulative change in the fair value of the hedged item attributable to changes in the benchmark interest rate with the cumulative changes in the fair value of the interest rate swap, with any ineffectiveness recorded in earnings as interest expense during the period incurred. As of June 30, 2015 and December 31, 2014, the impact of the fair value hedges on the 2022 Notes increased the carrying value by $14 million and $16 million, respectively.
FOREIGN EXCHANGE
Cash Flow Hedges
The Company's Canadian business purchases its inventory through transactions denominated and settled in United States ("U.S.") dollars, a currency different from the functional currency of the Canadian business. These inventory purchases are subject to exposure from movements in exchange rates. During the three and six months ended June 30, 2015 and 2014, the Company utilized foreign exchange forward contracts designated as cash flow hedges to manage the exposures resulting from changes in these foreign currency exchange rates. The intent of these foreign exchange contracts is to provide predictability in the Company's overall cost structure. These foreign exchange contracts, carried at fair value, have maturities between one and six months as of June 30, 2015. The Company had outstanding foreign exchange forward contracts with notional amounts of $16 million and $10 million as of June 30, 2015 and December 31, 2014, respectively.
COMMODITIES
Economic Hedges
DPS centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through forward and future contracts. The intent of these contracts is to provide a certain level of predictability in the Company's overall cost structure. During the three and six months ended June 30, 2015 and 2014, the Company held forward and future contracts that economically hedged certain of its risks. In these cases, a natural hedging relationship exists in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded in net income throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Income as the hedged transaction. Unrealized gains and losses are recognized as a component of unallocated corporate costs until the Company's operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's operating profit ("SOP"). The total notional values of derivatives related to economic hedges of this type were $175 million and $160 million as of June 30, 2015 and December 31, 2014, 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:
(in millions)
Balance Sheet Location
 
June 30,
2015
 
December 31,
2014
Assets:
 
 
 
 
 
Derivative instruments designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Interest rate contracts
Prepaid expenses and other current assets
 
$
23

 
$
11

Foreign exchange forward contracts
Prepaid expenses and other current assets
 
1

 

Interest rate contracts
Other non-current assets
 
23

 
29

Total assets
 
 
$
47

 
$
40

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

 
$

Interest rate contracts
Other non-current liabilities
 
5

 
9

Derivative instruments not designated as hedging instruments under U.S. GAAP:
 
 
 
 
 
Commodity contracts
Other current liabilities
 
18

 
18

Commodity contracts
Other non-current liabilities
 
4

 
8

Total liabilities
 
 
$
27

 
$
35



16

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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:
 
Amount of Gain (Loss) Recognized in
 
Amount of Gain (Loss) Reclassified from AOCL into Income
 
Location of Gain (Loss) Reclassified from AOCL into Income
(in millions)
Other Comprehensive Income (Loss) ("OCI")
 
 
For the three months ended June 30, 2015:
 
 
 
 
 
Interest rate contracts
$
26

 
$
(2
)
 
Interest expense
Foreign exchange forward contracts

 

 
Cost of sales
Total
$
26

 
$
(2
)
 
 
 
 
 
 
 
 
For the six months ended June 30, 2015:
 
 
 
 
 
Interest rate contracts
$
15

 
$
(4
)
 
Interest expense
Foreign exchange forward contracts

 

 
Cost of sales
Total
$
15

 
$
(4
)
 
 
 
 
 
 
 
 
For the three months ended June 30, 2014:
 
 
 
 
 
Interest rate contracts
$

 
$
(2
)
 
Interest expense
Foreign exchange forward contracts
(2
)
 

 
Cost of sales
Total
$
(2
)
 
$
(2
)
 
 
 
 
 
 
 
 
For the six months ended June 30, 2014:
 
 
 
 
 
Interest rate contracts
$

 
$
(4
)
 
Interest expense
Foreign exchange forward contracts
(1
)
 
1

 
Cost of sales
Total
$
(1
)
 
$
(3
)
 
 
There was no hedge ineffectiveness recognized in earnings for the three and six months ended June 30, 2015 and 2014 with respect to derivative instruments designated as cash flow hedges. During the next 12 months, the Company expects to reclassify pre-tax net losses of $7 million from AOCL into net income.

17

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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:
 
 
Amount of Gain
 
Location of Gain
(in millions)
 
Recognized in Income
 
Recognized in Income
For the three months ended June 30, 2015:
 
 
 
 
Interest rate contracts(1)
 
$
5

 
Interest expense
Total
 
$
5

 
 
 
 
 
 
 
For the six months ended June 30, 2015:
 
 
 
 
Interest rate contracts(1)
 
$
9

 
Interest expense
Total
 
$
9

 
 
 
 
 
 
 
For the three months ended June 30, 2014:
 
 
 
 
Interest rate contracts
 
$
4

 
Interest expense
Total
 
$
4

 
 
 
 
 
 
 
For the six months ended June 30, 2014:
 
 
 
 
Interest rate contracts
 
$
8

 
Interest expense
Total
 
$
8

 
 
____________________________
(1)    Interest expense for the three and six months ended June 30, 2015 includes amortization of the forward starting swap associated with the 2038 Notes, which was de-designated in February 2015, and basis adjustments related to the 2038 and 2022 Notes.
For the three months ended June 30, 2015, a $1 million expense 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 six months ended June 30, 2015. There was no hedge ineffectiveness recognized in earnings for the three months ended June 30, 2014. For the six months ended June 30, 2014, a $1 million benefit due to hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges.

18

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


IMPACT OF ECONOMIC HEDGES
The following table presents the impact of derivative instruments not designated as hedging instruments under U.S. GAAP to the unaudited Condensed Consolidated Statements of Income:
 
 
Amount of Gain (Loss)
 
Location of Gain (Loss)
(in millions)
 
Recognized in Income
 
Recognized in Income
For the three months ended June 30, 2015:
 
 
 
 
Commodity contracts(1)
 
$
(1
)
 
Cost of sales
Commodity contracts(1)
 
(11
)
 
SG&A expenses
Total
 
$
(12
)
 
 
 
 
 
 
 
For the six months ended June 30, 2015:
 
 
 
 
Commodity contracts(1)
 
$

 
Cost of sales
Commodity contracts(1)
 
(17
)
 
SG&A expenses
Total
 
$
(17
)
 
 
 
 
 
 
 
For the three months ended June 30, 2014:
 
 
 
 
Commodity contracts(1)
 
$
(2
)
 
Cost of sales
Commodity contracts(1)
 
2

 
SG&A expenses
Total
 
$

 
 
 
 
 
 
 
For the six months ended June 30, 2014:
 
 
 
 
Commodity contracts(1)
 
$
9

 
Cost of sales
Commodity contracts(1)
 
2

 
SG&A expenses
Total
 
$
11

 
 
____________________________
(1)
Commodity contracts include both realized and unrealized gains and losses.
Refer to Note 10 for additional information on the valuation of derivative instruments. The Company has exposure to credit losses from derivative instruments in an asset position in the event of nonperformance by the counterparties to the agreements. Historically, DPS has not experienced credit losses as a result of counterparty nonperformance. The Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines and monitors the market position of the programs upon execution of a hedging transaction and at least on a quarterly basis.

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Table of Contents
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:
 
June 30,
 
December 31,
(in millions)
2015
 
2014
Other non-current assets:
 
 
 
Deferred financing costs, net
$
8

 
$
9

Customer incentive programs
55

 
55

Marketable securities - trading
26

 
25

Derivative instruments
23

 
29

Cost method investments(1)
15

 

Other
38

 
41

Total other non-current assets
$
165

 
$
159

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

 
$
37

Long-term pension and post-retirement liability
43

 
44

Multi-employer pension plan withdrawal liability
57

 
57

Insurance liability
90

 
90

Derivative instruments
9

 
17

Deferred compensation liability
26

 
25

Other
39

 
32

Total other non-current liabilities
$
298

 
$
302

____________________________
(1)
During the quarter ended March 31, 2015, the Company acquired a minor interest in an allied brand for $15 million. This investment is accounted for as a cost-method investment, as the Company owns a minor interest and does not have the ability to exercise significant influence over operating and financial policies of the entity. This cost method investment does not have a readily determinable fair value as the entity is not publicly traded.
8. Income Taxes
The effective tax rates for the three months ended June 30, 2015 and 2014 were 35.5% and 35.1%, respectively.
The effective tax rates for the six months ended June 30, 2015 and 2014 were 35.6% and 34.8%, respectively. The prior year provision for income taxes included an income tax benefit of $2 million from revaluing our U.S. deferred liabilities due to the favorable impact of a New York State law change.

20

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


9. Employee Benefit Plans
The following table sets forth the components of net periodic benefit costs for the Company's pension plans:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
(in millions)
2015
 
2014
 
2015
 
2014
Service cost
$

 
$

 
$
1

 
$
1

Interest cost
3

 
4

 
5

 
7

Expected return on assets
(3
)
 
(3
)
 
(5
)
 
(7
)
Recognition of actuarial loss
1

 

 
2

 
1

Net periodic benefit costs
$
1

 
$
1

 
$
3

 
$
2

The Company contributed $1 million to its pension plans during the three and six months ended June 30, 2015. There were no contributions made to its pension plans during the three months ended June 30, 2014. The Company contributed $1 million to its pension plans during the six months ended June 30, 2014.
10. Fair Value
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. The three-level hierarchy for disclosure of fair value measurements is as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Valuations with one or more unobservable significant inputs that reflect the reporting entity's own assumptions.

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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:
 
Fair Value Measurements at June 30, 2015
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
(in millions)
Level 1
 
Level 2
 
Level 3
Interest rate contracts
$

 
$
46

 
$

Foreign exchange forward contracts

 
1

 

Marketable securities - trading
26

 

 

Total assets
$
26

 
$
47

 
$

 
 
 
 
 
 
Commodity contracts
$

 
$
22

 
$

Interest rate contracts

 
5

 

Total liabilities
$

 
$
27

 
$

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

 
$
40

 
$

Marketable securities - trading
25

 

 

Total assets
$
25

 
$
40

 
$

 
 
 
 
 
 
Commodity contracts
$

 
$
26

 
$

Interest rate contracts

 
9

 

Total liabilities
$

 
$
35

 
$

The fair values of marketable securities are determined using quoted market prices from daily exchange traded markets based on the closing price as of the balance sheet date and are classified as Level 1. The fair values of commodity forward and future contracts, interest rate swap contracts and foreign currency forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity forward and future contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the balance sheet date. Interest rate swap contracts are valued using models based primarily on readily observable market parameters, such as London Interbank Offered Rate forward rates, for all substantial terms of the Company's contracts and credit risk of the counterparties. The fair value of foreign currency forward contracts are valued using quoted forward foreign exchange prices at the reporting date. Therefore, the Company has categorized these contracts as Level 2.
As of June 30, 2015 and December 31, 2014, the Company did not have any assets or liabilities measured on a recurring basis without observable market values that would require a high level of judgment to determine fair value (Level 3).
There were no transfers of financial instruments between the three levels of fair value hierarchy during the three and six months ended June 30, 2015 and 2014.

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


ESTIMATED FAIR VALUE OF LONG-TERM OBLIGATIONS
The estimated fair values of long-term obligations are as follows:
 
June 30, 2015
 
December 31, 2014
(in millions)
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt – 2016 Notes
$
500

 
$
506

 
$
500

 
$
510

Long-term debt – 2018 Notes
724

 
822

 
724

 
835

Long-term debt – 2019 Notes(1)
250

 
252

 
250

 
253

Long-term debt – 2020 Notes(1)
246

 
245

 
245

 
244

Long-term debt – 2021 Notes(1)
249

 
255

 
249

 
255

Long-term debt – 2022 Notes(1)
264

 
238

 
265

 
244

Long-term debt – 2038 Notes(1)
266

 
342

 
272

 
363

 
$
2,499

 
$
2,660

 
$
2,505

 
$
2,704

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

Capital lease obligations have been excluded from the calculation of fair value for both 2015 and 2014.
The fair value amounts of long term debt as of June 30, 2015 and December 31, 2014 were based on current market rates available to the Company (Level 2 inputs). The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all debt at such date.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The fair value amounts for cash and cash equivalents, accounts receivable, net, commercial paper, accounts payable and other current liabilities approximate carrying amounts due to the short maturities of these instruments.
11. Stock-Based Compensation
The Company's Omnibus Stock Incentive Plan of 2009 ( "DPS Stock Plan") provides for various long-term incentive awards, including stock options, restricted stock units ("RSUs") and performance share units ("PSUs").
Stock-based compensation expense is recorded in SG&A expenses in the unaudited Condensed Consolidated Statements of Income. The components of stock-based compensation expense are presented below:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
(in millions)
2015
 
2014
 
2015
 
2014
Total stock-based compensation expense
$
12

 
$
11

 
$
21

 
$
22

Income tax benefit recognized in the statement of income
(4
)
 
(4
)
 
(7
)
 
(8
)
Stock-based compensation expense, net of tax
$
8

 
$
7

 
$
14

 
$
14


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


STOCK OPTIONS
The table below summarizes stock option activity for the six months ended June 30, 2015:
 
Stock Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of January 1, 2015
1,529,235

 
$
45.27

 
8.20
 
$
40

Granted
427,698

 
79.20

 
 
 
 
Exercised
(520,249
)
 
42.61

 
 
 
19

Forfeited or expired
(11,313
)
 
59.63

 
 
 
 
Outstanding as of June 30, 2015
1,425,371

 
56.31

 
8.45
 
26

Exercisable as of June 30, 2015
392,228

 
42.33

 
7.24
 
12

As of June 30, 2015, there was $6 million of unrecognized compensation cost related to unvested stock options granted under the DPS Stock Plan that is expected to be recognized over a weighted average period of 1.29 years.
RESTRICTED STOCK UNITS    
The table below summarizes RSU activity for the six months ended June 30, 2015. The fair value of RSUs is determined based on the number of units granted and the grant date price of the Company's common stock.
 
RSUs
 
Weighted Average Grant Date Fair Value
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of January 1, 2015
1,925,934

 
$
43.85

 
1.08
 
$
138

Granted
380,349

 
79.18

 
 
 
 
Vested and released
(749,421
)
 
37.84

 
 
 
59

Forfeited
(25,062
)
 
55.86

 
 
 
 
Outstanding as of June 30, 2015
1,531,800

 
55.37

 
1.53
 
112

As of June 30, 2015, there was $49 million of unrecognized compensation cost related to unvested RSUs granted under the DPS Stock Plan that is expected to be recognized over a weighted average period of 1.50 years.
During the six months ended June 30, 2015, 749,421 shares subject to previously granted RSUs vested. A majority of these vested RSUs were net share settled. The Company withheld 237,032 shares based upon the Company's closing stock price on the vesting date to settle the employees' minimum statutory obligation for applicable income and other employment taxes. Subsequently, the Company remitted the required funds to the appropriate taxing authorities.
Total payments for the employees' tax obligations to the relevant taxing authorities were $22 million and $14 million for the six months ended June 30, 2015 and 2014, respectively, and are reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows. These payments were used for tax withholdings related to the net share settlements of RSUs and dividend equivalent units ("DEUs"). These payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.

24

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 six months ended June 30, 2015. The fair value of PSUs is determined based on the number of units granted and the grant date price of the Company's common stock.
 
PSUs
 
Weighted Average Grant Date Fair Value
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of January 1, 2015
444,281

 
$
44.97

 
1.07
 
$
32

Granted
188,439

 
66.14

 
 
 
 
Vested and released
(188,675
)
 
37.80

 
 
 
15

Forfeited
(2,536
)
 
60.92

 
 
 
 
Outstanding as of June 30, 2015
441,509

 
56.97

 
1.38
 
32

As of June 30, 2015, there was $19 million of unrecognized compensation cost related to unvested PSUs granted under the DPS Stock Plan that is expected to be recognized over a weighted average period of 1.37 years.
During the six months ended June 30, 2015, 188,675 shares subject to previously granted PSUs vested. A majority of these vested PSUs were net share settled. The Company withheld 62,208 shares based upon the Company's closing stock price on the vesting date to settle the employees' minimum statutory obligation for the applicable income and other employment taxes. Subsequently, the Company remitted the required funds to the appropriate taxing authorities.
Total payments for the employees' tax obligations to the relevant taxing authorities were $5 million and $2 million for the six months ended June 30, 2015 and 2014, respectively, and are reflected as a financing activity within the unaudited Condensed Consolidated Statements of Cash Flows. These payments were used for tax withholdings related to the net share settlements of PSUs and DEUs. These payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of additional paid-in capital.
12. Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities. The following table presents the basic and diluted EPS and the Company's basic and diluted shares outstanding:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
(in millions, except per share data)
2015
 
2014
 
2015
 
2014
Basic EPS:
 
 
 
 
 
 
 
Net income
$
220

 
$
210

 
$
377

 
$
365

Weighted average common shares outstanding
191.4

 
196.6

 
192.2

 
197.3

Earnings per common share — basic
$
1.15

 
$
1.07

 
$
1.96

 
$
1.85

Diluted EPS:
 
 
 
 
 
 
 
Net income
$
220

 
$
210

 
$
377

 
$
365

Weighted average common shares outstanding
191.4

 
196.6

 
192.2

 
197.3

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, RSUs, PSUs and dividend equivalent units
1.0

 
1.2

 
1.3

 
1.3

Weighted average common shares outstanding and common stock equivalents
192.4

 
197.8

 
193.5

 
198.6

Earnings per common share — diluted
$
1.14

 
$
1.06

 
$
1.95

 
$
1.84


25

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


Stock options, RSUs, PSUs and DEUs totaling 0.4 million and 0.3 million shares were excluded from the diluted weighted average shares outstanding for each of the three and six months ended June 30, 2015, respectively, as they were not dilutive. Stock options, RSUs, PSUs and DEUs totaling 0.4 million and 0.6 million shares were excluded from the diluted weighted average shares outstanding for the three and six months ended June 30, 2014, respectively, as they were not dilutive.
Under the terms of our RSU and PSU agreements, unvested RSU and PSU awards contain forfeitable rights to dividends and DEUs. Because the DEUs are forfeitable, they are defined as non-participating securities. As of June 30, 2015, there were 78,412 DEUs, which will vest at the time that the underlying RSU or PSU vests.
Through 2011, the Board authorized a total aggregate share repurchase plan of $3 billion. In February 2015, the Board authorized an additional $1 billion of share repurchases. The Company repurchased and retired 1.5 million shares of common stock valued at approximately $116 million and 3.2 million shares of common stock valued at approximately $251 million for the three and six months ended June 30, 2015, respectively. The Company repurchased and retired 2.7 million shares of common stock valued at approximately $146 million and 3.9 million shares of common stock valued at approximately $206 million for the three and six months ended June 30, 2014, respectively. These amounts were recorded as a reduction of equity, primarily additional paid-in capital in the unaudited Condensed Consolidated Statement of Equity. As of June 30, 2015, $921 million remains available for share repurchases under the Board's authorization.
13. Accumulated Other Comprehensive Loss
The following tables provide a summary of changes in the balances of each component of AOCL, net of taxes:
 (in millions)
Foreign Currency Translation
 
Change in Pension Liability
 
Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance as of April 1, 2015
$
(82
)
 
$
(39
)
 
$
(41
)
 
$
(162
)
OCI before reclassifications
(5
)
 
1

 
15

 
11

Amounts reclassified from AOCL

 

 
2

 
2

Net current year OCI
(5
)
 
1

 
17

 
13

Balance as of June 30, 2015
$
(87
)
 
$
(38
)
 
$
(24
)
 
$
(149
)
 (in millions)
Foreign Currency Translation
 
Change in Pension Liability
 
Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance as of January 1, 2014
$
(17
)
 
$
(33
)
 
$
(38
)
 
$
(88
)
OCI before reclassifications
(44
)
 
(19
)
 
(2
)
 
(65
)
Amounts reclassified from AOCL

 
12

 
4

 
16

Net current year OCI
(44
)
 
(7
)
 
2

 
(49
)
Balance as of December 31, 2014
(61
)
 
(40
)
 
(36
)
 
(137
)
OCI before reclassifications
(26
)
 
1

 
9

 
(16
)
Amounts reclassified from AOCL

 
1

 
3

 
4

Net current year OCI
(26
)
 
2

 
12

 
(12
)
Balance as of June 30, 2015
$
(87
)
 
$
(38
)
 
$
(24
)
 
$
(149
)

26

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 Months Ended June 30,
 
For the Six Months Ended June 30,
 (in millions)
Location of (Gain) Loss Reclassified from AOCL into Income
 
2015
 
2014
 
2015
 
2014
Loss on cash flow hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
Interest expense
 
$
(2
)
 
$
(2
)
 
$
(4
)
 
$
(4
)
Foreign exchange forward contracts
Cost of sales
 

 

 

 
1

Total
 
 
(2
)
 
(2
)
 
(4
)
 
(3
)
Income tax expense
 
 

 

 
(1
)
 
(1
)
Total
 
 
$
(2
)
 
$
(2
)
 
$
(3
)
 
$
(2
)
 
 
 
 
 
 
 
 
 
 
Defined benefit pension and postretirement plan items:
 
 
 
 
 
 
 
 
 
Amortization of prior service costs
SG&A expenses
 
$

 
$

 
$

 
$

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

 
(2
)
 
(1
)
Settlement loss
SG&A expenses
 

 

 

 

Total
 
 
(1
)
 

 
(2
)
 
(1
)
Income tax expense
 
 
(1
)
 

 
(1
)
 

Total
 
 
$

 
$

 
$
(1
)
 
$
(1
)
Total reclassifications
 
 
$
(2
)
 
$
(2
)
 
$
(4
)
 
$
(3
)
14. Supplemental Cash Flow Information
The following table details supplemental cash flow disclosures of non-cash investing and financing activities: 
 
For the Six Months Ended June 30,
 (in millions)
2015
 
2014
Supplemental cash flow disclosures of non-cash investing and financing activities:
 
 
 
Dividends declared but not yet paid
$
92

 
$
81

Capital expenditures included in accounts payable and other current liabilities
11

 
11

Capital lease additions
19

 

Supplemental cash flow disclosures:
 
 
 
Interest paid
$
47

 
$
48

Income taxes paid
119

 
146

15. Commitments and Contingencies
LEGAL MATTERS
The Company is occasionally subject to litigation or other legal proceedings. The Company does not believe that the outcome of these, or any other, pending legal matters, individually or collectively, will have a material adverse effect on the results of operations, financial condition or liquidity of the Company.

27

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


ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company operates many manufacturing, bottling and distribution facilities. In these and other aspects of the Company's business, it is subject to a variety of federal, state and local environmental, health and safety laws and regulations. The Company maintains environmental, health and safety policies and a quality, environmental, health and safety program designed to ensure compliance with applicable laws and regulations. However, the nature of the Company's business exposes it to the risk of claims with respect to environmental, health and safety matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims.
The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as the Superfund law, as well as similar state laws, generally impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. In October 2008, DPS was notified by the Environmental Protection Agency that it is a potentially responsible party for study and cleanup costs at a Superfund site in New Jersey. Investigation and remediation costs are yet to be determined, therefore no reasonable estimate exists on which to base a loss accrual. Through June 30, 2015, the Company has paid approximately $750,000 since the notification for DPS' allocation of costs related to the study for this site.
16. Segments
As of June 30, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014, the Company's operating structure consisted of the following three operating segments:
The Beverage Concentrates segment reflects sales of the Company's branded concentrates and syrup to third party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands.
The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company's own brands and third party brands, through both DSD and WD.
The Latin America Beverages segment reflects sales in the Mexico, Caribbean, and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.
Segment results are based on management reports. Net sales and SOP are the significant financial measures used to assess the operating performance of the Company's operating segments.

28

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 is as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
(in millions)
2015
 
2014
 
2015
 
2014
Segment Results – Net sales

 

 
 
 
 
Beverage Concentrates
$
330

 
$
327

 
$
615

 
$
608

Packaged Beverages
1,188

 
1,154

 
2,241

 
2,160

Latin America Beverages
137

 
150

 
250

 
261

Net sales
$
1,655

 
$
1,631

 
$
3,106

 
$
3,029

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 (in millions)
2015
 
2014
 
2015
 
2014
Segment Results – SOP
 
 
 
 
 
 
 
Beverage Concentrates
$
222

 
$
214

 
$
405

 
$
388

Packaged Beverages
190

 
177

 
331

 
308

Latin America Beverages
27

 
24

 
44

 
37

Total SOP
439

 
415

 
780

 
733

Unallocated corporate costs
70

 
70

 
141

 
127

Other operating income, net

 
(3
)
 

 
(2
)
Income from operations
369

 
348

 
639

 
608

Interest expense, net
27

 
27

 
54

 
52

Other expense (income), net
1

 
(1
)
 

 
(2
)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
$
341

 
$
322

 
$
585

 
$
558

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

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 June 30, 2015
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Net sales
$

 
$
1,480

 
$
181

 
$
(6
)
 
$
1,655

Cost of sales

 
595

 
85

 
(6
)
 
674

Gross profit

 
885

 
96

 

 
981

Selling, general and administrative expenses

 
529

 
57

 

 
586

Depreciation and amortization

 
25

 
1

 

 
26

Other operating (income) expense, net

 

 

 

 

Income from operations

 
331

 
38

 

 
369

Interest expense
26

 
13

 

 
(11
)
 
28

Interest income
(10
)
 

 
(2
)
 
11

 
(1
)
Other expense (income), net

 
(1
)
 
2

 

 
1

(Loss) income before (benefit) provision for income taxes and equity in earnings of subsidiaries
(16
)
 
319

 
38

 

 
341

(Benefit) provision for income taxes
(6
)
 
117

 
10

 

 
121

Income (loss) before equity in earnings of subsidiaries
(10
)
 
202

 
28

 

 
220

Equity in earnings of consolidated subsidiaries
230

 
28

 

 
(258
)
 

Equity in earnings of unconsolidated subsidiaries, net of tax

 

 

 

 

Net income
$
220

 
$
230

 
$
28

 
$
(258
)
 
$
220



30

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 June 30, 2014
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Net sales
$

 
$
1,443

 
$
196

 
$
(8
)
 
$
1,631

Cost of sales

 
578

 
95

 
(8
)
 
665

Gross profit

 
865

 
101

 

 
966

Selling, general and administrative expenses
1

 
529

 
62

 

 
592

Depreciation and amortization

 
27

 
2

 

 
29

Other operating (income) expense, net

 
(3
)
 

 

 
(3
)
Income from operations
(1
)
 
312

 
37

 

 
348

Interest expense
26

 
12

 

 
(11
)
 
27

Interest income
(9
)
 

 
(2
)
 
11

 

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

 

 
(1
)
Income (loss) before (benefit) provision for income taxes and equity in earnings of subsidiaries
(16
)
 
301

 
37

 

 
322

(Benefit) provision for income taxes
(7
)
 
110

 
10

 

 
113

Income (loss) before equity in earnings of subsidiaries
(9
)
 
191

 
27

 

 
209

Equity in earnings of consolidated subsidiaries
219

 
28

 

 
(247
)
 

Equity in earnings of unconsolidated subsidiaries, net of tax

 

 
1

 

 
1

Net income
$
210

 
$
219

 
$
28

 
$
(247
)
 
$
210



31

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


 
Condensed Consolidating Statements of Income
 
For the Six Months Ended June 30, 2015
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Net sales
$

 
$
2,801

 
$
319

 
$
(14
)
 
$
3,106

Cost of sales

 
1,134

 
156

 
(14
)
 
1,276

Gross profit

 
1,667

 
163

 

 
1,830

Selling, general and administrative expenses
1

 
1,031

 
106

 

 
1,138

Depreciation and amortization

 
50

 
3

 

 
53

Other operating income, net

 

 

 

 

Income from operations
(1
)
 
586

 
54

 

 
639

Interest expense
51

 
27

 

 
(23
)
 
55

Interest income
(20
)
 

 
(4
)
 
23

 
(1
)
Other (income) expense, net
(2
)
 
(3
)
 
5

 

 

Income before provision for income taxes and equity in earnings of subsidiaries
(30
)
 
562

 
53

 

 
585

Provision for income taxes
(11
)
 
205

 
14

 

 
208

Income (loss) before equity in earnings of subsidiaries
(19
)
 
357

 
39

 

 
377

Equity in earnings of consolidated subsidiaries
396

 
39

 

 
(435
)
 

Equity in earnings of unconsolidated subsidiaries, net of tax

 

 

 

 

Net income
$
377

 
$
396

 
$
39

 
$
(435
)
 
$
377





32

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


 
Condensed Consolidating Statements of Income
 
For the Six Months Ended June 30, 2014
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Net sales
$

 
$
2,715

 
$
330

 
$
(16
)
 
$
3,029

Cost of sales

 
1,072

 
163

 
(16
)
 
1,219

Gross profit

 
1,643

 
167

 

 
1,810

Selling, general and administrative expenses
1

 
1,031

 
114

 

 
1,146

Depreciation and amortization

 
54

 
4

 

 
58

Other operating income, net

 
(2
)
 

 

 
(2
)
Income from operations
(1
)
 
560

 
49

 

 
608

Interest expense
51

 
24

 

 
(22
)
 
53

Interest income
(19
)
 

 
(4
)
 
22

 
(1
)
Other expense (income), net
(2
)
 
(3
)
 
3

 

 
(2
)
Income (loss) before (benefit) provision for income taxes and equity in earnings of subsidiaries
(31
)
 
539

 
50

 

 
558

(Benefit) provision for income taxes
(12
)
 
194

 
12

 

 
194

Income (loss) before equity in earnings of subsidiaries
(19
)
 
345

 
38

 

 
364

Equity in earnings of consolidated subsidiaries
384

 
39

 

 
(423
)
 

Equity in earnings of unconsolidated subsidiaries, net of tax

 

 
1

 

 
1

Net income
$
365

 
$
384

 
$
39

 
$
(423
)
 
$
365



33

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 June 30, 2015
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Comprehensive income (loss)
$
233

 
$
226

 
$
26

 
$
(252
)
 
$
233


 
Condensed Consolidating Statements of Comprehensive Income
 
For the Three Months Ended June 30, 2014
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Comprehensive income (loss)
$
216

 
$
226

 
$
40

 
$
(266
)
 
$
216


 
Condensed Consolidating Statements of Comprehensive Income
 
For the Six Months Ended June 30, 2015
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Comprehensive income (loss)
$
365

 
$
369

 
$
(2
)
 
$
(367
)
 
$
365


 
Condensed Consolidating Statements of Comprehensive Income
 
For the Six Months Ended June 30, 2014
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Comprehensive income (loss)
$
368

 
$
385

 
$
38

 
$
(423
)
 
$
368




34

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


 
Condensed Consolidating Balance Sheets
 
As of June 30, 2015
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
82

 
$
45

 
$

 
$
127

Accounts receivable:
 
 
 
 
 
 
 
 
 
Trade, net

 
553

 
77

 

 
630

Other
4

 
45

 
14

 

 
63

Related party receivable
10

 
10

 

 
(20
)
 

Inventories

 
181

 
36

 

 
217

Deferred tax assets

 
66

 
3

 
(6
)
 
63

Prepaid expenses and other current assets
241

 
127

 
9

 
(218
)
 
159

Total current assets
255

 
1,064

 
184

 
(244
)
 
1,259

Property, plant and equipment, net

 
999

 
96

 

 
1,095

Investments in consolidated subsidiaries
6,601

 
610

 

 
(7,211
)
 

Investments in unconsolidated subsidiaries

 

 
13

 

 
13

Goodwill

 
2,971

 
18

 

 
2,989

Other intangible assets, net

 
2,614

 
65

 

 
2,679

Long-term receivable, related parties
3,138

 
5,116

 
294

 
(8,548
)
 

Other non-current assets
56

 
105

 
4

 

 
165

Non-current deferred tax assets
20

 

 
67

 
(20
)
 
67

Total assets
$
10,070

 
$
13,479

 
$
741

 
$
(16,023
)
 
$
8,267

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
280

 
$
25

 
$

 
$
305

Related party payable

 
10

 
10

 
(20
)
 

Deferred revenue

 
62

 
2

 

 
64

Short-term borrowings and current portion of long-term obligations
500

 
5

 

 

 
505

Income taxes payable

 
272

 
4

 
(218
)
 
58

Other current liabilities
129

 
459

 
49

 
(6
)
 
631

Total current liabilities
629

 
1,088

 
90

 
(244
)
 
1,563

Long-term obligations to third parties
1,999

 
98

 

 

 
2,097

Long-term obligations to related parties
5,116

 
3,432

 

 
(8,548
)
 

Non-current deferred tax liabilities

 
851

 

 
(20
)
 
831

Non-current deferred revenue

 
1,185

 
31

 

 
1,216

Other non-current liabilities
64

 
224

 
10

 

 
298

Total liabilities
7,808

 
6,878

 
131

 
(8,812
)
 
6,005

Total stockholders' equity
2,262

 
6,601

 
610

 
(7,211
)
 
2,262

Total liabilities and stockholders' equity
$
10,070

 
$
13,479

 
$
741

 
$
(16,023
)
 
$
8,267



35

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


 
Condensed Consolidating Balance Sheets
 
As of December 31, 2014
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
186

 
$
51

 
$

 
$
237

Accounts receivable:
 
 
 
 
 
 
 
 
 
Trade, net

 
494

 
62

 

 
556

Other
3

 
42

 
16

 

 
61

Related party receivable
10

 
10

 

 
(20
)
 

Inventories

 
168

 
36

 

 
204

Deferred tax assets

 
65

 
3

 
(1
)
 
67

Prepaid and other current assets
218

 
67

 
9

 
(208
)
 
86

Total current assets
231

 
1,032

 
177

 
(229
)
 
1,211

Property, plant and equipment, net

 
1,039

 
102

 

 
1,141

Investments in consolidated subsidiaries
6,194

 
612

 

 
(6,806
)
 

Investments in unconsolidated subsidiaries
1

 

 
13

 

 
14

Goodwill

 
2,971

 
19

 

 
2,990

Other intangible assets, net

 
2,615

 
69

 

 
2,684

Long-term receivable, related parties
3,118

 
4,647

 
295

 
(8,060
)
 

Other non-current assets
63

 
90

 
6

 

 
159

Non-current deferred tax assets
23

 

 
74

 
(23
)
 
74

Total assets
$
9,630

 
$
13,006

 
$
755

 
$
(15,118
)
 
$
8,273

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
258

 
$
31

 
$

 
$
289

Related party payable

 
10

 
10

 
(20
)
 

Deferred revenue

 
62

 
2

 

 
64

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

 
3

 

 

 
3

Income taxes payable

 
212

 
6

 
(208
)
 
10

Other current liabilities
112

 
512

 
49

 
(1
)
 
672

Total current liabilities
112

 
1,057

 
98

 
(229
)
 
1,038

Long-term obligations to third parties
2,505

 
83

 

 

 
2,588

Long-term obligations to related parties
4,647

 
3,413

 

 
(8,060
)
 

Non-current deferred tax liabilities

 
824

 

 
(23
)
 
801

Non-current deferred revenue

 
1,216

 
34

 

 
1,250

Other non-current liabilities
72

 
219

 
11

 

 
302

Total liabilities
7,336

 
6,812

 
143

 
(8,312
)
 
5,979

Total stockholders' equity
2,294

 
6,194

 
612

 
(6,806
)
 
2,294

Total liabilities and stockholders' equity
$
9,630

 
$
13,006

 
$
755

 
$
(15,118
)
 
$
8,273



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 Six Months Ended June 30, 2015
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Operating activities:
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(40
)
 
$
365

 
$
24

 
$

 
$
349

Investing activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment

 
(35
)
 
(7
)
 

 
(42
)
Purchase of cost method investment

 
(15
)
 

 

 
(15
)
Purchase of intangible assets

 
(1
)
 

 

 
(1
)
Proceeds from disposals of property, plant and equipment

 
11

 

 

 
11

Issuance of related party notes receivable

 
(468
)
 
(20
)
 
488

 

Net cash (used in) provided by investing activities

 
(508
)
 
(27
)
 
488

 
(47
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of related party debt
468

 
20

 

 
(488
)
 

Repurchase of shares of common stock
(251
)
 

 

 

 
(251
)
Dividends paid
(172
)
 

 

 

 
(172
)
Tax withholdings related to net share settlements of certain stock awards
(27
)
 

 

 

 
(27
)
Proceeds from stock options exercised
22

 

 

 

 
22

Excess tax benefit on stock-based compensation

 
20

 

 

 
20

Other, net

 
(1
)
 

 

 
(1
)
Net cash (used in) provided by financing activities
40

 
39

 

 
(488
)
 
(409
)
Cash and cash equivalents — net change from:
 

 
 

 
 

 
 

 
 

Operating, investing and financing activities

 
(104
)
 
(3
)
 

 
(107
)
Effect of exchange rate changes on cash and cash equivalents

 

 
(3
)
 

 
(3
)
Cash and cash equivalents at beginning of period

 
186

 
51

 

 
237

Cash and cash equivalents at end of period
$

 
$
82

 
$
45

 
$

 
$
127



37

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


 
Condensed Consolidating Statements of Cash Flows
 
For the Six Months Ended June 30, 2014
 (in millions)
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Operating activities:
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(56
)
 
$
445

 
$
49

 
$

 
$
438

Investing activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment

 
(63
)
 
(8
)
 

 
(71
)
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

 
(460
)
 
(37
)
 
497

 

Repayment of related party notes receivable

 
5

 

 
(5
)
 

Other, net
(3
)
 

 

 

 
(3
)
Net cash (used in) provided by investing activities
(3
)
 
(510
)
 
(47
)
 
492

 
(68
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of related party debt
460

 
37

 

 
(497
)
 

Repayment of related party debt
(5
)
 

 

 
5

 

Net issuance of commercial paper
5

 

 

 

 
5

Repurchase of shares of common stock
(206
)
 

 

 

 
(206
)
Cash paid for shares not yet received
(50
)
 

 

 

 
(50
)
Dividends paid
(157
)
 

 

 

 
(157
)
Tax withholdings related to net share settlements of certain stock awards
(16
)
 

 

 

 
(16
)
Proceeds from stock options exercised
28

 

 

 

 
28

Excess tax benefit on stock-based compensation

 
8

 

 

 
8

Net cash (used in) provided by financing activities
59

 
45

 

 
(492
)
 
(388
)
Cash and cash equivalents — net change from:
 
 
 
 
 
 
 
 
 
Operating, investing and financing activities

 
(20
)
 
2

 

 
(18
)
Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

Cash and cash equivalents at beginning of period

 
88

 
65

 

 
153

Cash and cash equivalents at end of period
$

 
$
68

 
$
67

 
$

 
$
135





38

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, 2014.
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, 2014. 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.
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 (non-cola) carbonated soft drinks ("CSDs") and non-carbonated beverages ("NCBs"), including ready-to-drink teas, juices, juice drinks, water 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, Sunkist soda, 7UP, A&W, Sun Drop, RC Cola, Squirt, Diet Rite, Vernors and the concentrate form of Hawaiian Punch.
Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri.
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 them in PET containers, glass bottles and aluminum cans, and sell them as finished beverages 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.

39

Table of Contents


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 and our WD system, both of which include the sales to all major retail channels, including supermarkets, fountains, 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 and other international locations, 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.
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.

40

Table of Contents


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 $1,655 million for the three months ended June 30, 2015, an increase of $24 million, or 1%, from the three months ended June 30, 2014.
Net income for the three months ended June 30, 2015 was $220 million, compared to $210 million for the three months ended June 30, 2014, an increase of $10 million, or 5%.
Net income for the three months ended June 30, 2015 was reduced 2% for foreign currency translation compared to the prior year period.
Diluted earnings per share was $1.14 for the three months ended June 30, 2015 and $1.06 for the year ago period, an increase of $0.08, or 8%.
During the second quarter of 2015, our Board of Directors (our "Board") declared a dividend of $0.48 per share on outstanding common stock, which was paid on July 7, 2015 to stockholders of record on June 15, 2015.
During the three and six months ended June 30, 2015, we repurchased 1.5 million and 3.2 million shares of our common stock valued at approximately $116 million and $251 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."

41

Table of Contents


Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014
Consolidated Operations
The following table sets forth our unaudited consolidated results of operations for the three months ended June 30, 2015 and 2014:
 
For the Three Months Ended June 30,
 
 
 
 
 
2015
 
2014
 
Dollar
 
Percentage
(dollars in millions)
Dollars
 
Percent
 
Dollars
 
Percent
 
Change
 
Change
Net sales
$
1,655

 
100.0
%
 
$
1,631

 
100.0
%
 
$
24

 
1
 %
Cost of sales
674

 
40.7

 
665

 
40.8

 
9

 
1

Gross profit
981

 
59.3

 
966

 
59.2

 
15

 
2

Selling, general and administrative expenses
586

 
35.4

 
592

 
36.3

 
(6)

 
(1
)
Income from operations
369

 
22.3

 
348

 
21.3

 
21

 
6

Provision for income taxes
121

 
7.3

 
113

 
6.9

 
8

 
7

Effective tax rate
35.5
%
 
NM

 
35.1
%
 
NM

 
NM

 
NM

Volume (BCS). Volume (BCS) increased 1% for the three months ended June 30, 2015 compared with the three months ended June 30, 2014. In the U.S. and Canada, volume gained 1%, and in Mexico and the Caribbean, volume increased 7%, compared with the year ago period. Branded CSD and NCB volume increased 1% and 3%, respectively.
In branded CSDs, Peñafiel grew 12% in our Latin America Beverages segment as a result of increased promotional activity and distribution gains. Squirt increased 6% due primarily to higher sales to our third-party bottlers in our Latin America Beverages segment. Schweppes was 8% higher in the current period reflecting distribution gains in our seltzer water and growth in the ginger ale category. Dr Pepper increased 1% driven by gains in our fountain business. These increases were partially offset by a 1% decline in Canada Dry, 7UP, A&W and Sunkist soda (our "Core 4 brands"), a 4% decrease in Crush and a 4% reduction in RC Cola. The 1% decline in our Core 4 brands were driven by a 7% decrease in 7UP, a 5% decline in Sunkist soda and a 3% reduction in A&W, partially offset by a 7% increase in Canada Dry. Our other CSD brands in total were flat in the current period.
In branded NCBs, Snapple grew 11% primarily due to product innovation. Our water category increased 6% due to distribution gains for Bai 5 and marketing investments behind Fiji, partially offset by declines in Aguafiel. Clamato grew 8% driven by increased promotional activity. Hawaiian Punch increased 2% as a result of increased promotional activity and package innovation. These increases were partially offset by a 7% decline in Mott's, driven by decreases in apple juice and a 3% decrease in our other NCB brands in total.
Net Sales. Net sales increased $24 million, or approximately 1%, for the three months ended June 30, 2015 compared with the three months ended June 30, 2014. The drivers of the increase in net sales were favorable product and package mix, gains in our branded volumes and favorable segment mix, partially offset by $29 million in unfavorable foreign currency translation.
Gross Profit. Gross profit increased $15 million for the three months ended June 30, 2015 compared with the three months ended June 30, 2014. Gross margin of 59.3% for the three months ended June 30, 2015, was higher than the 59.2% gross margin for the three months ended June 30, 2014. The primary drivers of the change in gross margin for the three months ended June 30, 2015 included:
Ongoing productivity improvements, which increased our gross margin by 0.5%;
Lower commodity costs, led by packaging and apple juice concentrate, and net of the change in our LIFO inventory provision, which increased our gross margin by 0.5%;
Decrease in our other manufacturing costs, which increased our gross margin by 0.2%;
Unfavorable product, package and segment mix, which reduced our gross margin by 0.5%;
Unfavorable foreign currency effects, which reduced our gross margin by 0.4%; and
Unfavorable comparison in our mark-to-market activity on commodity derivative contracts, which decreased our gross margin by 0.1%.

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Table of Contents


The unfavorable mark-to-market activity on commodity derivative contracts for the three months ended June 30, 2015 was $2 million in unrealized losses versus $1 million in unrealized losses in the year ago period.
Income from Operations. Income from operations increased $21 million to $369 million for the three months ended June 30, 2015 due to the increase in gross profit and a decrease in SG&A expenses. Income from operations for the three months ended June 30, 2015 was reduced by 2% for foreign currency translation.
Provision for Income Taxes. The effective tax rates for the three months ended June 30, 2015 and 2014 were 35.5% and 35.1%, respectively.
Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the three months ended June 30, 2015 and 2014, 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"):
 
For the Three Months Ended
 
June 30,
(in millions)
2015
 
2014
Segment Results — Net sales
 
 
 
Beverage Concentrates
$
330

 
$
327

Packaged Beverages
1,188

 
1,154

Latin America Beverages
137

 
150

Net sales
$
1,655

 
$
1,631

 
 
 
 
 
For the Three Months Ended
 
June 30,
(in millions)
2015
 
2014
Segment Results — SOP
 
 
 
Beverage Concentrates
$
222

 
$
214

Packaged Beverages
190

 
177

Latin America Beverages
27

 
24

Total SOP
439

 
415

Unallocated corporate costs
70

 
70

Other operating income, net

 
(3
)
Income from operations
369

 
348

Interest expense, net
27

 
27

Other expense (income), net
1

 
(1
)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
$
341

 
$
322



43

Table of Contents


BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the three months ended June 30, 2015 and 2014:
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
Dollar
 
Percentage
(in millions)
2015
 
2014
 
Change
 
Change
Net sales
$
330

 
$
327

 
$
3

 
1
%
SOP
222

 
214

 
8

 
4

Net Sales. Net sales increased $3 million for the three months ended June 30, 2015, compared with the three months ended June 30, 2014. The change was due to favorable mix and higher pricing, partially offset by a 1% decrease in concentrate case sales, higher discounts and unfavorable foreign currency translation of $3 million.
SOP. SOP increased $8 million for the three months ended June 30, 2015, compared with the three months ended June 30, 2014, driven primarily by a decrease in SG&A expenses and an increase in net sales. The decrease in SG&A expenses was the result of $2 million in lower marketing investments and lower IT costs.
Volume (BCS). Volume (BCS) was flat for the three months ended June 30, 2015, compared with the three months ended June 30, 2014. Schweppes had an 8% increase driven by distribution gains in our seltzer water and growth in the ginger ale category. Dr Pepper increased 1%, driven by gains in our fountain business. These increases were fully offset by 4% decline in Crush and our other brands in total. Our Core 4 brands were flat compared to the prior year as a result of a 5% increase in Canada Dry which was fully offset by an 8% decrease in 7UP, a 4% reduction in Sunkist soda and a 3% decline in A&W.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the three months ended June 30, 2015 and 2014:
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
Dollar
 
Percentage
(in millions)
2015
 
2014
 
Change
 
Change
Net sales
$
1,188

 
$
1,154

 
$
34

 
3
%
SOP
190

 
177

 
13

 
7

Volume. Branded CSD volumes decreased 1% for the three months ended June 30, 2015 compared with the three months ended June 30, 2014. Dr Pepper decreased 2%, driven by declines in our diet products. Volume for our Core 4 brands declined 1% compared to the prior year period, led by a 7% decrease in 7UP, a 4% decline in Sunkist soda and a 1% decrease in A&W, partially offset by a 13% increase in Canada Dry. RC Cola decreased 3% for the current period. The decreases were partially offset by a 4% gain in Squirt. Volume for our other CSD brands declined 3% for the current period.
Branded NCB volumes increased 4%, driven primarily by Snapple and our water category. Snapple grew 7% due primarily to product innovation, while our water category increased 17% due to distribution gains for Bai 5 and marketing investments behind Fiji. Hawaiian Punch increased 3% as a result of increased promotional activity and package innovation. Clamato increased 4% while our other NCB brands gained 2% for the current period. These increases were partially offset by a 5% decline in Mott's due to declines in our juice category.
Contract manufacturing decreased 3% for the three months ended June 30, 2015 compared with the three months ended June 30, 2014.
Net Sales. Net sales increased $34 million for the three months ended June 30, 2015, compared with the three months ended June 30, 2014. Net sales increased due to favorable product mix and higher branded sales volumes, partially offset by $5 million of unfavorable foreign currency translation.
SOP. SOP increased $13 million for the three months ended June 30, 2015, compared with the three months ended June 30, 2014 as increases in net sales were partially offset by increases in cost of sales. Cost of sales increased as a result of higher costs associated with product mix and increased branded sales volumes, partially offset by ongoing productivity improvements and lower commodity costs, led by packaging costs.

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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 June 30, 2015 and 2014:
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
Dollar
 
Percent
(in millions)
2015
 
2014
 
Change
 
Change
Net sales
$
137

 
$
150

 
$
(13
)
 
(9
)%
SOP
27

 
24

 
3

 
13

Volume. Sales volume increased 7% for the three months ended June 30, 2015, as compared with the three months ended June 30, 2014. The increase in sales volume was primarily driven by a 13% increase in Peñafiel as a result of increased promotional activity and distribution gains. Squirt grew 8% as a result of increased sales to third party bottlers. Clamato grew 15% as a result of increased promotional activity. 7UP increased 2%. These increases were partially offset by a decline in Aguafiel and Crush of 9% and 8%, respectively, while our other brands in total decreased 1%.
Net Sales. Net sales decreased $13 million for the three months ended June 30, 2015, compared with the three months ended June 30, 2014. Net sales decreased as a result of unfavorable foreign currency translation of $22 million and higher discounts, partially offset by increased sales volume.
SOP. SOP increased $3 million for the three months ended June 30, 2015, compared with the three months ended June 30, 2014, driven by decreases in cost of sales and SG&A expenses, partially offset by decreases in net sales. Cost of sales declined in the current period as a result of favorable foreign currency effects, ongoing productivity improvements, lower commodity costs, led by packaging costs, and a reduction in other manufacturing costs. These decreases were partially offset by higher costs associated with increased sales volumes. SG&A expenses declined in the current period as a result of favorable foreign currency effects and lower marketing investments, partially offset by higher logistics costs. The impact of the favorable foreign currency effects, which decreased cost of sales and SG&A expenses, totaled $14 million.
Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014
Consolidated Operations
The following table sets forth our unaudited consolidated results of operations for the six months ended June 30, 2015 and 2014:
 
For the Six Months Ended June 30,
 
 
 
 
 
2015
 
2014
 
Dollar
 
Percentage
(dollars in millions)
Dollars
 
Percent
 
Dollars
 
Percent
 
Change
 
Change
Net sales
$
3,106

 
100.0
%
 
$
3,029

 
100.0
%
 
$
77

 
3
 %
Cost of sales
1,276

 
41.1

 
1,219

 
40.2

 
57

 
5

Gross profit
1,830

 
58.9

 
1,810

 
59.8

 
20

 
1

Selling, general and administrative expenses
1,138

 
36.6

 
1,146

 
37.8

 
(8
)
 
(1
)
Income from operations
639

 
20.6

 
608

 
20.1

 
31

 
5

Provision for income taxes
208

 
6.7

 
194

 
6.4

 
14

 
7

Effective tax rate
35.6
%
 
NM

 
34.8
%
 
NM

 
NM

 
NM

Volume (BCS). Volume (BCS) increased 2% for the six months ended June 30, 2015 compared with the six months ended June 30, 2014. In the U.S. and Canada, volume grew 1%, and in Mexico and the Caribbean, volume increased 10%, compared with the year ago period. Branded CSD volume increased 2% while branded NCB volume grew 4%.

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In branded CSDs, Peñafiel grew 15% as a result of distribution gains and increased promotional activity in our Latin America Beverages segment. Squirt increased 10% due primarily to higher sales to our third-party bottlers in our Latin America Beverages segment. Schweppes increased 8% reflecting distribution gains in our seltzer water and growth in the ginger ale category. Our Core 4 brands increased 1% compared to the year ago period, driven by a 10% increase in Canada Dry partially offset by a 5% decrease in 7UP, a 4% decline in Sunkist soda and a 2% decrease in A&W. These gains were partially offset by a 4% decline in Crush. Our other CSD brands and RC Cola both declined 1%. Dr Pepper was flat in the current period.
In branded NCBs, growth was driven by Snapple, which increased 8% partially driven by product innovation. Our water category grew 8%, due to distribution gains for Bai 5 and marketing investments behind Fiji, which were partially offset by declines in Aguafiel. Hawaiian Punch was 4% higher as a result of package innovation and increased promotional activity. Clamato grew 13% due to increased promotional activity. These gains were slightly offset by declines of 4% and 2% in Mott's and our other NCB brands in total, respectively.
Net Sales. Net sales increased $77 million, or approximately 3%, for the six months ended June 30, 2015 compared with the six months ended June 30, 2014. The primary drivers of the increase were favorable product and package mix, gains in our branded volumes and favorable segment mix, partially offset by $47 million in unfavorable foreign currency translation.
Gross Profit. Gross profit increased $20 million for the six months ended June 30, 2015 compared with the six months ended June 30, 2014. Gross margin was 58.9% for the six months ended June 30, 2015 compared to the gross margin of 59.8% for the six months ended June 30, 2014. The drivers of the change in gross margin included:
Unfavorable product, package and segment mix, which decreased our gross margin by 0.8%;
Unfavorable comparison in our mark-to-market activity on commodity derivative contracts, which decreased our gross margin by 0.5%;
Unfavorable foreign currency effects, which decreased our gross margin by 0.4%;
Ongoing productivity improvements, which increased our gross margin by 0.5%;
Lower commodity costs, led by packaging and sweeteners, and net of the change in our LIFO inventory provision, which increased our gross margin by 0.3%.
The unfavorable mark-to-market activity on commodity derivative contracts for the six months ended June 30, 2015 was $4 million in unrealized losses versus $11 million in unrealized gains in the year ago period.
Income from Operations. Income from operations increased $31 million to $639 million for the six months ended June 30, 2015 due primarily to the increase in gross profit and decreases in SG&A expenses. Income from operations for the six months ended June 30, 2015 was reduced by 2% for foreign currency translation.
Provision for Income Taxes. The effective tax rates for the six months ended June 30, 2015 and 2014 were 35.6% and 34.8%, respectively. The prior year provision for income taxes included an income tax benefit of $2 million from revaluing our U.S. deferred tax liabilities due to the favorable impact of a New York State law change.

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Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the six months ended June 30, 2015 and 2014, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:
 
For the Six Months Ended
 
June 30,
(in millions)
2015
 
2014
Segment Results — Net sales
 
 
 
Beverage Concentrates
$
615

 
$
608

Packaged Beverages
2,241

 
2,160

Latin America Beverages
250

 
261

Net sales
$
3,106

 
$
3,029

 
 
 
 
 
For the Six Months Ended
 
June 30,
(in millions)
2015
 
2014
Segment Results — SOP
 
 
 
Beverage Concentrates
$
405

 
$
388

Packaged Beverages
331

 
308

Latin America Beverages
44

 
37

Total SOP
780

 
733

Unallocated corporate costs
141

 
127

Other operating income, net

 
(2
)
Income from operations
639

 
608

Interest expense, net
54

 
52

Other expense (income), net

 
(2
)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
$
585

 
$
558

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the six months ended June 30, 2015 and 2014:
 
For the Six Months Ended
 
 
 
 
 
June 30,
 
Dollar
 
Percent
(in millions)
2015
 
2014
 
Change
 
Change
Net sales
$
615

 
$
608

 
$
7

 
1
%
SOP
405

 
388

 
17

 
4

Net Sales. Net sales increased $7 million for the six months ended June 30, 2015, compared with the six months ended June 30, 2014. The change was due to favorable mix and higher pricing, which were partially offset by a 2% reduction in concentrate case sales, higher discounts and unfavorable foreign currency translation of $5 million.
SOP. SOP increased $17 million for the six months ended June 30, 2015, compared with the six months ended June 30, 2014, primarily driven by lower SG&A expenses and an increase in net sales. The decrease in SG&A expenses was the result of $5 million in planned lower marketing investments and lower IT costs.

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Volume (BCS). Volume (BCS) was flat for the six months ended June 30, 2015 compared with the six months ended June 30, 2014. Schweppes had gains of 8% driven by distribution gains in our seltzer water and growth in the ginger ale category. Our Core 4 brands were 2% higher compared to the prior year as a result of a 9% increase in Canada Dry, partially offset by a 5% reduction in 7UP, a 3% decrease in Sunkist soda and a 4% decline in A&W. These gains were fully offset by 3% declines in both Crush and our other brands in total. Dr Pepper was flat in the current period.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the six months ended June 30, 2015 and 2014:
 
For the Six Months Ended
 
 
 
 
 
June 30,
 
Dollar
 
Percent
(in millions)
2015
 
2014
 
Change
 
Change
Net sales
$
2,241

 
$
2,160

 
$
81

 
4
%
SOP
331

 
308

 
23

 
7

Volume. Branded CSD volumes were flat for the six months ended June 30, 2015 compared with the six months ended June 30, 2014. Volume for our Core 4 brands increased 1% compared to the prior year period, led by a 14% increase in Canada Dry and a 1% increase in A&W, partially offset by a 4% decrease in 7UP and a 3% decline in Sunkist soda. Squirt increased 4%. These increases were offset by a 2% decline in our other CSD brands and a 2% decrease in Dr Pepper, driven primarily by declines in our diet products. RC Cola was flat in the current period.
Branded NCB volumes increased 5%, driven primarily by a 20% increase in our water category, due to distribution gains for Bai 5 and marketing investments behind Fiji. Snapple gained 6% partially driven by product innovation, while Hawaiian Punch increased 5% as a result of package innovation and increased promotional activity. Clamato increased 8% driven primarily by increased promotional activity. Our other NCB brands were 2% higher in the current period. These increases were partially offset by a 2% decrease in Mott's due to declines in our juice category.
Contract manufacturing decreased 1% for the six months ended June 30, 2015 compared with the six months ended June 30, 2014.
Net Sales. Net sales increased $81 million for the six months ended June 30, 2015 compared with the six months ended June 30, 2014. Net sales increased due to higher branded sales volumes and favorable product mix, partially offset by $9 million of unfavorable foreign currency translation.
SOP. SOP increased $23 million for the six months ended June 30, 2015, compared with the six months ended June 30, 2014 as a result of increases in net sales partially offset by increases in cost of sales. Cost of sales increased as a result of higher costs associated with product mix and increased branded sales volumes. These increases in our cost of sales were partially offset by ongoing productivity improvements, lower commodity costs, led by sweeteners, and a favorable comparison in our LIFO inventory provision.
LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the six months ended June 30, 2015 and 2014:
 
For the Six Months Ended
 
 
 
 
 
June 30,
 
Dollar
 
Percent
(in millions)
2015
 
2014
 
Change
 
Change
Net sales
$
250

 
$
261

 
$
(11
)
 
(4
)%
SOP
44

 
37

 
7

 
19

Volume. Sales volume increased 10% for the six months ended June 30, 2015 as compared with the six months ended June 30, 2014. The increase in sales volume was primarily driven by a 16% increase in Peñafiel as a result of distribution gains and increased promotional activity. Squirt grew by 14% as a result of increased sales to third party bottlers. Clamato grew 22% due to increased promotional activity, while 7UP increased 5%. These increases were partially offset by declines in Aguafiel and Crush of 10% each, while our other brands decreased 2%.

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Net Sales. Net sales decreased $11 million for the six months ended June 30, 2015 compared with the six months ended June 30, 2014. Net sales decreased as a result of unfavorable foreign currency translation of $34 million and unfavorable product mix, partially offset by increased sales volume.
SOP. SOP increased $7 million for the six months ended June 30, 2015 compared with the six months ended June 30, 2014, driven by decreases in cost of sales and SG&A expenses partially offset by decreases in net sales. Cost of sales declined in the current period as a result of favorable foreign currency effects, ongoing productivity improvements, lower commodity costs, led by packaging costs, a reduction in other manufacturing costs and favorable product mix. These decreases were partially offset by higher costs associated with increased sales volumes. SG&A expenses declined in the current period as a result of favorable foreign currency effects and lower marketing investments partially offset by higher logistics costs. The impact of the favorable foreign currency effects, which decreased cost of sales and SG&A expenses, totaled $22 million.
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;
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, 2014.

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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, 2014, 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 or investments in companies to further extend our geographic coverage or access to new products or processes; and
our ability to refinance $500 million of our outstanding 2.90% senior notes due January 15, 2016 (the "2016 Notes"). We intend to issue senior notes to refinance the 2016 Notes before the maturity date of the 2016 Notes.
Financing Arrangements
The following descriptions represent our available financing arrangements as of June 30, 2015. As of June 30, 2015, 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 June 30, 2015, we had no Commercial Paper outstanding. However, under this program, during the three and six months ended June 30, 2015, we had weighted average commercial paper borrowings of $91 million and $46 million, respectively. These borrowings had maturities of 90 days or less and a weighted average annual rate of 0.51% for the three and six months ended June 30, 2015.
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 London Interbank Offered Rate ("LIBOR") for a one month interest period. The adjusted LIBOR is LIBOR 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 June 30, 2015:
(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 credit 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 SEC, effective May 23, 2013, which registers an indeterminable amount of securities for future sales. As of June 30, 2015, 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, $61 million of which was utilized as of June 30, 2015 and $79 million of which remains available for use.
Credit Ratings
As of June 30, 2015, our credit ratings were as follows:
Rating Agency
Long-Term Debt Rating
Commercial Paper Rating
Outlook
Moody's
Baa1
P-2
Stable
S&P
BBB+
A-2
Stable

Our credit ratings impact our borrowing costs, access to capital markets and operating lease costs.  The rating agency ratings are not recommendations to buy, sell or hold our unsecured senior notes or commercial paper.  Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating.
Cash Management
We primarily fund our liquidity needs from cash flow from operations and cash on hand. We will use amounts available under our financing arrangements as seasonality of our operating cash flows impact short-term liquidity or our senior unsecured notes mature.

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Capital Expenditures
Capital expenditures were $42 million for the six months ended June 30, 2015. Capital expenditures were primarily related to machinery and equipment, replacement of existing cold drink equipment, IT investments and distribution fleet. In 2015, 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.
Acquisitions
We may make future acquisitions of or investments in companies to further extend our geographic coverage or access to new products or processes. Any acquisitions or investments 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 six months ended June 30, 2015 and 2014:
 
For the Six Months Ended
 
June 30,
(in millions)
2015
 
2014
Net cash provided by operating activities
$
349

 
$
438

Net cash used in investing activities
(47
)
 
(68
)
Net cash used in financing activities
(409
)
 
(388
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities decreased $89 million for the six months ended June 30, 2015, as compared to the six months ended June 30, 2014, primarily due to changes in working capital.
NET CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities for the six months ended June 30, 2015, consisted primarily of purchases of property, plant and equipment of $42 million and the purchase of cost method investment in an allied brand for $15 million.
NET CASH USED IN FINANCING ACTIVITIES
Cash used in financing activities for the six months ended June 30, 2015, consisted primarily of stock repurchases of $251 million and dividend payments of $172 million. Net cash used in financing activities for the six months ended June 30, 2014 consisted primarily of stock repurchases of $206 million, dividend payments of $157 million and $50 million paid for shares not yet received. 
Cash and Cash Equivalents
Cash and cash equivalents decreased $110 million since December 31, 2014 to $127 million as of June 30, 2015 primarily driven by returns to our stockholders, capital expenditures and a cost method investment, partially offset by operating cash flows.
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 $45 million and $51 million as of June 30, 2015 and December 31, 2014, respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.

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Total Stockholder Returns
Dividends Declared
Our Board declared dividends aggregating $0.96 and $0.82 per share on outstanding common stock during the six months ended June 30, 2015 and 2014, respectively.
Dividends Paid
We paid dividends of $172 million and $157 million during the six months ended June 30, 2015 and 2014, respectively.
Common Stock Repurchases
The Board has authorized us to repurchase an aggregate amount of up to $4 billion of our outstanding common stock. For the six months ended June 30, 2015 and 2014, we repurchased and retired 3.2 million and 3.9 million shares of common stock, respectively, valued at approximately $251 million and $206 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 June 30, 2015, that have significantly changed from the amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014:
 
Payments Due in Year
 (in millions)
Total
 
2015
 
2016
 
2017
 
2018
 
2019
 
After 2019
Purchase obligations (1)
$
796

 
$
384

 
$
242

 
$
55

 
$
48

 
$
42

 
$
25

Interest payments
711

 
47

 
90

 
89

 
68

 
42

 
375

Total
$
1,507

 
$
431

 
$
332

 
$
144

 
$
116

 
$
84

 
$
400

____________________________
(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 June 30, 2015, 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, 2014.
OFF-BALANCE SHEET ARRANGEMENTS
We currently participate in three multi-employer pension plans. In the event that we withdraw from participation in one of these plans, the plan will ultimately assess us a withdrawal liability for exiting the plan, and U.S. GAAP would require us to record the withdrawal charge as an expense in our consolidated statements of income and as a liability on our consolidated balance sheets once the multi-employer pension withdrawal charge is probable and estimable.
There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our results of operations, financial condition, liquidity, capital expenditures or capital resources other than letters of credit outstanding. Refer to Note 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 June 30, 2015, 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 June 30, 2015, we had derivative contracts outstanding with a notional value of $16 million maturing at various dates through December 15, 2015.
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 June 30, 2015, the carrying value of our fixed-rate debt, excluding capital lease obligations, was $2,499 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 June 30, 2015:
Sensitivity Analysis
Hypothetical Change in Interest Rates
 
Annual Impact to Interest Expense
 
Change in Fair Value (2)
1-percent decrease(1)
 
$

 
$57 million increase
1-percent increase
 
$7 million increase

 
$51 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. As LIBOR would not fall below zero, we did not calculate the hypothetical change in the interest rate.
(2) The change in fair value would impact the carrying value of our unsecured senior notes with an 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 June 30, 2015 was a net liability of $22 million.
As of June 30, 2015, 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 $5 million to our income from operations for the remainder of 2015.

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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 June 30, 2015, 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 SEC'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 ended June 30, 2015 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 15 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, 2014.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
We repurchased approximately 1.5 million shares of our common stock, valued at approximately $116 million, in the second quarter of 2015. Our share repurchase activity, on a monthly basis, for the quarter ended June 30, 2015 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
 
Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs (1)
April 1, 2015 – April 30, 2015
 
892

 
$
78.53

 
892

 
$
967,066

May 1, 2015 – May 31, 2015
 
385

 
76.08

 
385

 
937,753

June 1, 2015 – June 30, 2015
 
228

 
74.22

 
228

 
920,795

For the quarter ended June 30, 2015
 
1,505

 
77.25

 
1,505

 
 
____________________________
(1)
The Board has authorized us to repurchase an aggregate amount of up to $4,000 million of our outstanding common stock. This column discloses the dollar value of shares available to be repurchased pursuant to these programs during the indicated time periods. As of June 30, 2015, there was a remaining balance of $921 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
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).
4.12
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).
4.13
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).
4.14
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).
4.15
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).

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4.16
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).
4.17
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).
4.18
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 June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014, (iii) Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014, (v) Condensed Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2015, 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: July 23, 2015
 
 
 
 


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