|
|
ITEM 1.
|
Financial Statements (Unaudited)
|
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
For the
Three Months Ended March 31, 2017 and 2016
(
Unaudited
)
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
Three Months Ended
|
|
|
March 31,
|
(in millions, except per share data)
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
1,510
|
|
|
$
|
1,487
|
|
Cost of sales
|
|
607
|
|
|
602
|
|
Gross profit
|
|
903
|
|
|
885
|
|
Selling, general and administrative expenses
|
|
621
|
|
|
546
|
|
Depreciation and amortization
|
|
25
|
|
|
26
|
|
Other operating income, net
|
|
(28
|
)
|
|
—
|
|
Income from operations
|
|
285
|
|
|
313
|
|
Interest expense
|
|
40
|
|
|
33
|
|
Interest income
|
|
(1
|
)
|
|
—
|
|
Other income, net
|
|
(2
|
)
|
|
(1
|
)
|
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
|
|
248
|
|
|
281
|
|
Provision for income taxes
|
|
71
|
|
|
99
|
|
Income before equity in earnings of unconsolidated subsidiaries
|
|
177
|
|
|
182
|
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
|
—
|
|
|
—
|
|
Net income
|
|
$
|
177
|
|
|
$
|
182
|
|
Earnings per common share:
|
|
|
|
|
Basic
|
|
$
|
0.97
|
|
|
$
|
0.97
|
|
Diluted
|
|
0.96
|
|
|
0.96
|
|
Weighted average common shares outstanding:
|
|
|
|
|
Basic
|
|
183.4
|
|
|
187.6
|
|
Diluted
|
|
184.6
|
|
|
189.0
|
|
Cash dividends declared per common share
|
|
$
|
0.58
|
|
|
$
|
0.53
|
|
The accompanying notes are an integral part of these
unaudited condensed consolidated
financial statements.
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For the
Three Months Ended March 31, 2017 and 2016
(
Unaudited
)
|
|
|
|
|
|
|
|
|
|
For the
|
|
Three Months Ended
|
|
March 31,
|
(in millions)
|
2017
|
|
2016
|
Comprehensive income
|
$
|
200
|
|
|
$
|
190
|
|
The accompanying notes are an integral part of these
unaudited condensed consolidated
financial statements.
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
As of
March 31, 2017 and December 31, 2016
(
Unaudited
)
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions, except share and per share data)
|
2017
|
|
2016
|
Assets
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
73
|
|
|
$
|
1,787
|
|
Restricted cash and restricted cash equivalents
|
87
|
|
|
—
|
|
Accounts receivable:
|
|
|
|
Trade, net
|
606
|
|
|
595
|
|
Other
|
55
|
|
|
51
|
|
Inventories
|
246
|
|
|
202
|
|
Prepaid expenses and other current assets
|
180
|
|
|
101
|
|
Total current assets
|
1,247
|
|
|
2,736
|
|
Property, plant and equipment, net
|
1,125
|
|
|
1,138
|
|
Investments in unconsolidated subsidiaries
|
23
|
|
|
23
|
|
Goodwill
|
3,560
|
|
|
2,993
|
|
Other intangible assets, net
|
3,784
|
|
|
2,656
|
|
Other non-current assets
|
206
|
|
|
183
|
|
Non-current deferred tax assets
|
63
|
|
|
62
|
|
Total assets
|
$
|
10,008
|
|
|
$
|
9,791
|
|
Liabilities and Stockholders' Equity
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
353
|
|
|
$
|
303
|
|
Deferred revenue
|
64
|
|
|
64
|
|
Short-term borrowings and current portion of long-term obligations
|
10
|
|
|
10
|
|
Income taxes payable
|
24
|
|
|
4
|
|
Other current liabilities
|
696
|
|
|
670
|
|
Total current liabilities
|
1,147
|
|
|
1,051
|
|
Long-term obligations
|
4,467
|
|
|
4,468
|
|
Non-current deferred tax liabilities
|
842
|
|
|
812
|
|
Non-current deferred revenue
|
1,101
|
|
|
1,117
|
|
Other non-current liabilities
|
258
|
|
|
209
|
|
Total liabilities
|
7,815
|
|
|
7,657
|
|
Commitments and contingencies
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued
|
—
|
|
|
—
|
|
Common stock, $0.01 par value, 800,000,000 shares authorized, 183,795,277 and 183,119,843 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
|
2
|
|
|
2
|
|
Additional paid-in capital
|
61
|
|
|
95
|
|
Retained earnings
|
2,336
|
|
|
2,266
|
|
Accumulated other comprehensive loss
|
(206
|
)
|
|
(229
|
)
|
Total stockholders' equity
|
2,193
|
|
|
2,134
|
|
Total liabilities and stockholders' equity
|
$
|
10,008
|
|
|
$
|
9,791
|
|
The accompanying notes are an integral part of these
unaudited condensed consolidated
financial statements.
DR PEPPER SNAPPLE GROUP, INC
.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the
Three Months Ended March 31, 2017 and 2016
(
Unaudited
)
|
|
|
|
|
|
|
|
|
|
For the
|
|
Three Months Ended
|
|
March 31,
|
(in millions)
|
2017
|
|
2016
|
Operating activities:
|
|
|
|
Net income
|
$
|
177
|
|
|
$
|
182
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation expense
|
49
|
|
|
48
|
|
Amortization expense
|
11
|
|
|
8
|
|
Amortization of deferred revenue
|
(16
|
)
|
|
(16
|
)
|
Employee stock-based compensation expense
|
6
|
|
|
11
|
|
Deferred income taxes
|
30
|
|
|
16
|
|
Gain on step acquisition of unconsolidated subsidiaries
|
(28
|
)
|
|
—
|
|
Unrealized gains on economic hedges
|
(5
|
)
|
|
(7
|
)
|
Other, net
|
4
|
|
|
2
|
|
Changes in assets and liabilities, net of effects of acquisition:
|
|
|
|
Trade accounts receivable
|
18
|
|
|
(5
|
)
|
Other accounts receivable
|
5
|
|
|
1
|
|
Inventories
|
(16
|
)
|
|
(25
|
)
|
Other current and non-current assets
|
(85
|
)
|
|
(82
|
)
|
Other current and non-current liabilities
|
(92
|
)
|
|
(70
|
)
|
Trade accounts payable
|
19
|
|
|
81
|
|
Income taxes payable
|
20
|
|
|
53
|
|
Net cash provided by operating activities
|
97
|
|
|
197
|
|
Investing activities:
|
|
|
|
Acquisition of business
|
(1,548
|
)
|
|
—
|
|
Cash acquired in step acquisition of unconsolidated subsidiaries
|
3
|
|
|
—
|
|
Purchase of property, plant and equipment
|
(16
|
)
|
|
(27
|
)
|
Purchase of intangible assets
|
(1
|
)
|
|
—
|
|
Investment in unconsolidated subsidiaries
|
(1
|
)
|
|
(6
|
)
|
Proceeds from disposals of property, plant and equipment
|
1
|
|
|
1
|
|
Other, net
|
(7
|
)
|
|
(8
|
)
|
Net cash used in investing activities
|
(1,569
|
)
|
|
(40
|
)
|
Financing activities:
|
|
|
|
Repayment of senior unsecured notes
|
—
|
|
|
(500
|
)
|
Repurchase of shares of common stock
|
(28
|
)
|
|
(179
|
)
|
Dividends paid
|
(97
|
)
|
|
(90
|
)
|
Tax withholdings related to net share settlements of certain stock awards
|
(30
|
)
|
|
(31
|
)
|
Proceeds from stock options exercised
|
17
|
|
|
7
|
|
Deferred financing charges paid
|
(1
|
)
|
|
—
|
|
Capital lease payments
|
(3
|
)
|
|
(2
|
)
|
Net cash used in financing activities
|
(142
|
)
|
|
(795
|
)
|
Cash, cash equivalents, restricted cash and restricted cash equivalents — net change from:
|
|
|
|
Operating, investing and financing activities
|
(1,614
|
)
|
|
(638
|
)
|
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
|
3
|
|
|
2
|
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
|
1,787
|
|
|
911
|
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
|
$
|
176
|
|
|
$
|
275
|
|
See Note
14
for supplemental cash flow information.
The accompanying notes are an integral part of these
unaudited condensed consolidated
financial statements.
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the
Three Months
Ended
March 31, 2017
(
Unaudited
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
Other
|
|
|
|
Issued
|
|
Paid-In
|
|
Retained
|
|
Comprehensive
|
|
Total
|
(in millions, except per share data)
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Loss
|
|
Equity
|
Balance as of January 1, 2017
|
183.1
|
|
|
$
|
2
|
|
|
$
|
95
|
|
|
$
|
2,266
|
|
|
$
|
(229
|
)
|
|
$
|
2,134
|
|
Shares issued under employee stock-based compensation plans and other
|
1.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
177
|
|
|
—
|
|
|
177
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
23
|
|
Dividends declared, $0.58 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(107
|
)
|
|
—
|
|
|
(107
|
)
|
Stock options exercised and stock-based compensation
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
Common stock repurchases
|
(0.3
|
)
|
|
—
|
|
|
(28
|
)
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
Balance as of March 31, 2017
|
183.8
|
|
|
$
|
2
|
|
|
$
|
61
|
|
|
$
|
2,336
|
|
|
$
|
(206
|
)
|
|
$
|
2,193
|
|
The accompanying notes are an integral part of these
unaudited condensed consolidated
financial statements.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2016
("Annual Report").
PRINCIPLES OF CONSOLIDATION
DPS
consolidates all wholly owned subsidiaries. The
Company
uses the equity method to account for investments in companies if the investment provides the
Company
with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income includes DPS' proportionate share of the net income or loss of these companies. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.
The
Company
is also required to consolidate entities that are variable interest entities (“
VIE
s”) of which
DPS
is the primary beneficiary. Judgments are made in assessing whether the
Company
is the primary beneficiary, including determination of the activities that most significantly impact the
VIE
’s economic performance.
The
Company
eliminates from its financial results all intercompany transactions between entities included in the
unaudited condensed consolidated financial statements
and the intercompany transactions with its equity method investees.
USE OF ESTIMATES
The process of preparing
DPS
'
unaudited condensed consolidated
financial statements in conformity with
U.S. GAAP
requires the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the
Company
believes to be reasonable under the circumstances. These estimates and judgments are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates.
RECLASSIFICATIONS
Unrealized gains and losses on derivatives classified as economic hedges have been reclassified from other, net to the unrealized gains on economic hedges caption within the operating activities section in the
unaudited Condensed Consolidated
Statements of Cash Flows for the prior period to conform to the current year's presentation, with no impact to total cash provided by (used in) operating, investing or financing activities.
Excess tax benefit on stock-based compensation in the
unaudited Condensed Consolidated
Statement of Cash Flows has been reclassified from financing activities to other, net within operating activities for the prior period to conform to the current year's presentation as a result of the adoption of Accounting Standards Update ("
ASU
") 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting
("ASU 2016-09"). See Recently Adopted Provisions of U.S. GAAP below for further details on the impact of the adoption of ASU 2016-09 on the Company's financial statements.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective in 2018
In May 2014, the Financial Accounting Standards Board ("
FASB
") issued
ASU
2014-09,
Revenue from Contracts with Customers (Topic 606)
("
ASU 2014-09
"). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in
U.S. GAAP
. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.
ASU 2014-09
provides alternative methods of initial adoption.
In August 2015, the FASB issued
ASU 2015-14
,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which defers the effective date of
ASU 2014-09
by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date. In March 2016, the
FASB
issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, which clarifies the implementation guidance on principal versus agent considerations for the new model. In April 2016, the
FASB
issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which clarifies the implementation guidance related to identifying performance obligations and licensing for the new model. In May 2016, the
FASB
issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which improves guidance on assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. These updates are effective concurrently with Topic 606 (ASU 2014-09).
At this point in time, the Company intends to adopt the above standards using the modified retrospective approach for the quarter ending March 31, 2018. In preparation for the Company's adoption of the new standard in the quarter ending March 31, 2018, management assembled a project management team, which has obtained representative samples of contracts and other forms of agreements with our customers and is evaluating the provisions contained within those documents based on the new guidance. While the Company does not expect this change to have a material impact on the Company's results of operations, financial position and cash flows once implemented on an annual basis, the Company does expect that it could have an impact on its net sales in interim periods due to timing. The Company is still evaluating the disclosure requirements under these standards. As the Company completes its overall evaluation, the Company is also identifying and preparing to implement changes to its accounting policies, practices and controls to support the new standards.
In March 2017, the
FASB
issued ASU 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
("ASU 2017-07"). The ASU requires employers who offer defined benefit pension plans or other post-retirement benefit plans to report the service cost component within the same income statement caption as other compensation costs arising from services rendered by employees during the period. The ASU also requires the other components of net periodic benefit cost to be presented separately from the service cost component, in a caption outside of a subtotal of income from operations. Additionally, the ASU provides that only the service cost component is eligible for capitalization. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The standard requires retrospective adoption of the presentation of the components of net periodic benefit costs and prospective application of the capitalization of the service cost component in assets. The Company is currently evaluating the impact that ASU 2017-07 will have on the consolidated financial statements.
Effective in 2019
In February 2016, the
FASB
issued ASU 2016-02,
Leases (Topic 842)
("ASU 2016-02"). The ASU replaces the prior lease accounting guidance in its entirety. The underlying principle of the new standard is the recognition of lease assets and lease liabilities by lessees for substantially all leases, with an exception for leases with terms of less than twelve months. The standard also requires additional quantitative and qualitative disclosures. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The standard requires a modified retrospective approach, which includes several optional practical expedients. The
Company
does not intend to early adopt the standard. The Company has assembled a project management team and is in the early stages of evaluation. The Company anticipates the impact of the standard to be significant to its Consolidated Balance Sheet due to the amount of the Company's lease commitments. The Company is currently evaluating the other impacts that ASU 2016-02 will have on the consolidated financial statements.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
RECENTLY ADOPTED PROVISIONS OF U.S. GAAP
As of January 1, 2017, the Company adopted ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. This ASU requires inventories measured under any methods other than last-in, first-out ("LIFO") or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Subsequent measurement of inventory using LIFO or the retail inventory method is unchanged by this ASU. The adoption of the ASU did not have a material impact on the Company's financial statements.
As of January 1, 2017, the Company adopted ASU 2016-09, which is part of the FASB's simplification initiative. The new standard provides for changes to accounting for stock compensation including 1) excess tax benefits and tax deficiencies related to share based payment awards will be recognized as income tax benefit or expense in the reporting period in which they occur; 2) excess tax benefits will be classified as an operating activity in the statement of cash flow; 3) the option to elect to estimate forfeitures or account for them when they occur; and 4) an increase in the tax withholding requirements threshold to qualify for equity classification. Beginning in 2017, the primary impact of adoption was the recognition of excess tax benefits for our stock awards in the provision for income taxes rather than additional paid-in capital. Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
Adoption of the new standard resulted in the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital of
$18 million
for the three months ended March 31, 2017. The presentation of excess tax benefits on stock-based compensation was adjusted retrospectively within the
unaudited Condensed Consolidated
Statements of Cash Flows, resulting in a
$20 million
increase in net cash provided by operating activities for the three months ended March 31, 2016 with a corresponding increase to net cash used in financing activities. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented on the
unaudited Condensed Consolidated
Statements of Cash Flows as the Company has historically presented them as a financing activity.
As of January 1, 2017, the Company early adopted ASU No. 2016-18,
Statement of Cash Flows (Topic 230), Restricted Cash
("ASU 2016-18"), which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending amounts shown on the statement of cash flows. The Company elected to early adopt the provisions of ASU 2016-18 as of January 1, 2017 and has revised its
unaudited Condensed Consolidated
Statements of Cash Flows for the three-months ended March 31, 2017 and 2016 to reflect amounts described as restricted cash and restricted cash equivalents included with cash and cash equivalents in the reconciliation of beginning of period and end of period total amounts shown on the
unaudited Condensed Consolidated
Statements of Cash Flow. The adoption had no impact on amounts presented in the
unaudited Condensed Consolidated
Statements of Cash Flows for the three months ended March 31, 2016. Refer to Note 14 for the reconciliation of cash and cash equivalents and restricted cash as presented on the
unaudited Condensed Consolidated
Balance Sheets to the amounts as shown on the
unaudited Condensed Consolidated
Statements of Cash Flows.
2
.
Acquisitions
BAI BRANDS MERGER
Description of the Transaction
On November 21, 2016, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Bai Brands LLC ("Bai Brands"), pursuant to which we agreed to acquire Bai Brands for a cash purchase price of
$1.7 billion
, subject to certain adjustments in the Merger Agreement (the "Bai Brands Merger"). The acquisition of Bai Brands will further enable the Company to meet growing consumer demand for better-for-you beverages, as Bai Brands is positioned for expanding growth in key beverage segments.
On
January 31, 2017
, the Company funded the Bai Brands Merger with the net proceeds from the senior unsecured notes issued in December 2016 and cash on hand. In order to complete the Bai Brands Merger, the Company paid
$1,548 million
, net of the Company's previous ownership interest, in exchange for the remaining ownership interests and seller transaction costs. Additionally,
$103 million
was held back and placed in escrow.
As a result of the Bai Brands Merger, our existing
2.63%
equity interest in Bai Brands was remeasured to fair value of
$43 million
, which resulted in a gain of
$28 million
that was recognized in the first quarter of 2017 and included in other operating income, net.
Two transactions related to the merger were recognized separately from the acquisition of assets and assumptions of liabilities of Bai Brands:
|
|
•
|
The Company paid certain seller transaction costs, which included
$2 million
to reimburse Bai Brands for payments made on behalf of the Company for buyer acquisition-related costs, which were recorded as selling, general and administrative ("SG&A") expenses. The remainder of the seller transaction costs paid by the Company were accounted for by the Company as part of the consideration transferred.
|
|
|
•
|
Bai Brands had an executory contract as of
January 31, 2017
, which compensated certain counterparties with Profit Interest Units from Bai Brands (the “Predecessor PIUs”). The Predecessor PIUs were based upon the counterparties completing service requirements and various performance criteria. As a result of the Bai Brands Merger, these Predecessor PIUs have fully vested and were converted into cash as of
January 31, 2017
based upon the consideration paid by the Company to acquire Bai Brands. The cash was placed in escrow and will be released from escrow to the counterparties on certain anniversary dates as long as the counterparties are not in breach of the executory contract. Although none of the costs of these benefits have been paid by the Company, DPSG will record SG&A expenses for the deferred compensation amounts payable to these counterparties by Bai Brands. As of
March 31, 2017
, the total unrecognized compensation cost is
$13 million
and the period over which these costs are expected to be recognized is
18 months
.
|
The Company’s preliminary purchase price was
$1,649 million
, net of the Company's previous ownership interest.
The components of the preliminary purchase price are
presented below:
|
|
|
|
|
(in millions)
|
Preliminary Purchase Price
|
Cash paid to consummate Bai Brands Merger, net of the Company's previous ownership interest
|
$
|
1,548
|
|
Holdback placed in escrow
|
103
|
|
Less: Seller transaction costs reimbursed to Bai Brands for payments made on behalf of the Company for its acquisition-related costs
|
(2
|
)
|
Preliminary Purchase Price - Bai Brands
(1)
|
$
|
1,649
|
|
___________________________
|
|
(1)
|
The preliminary purchase price excludes the impact of the Company's pre-existing ownership interest.
|
Acquisition and integration-related expenses of
$19 million
were recognized during the three months ended March 31, 2017 and included in SG&A expenses.
Escrow/Holdback Liability
The
$103 million
holdback placed in escrow is made up of two components:
|
|
•
|
$90 million
, which will be held in escrow to secure indemnification obligations of the sellers relating to the accuracy of representations and warranties and a working capital adjustment to be settled 90 days after the acquisition date. As of January 31, 2018,
$80 million
less any working capital adjustment 90 days after the acquisition date will be released. The remaining
$10 million
will be released approximately 4 years after the acquisition date, subject to certain administrative conditions, and
|
|
|
•
|
$13 million
of unrecognized compensation associated with the Predecessor PIUs related to the performance of certain counterparties, which will be held in escrow and released over the next
18 months
.
|
The acquisition consideration held in escrow does not meet the definition of contingent consideration as provided under U.S. GAAP. The amount held in escrow was included in the preliminary purchase price as representations and warranties were expected to be valid as of the acquisition date. The escrow will be included in restricted cash along with a corresponding amount in the liability section of the
unaudited Condensed Consolidated
Balance Sheets, which will be allocated between other current liabilities and other non-current liabilities.
Refer to Note 14 for additional information
on location of the restricted cash on the
unaudited Condensed Consolidated
Balance Sheets.
Preliminary Purchase Price Allocation
The following table summarizes the preliminary allocation of the fair value of the assets acquired and liabilities assumed by major class for the Bai Brands Merger:
|
|
|
|
|
|
|
|
(in millions)
|
|
Fair Value
|
|
Useful Life
|
Property, plant & equipment
|
|
$
|
4
|
|
|
5 - 10 years
|
Customer relationships
|
|
30
|
|
|
7 years
|
Non-compete agreements
|
|
22
|
|
|
2 - 4 years
|
Brands
|
|
1,073
|
|
|
Indefinite
|
Goodwill
|
|
565
|
|
|
Indefinite
|
Assumed liabilities, net of acquired assets
|
|
(4
|
)
|
|
N/A
|
Total
|
|
$
|
1,690
|
|
|
|
The acquisition was accounted for as a business combination, and the identifiable assets acquired and liabilities assumed were recorded at their estimated fair values at the date of acquisition. We have completed our preliminary valuation to determine the fair value of the identifiable assets acquired and liabilities assumed. The fair values of the assets acquired were determined using various valuation techniques, including an income approach. The fair value measurements were primarily based on significant inputs that are not directly observable in the market and are considered Level 3 under the fair value measurements and disclosure framework. Key assumptions include cash flow projections of Bai Brands and the discount rate applied to those cash flows. The excess of the purchase price over the estimated fair values was recorded as goodwill.
In connection with this acquisition, the Company recorded goodwill of
$565 million
, which is deductible for tax purposes. The goodwill recognized was attributable to certain tax benefits the Company will realize over time, Bai Brands' management team and growth opportunities in a “better-for-you” beverage segment.
The Company recorded
$34 million
for the fair value of contingent liabilities assumed upon acquisition primarily related to existing manufacturing contracts. The fair value of the contingent liabilities was determined using discounted cash flows on expected future payments related to these contracts. The contingent liabilities will be evaluated each reporting period based on events and circumstances which may impact future payments under these contracts, and any changes in fair value will be recorded in the Company's unaudited Condensed Consolidated Statements of Income.
Pro Forma Information
The Company’s acquisition of Bai Brands is strategically significant to the future growth prospects of the Company; however at the time of the acquisition, the historical results of Bai Brands were immaterial to the Company’s consolidated financial results. Assuming the results of Bai Brands had been included in operations beginning on January 1, 2016, the estimated pro forma net operating revenues of the Company for the three months ended March 31, 2017 and 2016 would have been approximately
$1,512 million
and
$1,496 million
, respectively. The estimated pro forma net income, which includes the alignment of accounting policies, the effect of fair value adjustments related to the Merger, the associated tax effects and the impact of the additional debt to finance the Bai Brands Merger, for the three months ended March 31, 2017 and 2016 would have been approximately
$166 million
and
$170 million
, respectively. This estimated pro forma information is not necessarily indicative of the results that actually would have occurred had the Bai Brands Merger been completed on the date indicated or the future operating results.
Actual Results of Bai Brands
During the three months ended March 31, 2017, Bai Brands had net sales and net loss of
$35 million
and
$5 million
, respectively, since the acquisition date. These results do not reflect the consolidation impact of the Company's acquisition of Bai Brands.
The following table reconciles the net sales and net loss of Bai Brands since the acquisition date to the impact of Bai Brands to the Company's consolidated results of operations:
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions)
|
2017
|
Net sales - Bai Brands
|
$
|
35
|
|
Intercompany sales to Packaged Beverages Excluding Bai
|
(24
|
)
|
Incremental impact to consolidated net sales
|
$
|
11
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions)
|
2017
|
Net loss - Bai Brands
|
$
|
(5
|
)
|
Impact of intercompany activity with Packaged Beverages Excluding Bai
(1)
|
(6
|
)
|
Incremental impact to consolidated net income
|
$
|
(11
|
)
|
___________________________
|
|
(1)
|
Impact of intercompany activity includes the elimination of intercompany net sales and the deferral of gross profit recognition on shipments of product still in Packaged Beverages Excluding Bai as of March 31, 2017, net of tax.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
2017
|
|
2016
|
Raw materials
|
$
|
80
|
|
|
$
|
77
|
|
Spare parts
|
21
|
|
|
22
|
|
Work in process
|
6
|
|
|
5
|
|
Finished goods
|
171
|
|
|
130
|
|
Inventories at first in first out cost
|
278
|
|
|
234
|
|
Reduction to LIFO cost
|
(32
|
)
|
|
(32
|
)
|
Inventories
|
$
|
246
|
|
|
$
|
202
|
|
Approximately
$197 million
and
$158 million
of the
Company
's inventory was accounted for under the
LIFO
method of accounting as of
March 31, 2017 and December 31, 2016
, respectively. The reduction to
LIFO
cost reflects the excess of the current cost of
LIFO
inventories as of
March 31, 2017 and December 31, 2016
, over the amount at which these inventories were valued on the
unaudited Condensed Consolidated
Balance Sheets. For the
three months ended March 31, 2017
, there was
no
LIFO
inventory liquidation. For the three months ended
March 31, 2016
,
LIFO
inventory liquidation increased the Company's gross profit by
$1 million
.
|
|
4
.
|
Prepaid Expenses and Other Current Assets and Other Current Liabilities
|
The table below details the components of prepaid expenses and other current assets and other current liabilities:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
2017
|
|
2016
|
Prepaid expenses and other current assets:
|
|
|
|
Customer incentive programs
|
$
|
82
|
|
|
$
|
24
|
|
Derivative instruments
|
17
|
|
|
19
|
|
Prepaid income taxes
|
4
|
|
|
18
|
|
Current assets held for sale
|
1
|
|
|
1
|
|
Other
|
76
|
|
|
39
|
|
Total prepaid expenses and other current assets
|
$
|
180
|
|
|
$
|
101
|
|
Other current liabilities:
|
|
|
|
Customer rebates and incentives
|
$
|
220
|
|
|
$
|
280
|
|
Accrued compensation
|
76
|
|
|
134
|
|
Insurance liability
|
39
|
|
|
36
|
|
Interest accrual
|
53
|
|
|
24
|
|
Dividends payable
|
107
|
|
|
97
|
|
Derivative instruments
|
8
|
|
|
2
|
|
Holdback liability to former Bai Brands shareholders
(1)
|
87
|
|
|
—
|
|
Other
|
106
|
|
|
97
|
|
Total other current liabilities
|
$
|
696
|
|
|
$
|
670
|
|
____________________________
|
|
(1)
|
Refer to Note 2 for additional information
on holdback liability to former Bai Brands shareholders as of
March 31,
2017
.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
|
5
.
|
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)
|
|
Bai
|
|
Latin America Beverages
|
|
Total
|
Balance as of January 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,733
|
|
|
$
|
1,222
|
|
|
$
|
189
|
|
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
3,168
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
1,733
|
|
|
1,222
|
|
|
9
|
|
|
—
|
|
|
24
|
|
|
2,988
|
|
Foreign currency impact
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Acquisition activity
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
Balance as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
1,733
|
|
|
1,222
|
|
|
189
|
|
|
—
|
|
|
29
|
|
|
3,173
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
1,733
|
|
|
1,222
|
|
|
9
|
|
|
—
|
|
|
29
|
|
|
2,993
|
|
Foreign currency impact
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Acquisition activity
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
565
|
|
|
—
|
|
|
565
|
|
Balance as of March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
1,733
|
|
|
1,222
|
|
|
189
|
|
|
565
|
|
|
31
|
|
|
3,740
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
$
|
1,733
|
|
|
$
|
1,222
|
|
|
$
|
9
|
|
|
$
|
565
|
|
|
$
|
31
|
|
|
$
|
3,560
|
|
____________________________
|
|
(1)
|
The Packaged Beverages Excluding Bai operating segment is comprised of two reporting units, the Direct Store Delivery ("
DSD
") system and the Warehouse Direct ("
WD
") system.
|
|
|
(2)
|
Goodwill was recorded to the Latin America Beverages reporting unit during 2016 as a result of the step acquisition of Industria Embotelladora de Bebidas Mexicanas and Embotelladora Mexicana de Agua, S.A. de C.V.
|
|
|
(3)
|
Goodwill was recorded to Bai during the quarter ended March 31, 2017 as a result of the Bai Brands Merger.
Refer to Note 2 for additional information
about the Bai Brands Merger.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
INTANGIBLE ASSETS OTHER THAN GOODWILL
The net carrying amounts of intangible assets other than goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Gross
|
|
Accumulated
|
|
Net
|
|
Gross
|
|
Accumulated
|
|
Net
|
(in millions)
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Brands
(1)
|
$
|
3,697
|
|
|
$
|
—
|
|
|
$
|
3,697
|
|
|
$
|
2,621
|
|
|
$
|
—
|
|
|
$
|
2,621
|
|
Distribution rights
|
28
|
|
|
—
|
|
|
28
|
|
|
27
|
|
|
—
|
|
|
27
|
|
Intangible assets with definite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(1)
|
106
|
|
|
(77
|
)
|
|
29
|
|
|
76
|
|
|
(76
|
)
|
|
—
|
|
Non-compete agreements
(1)
|
22
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Distribution rights
|
17
|
|
|
(9
|
)
|
|
8
|
|
|
16
|
|
|
(8
|
)
|
|
8
|
|
Brands
|
29
|
|
|
(29
|
)
|
|
—
|
|
|
29
|
|
|
(29
|
)
|
|
—
|
|
Bottler agreements
|
19
|
|
|
(19
|
)
|
|
—
|
|
|
19
|
|
|
(19
|
)
|
|
—
|
|
Total
|
$
|
3,918
|
|
|
$
|
(134
|
)
|
|
$
|
3,784
|
|
|
$
|
2,788
|
|
|
$
|
(132
|
)
|
|
$
|
2,656
|
|
____________________________
|
|
(1)
|
As a result of the Bai Brands Merger, the Company recorded indefinite lived brand assets of
$1,073 million
and definite lived non-compete agreements and customer relationships of
$22 million
and
$30 million
, respectively.
Refer to Note 2 for additional information
. The remaining
$3 million
increase in brands with indefinite lives is due to foreign currency translation.
|
As of
March 31, 2017
, the weighted average useful life of intangible assets with finite lives was
7 years
for customer relationships,
4 years
for non-compete arrangements,
9 years
for distribution rights and
6 years
in total. Amortization expense for intangible assets was
$2 million
and
$1 million
for the
three months ended March 31, 2017
and 2016, respectively.
Amortization expense of these intangible assets over the
remainder of 2017 and the next four years
is expected to be the following:
|
|
|
|
|
Year
|
Aggregate Amortization Expense
(in millions)
|
April 1, 2017 through December 31, 2017
|
$
|
4
|
|
2018
|
16
|
|
2019
|
13
|
|
2020
|
9
|
|
2021
|
6
|
|
IMPAIRMENT TESTING
The
Company
conducts impairment tests on goodwill and all indefinite-lived intangible assets annually or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable.
DPS
did not identify any circumstances that indicated that the carrying amount of any goodwill or any indefinite-lived intangible asset may not be recoverable as of
March 31, 2017
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
The following table summarizes the
Company
's long-term obligations:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
2017
|
|
2016
|
Senior unsecured notes
|
$
|
4,320
|
|
|
$
|
4,325
|
|
Capital lease obligations
|
157
|
|
|
153
|
|
Subtotal
|
4,477
|
|
|
4,478
|
|
Less - current portion
|
(10
|
)
|
|
(10
|
)
|
Long-term obligations
|
$
|
4,467
|
|
|
$
|
4,468
|
|
The following table summarizes the
Company
's short-term borrowings and current portion of long-term obligations:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
2017
|
|
2016
|
Commercial paper
|
$
|
—
|
|
|
$
|
—
|
|
Current portion of long-term obligations:
|
|
|
|
Capital lease obligations
|
10
|
|
|
10
|
|
Short-term borrowings and current portion of long-term obligations
|
$
|
10
|
|
|
$
|
10
|
|
SENIOR UNSECURED NOTES
The
Company
's senior unsecured notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Principal Amount
|
|
Carrying Amount
|
|
|
|
|
|
|
March 31,
|
|
March 31,
|
|
December 31,
|
Issuance
|
|
Maturity Date
|
|
Rate
|
|
2017
|
|
2017
|
|
2016
|
2018 Notes
|
|
May 1, 2018
|
|
6.82%
|
|
364
|
|
|
364
|
|
|
364
|
|
2019 Notes
|
|
January 15, 2019
|
|
2.60%
|
|
250
|
|
|
249
|
|
|
249
|
|
2020 Notes
|
|
January 15, 2020
|
|
2.00%
|
|
250
|
|
|
247
|
|
|
247
|
|
2021-A Notes
|
|
November 15, 2021
|
|
3.20%
|
|
250
|
|
|
249
|
|
|
249
|
|
2021-B Notes
|
|
November 15, 2021
|
|
2.53%
|
|
250
|
|
|
246
|
|
|
246
|
|
2022 Notes
|
|
November 15, 2022
|
|
2.70%
|
|
250
|
|
|
270
|
|
|
273
|
|
2023 Notes
|
|
December 15, 2023
|
|
3.13%
|
|
500
|
|
|
494
|
|
|
495
|
|
2025 Notes
|
|
November 15, 2025
|
|
3.40%
|
|
500
|
|
|
495
|
|
|
495
|
|
2026 Notes
|
|
September 15, 2026
|
|
2.55%
|
|
400
|
|
|
396
|
|
|
396
|
|
2027 Notes
|
|
June 15, 2027
|
|
3.43%
|
|
400
|
|
|
397
|
|
|
397
|
|
2038 Notes
|
|
May 1, 2038
|
|
7.45%
|
|
250
|
|
|
269
|
|
|
270
|
|
2045 Notes
|
|
November 15, 2045
|
|
4.50%
|
|
250
|
|
|
247
|
|
|
247
|
|
2046 Notes
|
|
December 15, 2046
|
|
4.42%
|
|
400
|
|
|
397
|
|
|
397
|
|
|
|
|
|
|
|
$
|
4,314
|
|
|
$
|
4,320
|
|
|
$
|
4,325
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
UNSECURED CREDIT AGREEMENT
In March 2017, the Company entered into a new five-year unsecured credit agreement (the "Credit Agreement"), which provides for a
$500 million
revolving line of credit (the "Revolver"). This Credit Agreement and Revolver fully replaced the Company's previous unsecured credit agreement and revolving line of credit, which was due to expire on September 25, 2017 and was terminated on March 16, 2017. There were no principal borrowings outstanding under the previous unsecured credit agreement upon termination. The Company incurred debt issuance costs of approximately
$1 million
in connection with the Credit Agreement during the
three months ended
March 31, 2017
.
Borrowings under the Revolver bear interest at a floating rate per annum based upon the alternate base rate ("ABR") or the Eurodollar rate, in each case plus an applicable margin which varies based upon the Company's debt ratings. Rates range from
0.000%
to
0.300%
for the ABR loans and from
0.805%
to
1.300%
for Eurodollar loans. The ABR is defined as the greater of (a) JPMorgan Chase Bank's prime rate, (b) the Federal Reserve Bank of New York ("NYFRB") rate, as defined below, plus
0.500%
and (c) the Adjusted LIBOR, as defined below, for a one month interest period plus
1.00%
. The NYFRB rate is the greater of (a) the federal funds effective rate or (b) the overnight bank funding rate. The Adjusted LIBOR is the London interbank offered rate for dollars, adjusted for a statutory reserve rate set by the Board of Governors of the Federal Reserve System of the United States of America.
Additionally, the Revolver is available for the issuance of letters of credit, not to exceed
$75 million
. Letters of credit will reduce, on a dollar for dollar basis, the amount available under the Revolver.
The
Credit Agreement
further provides that we may request at any time, subject to the satisfaction of certain conditions, that the aggregate commitments under the facility be increased by a total amount not to exceed
$250 million
.
The
Credit Agreement
's representations, warranties, covenants and events of default are generally customary for investment grade credit and include a financial covenant that requires the Company to maintain a ratio as provided therein of Consolidated Total Debt to Consolidated EBITDA of no more than
3.50
to
1.00
, tested quarterly. During the twelve month period following a Material Acquisition thereunder, the ratio may increase to no more than
4.00
to
1.00
. Upon the occurrence of an event of default, among other things, amounts outstanding may be accelerated and the commitments may be terminated. The Company's obligations are guaranteed by certain of the Company's direct and indirect domestic subsidiaries. The Credit Agreement has a maturity date of March 16, 2022; however, with the consent of lenders holding more than 50% of the total commitments thereunder and subject to the satisfaction of certain conditions, the Company may extend the maturity date for up to two additional one-year terms.
The following table provides amounts utilized and available under our
Revolver
as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
(in millions)
|
Amount Utilized
|
|
Balances Available
|
Revolver
|
$
|
—
|
|
|
$
|
500
|
|
Letters of credit
|
—
|
|
|
75
|
|
As of
March 31, 2017
, the
Company
was in compliance with all financial covenant requirements relating to the
Credit Agreement
.
LETTERS OF CREDIT FACILITIES
In addition to the portion of the
Revolver
reserved for issuance of letters of credit, the
Company
has incremental letters of credit facilities. Under these facilities,
$120 million
is available for the issuance of letters of credit,
$60 million
of which was utilized as of
March 31, 2017
and
$60 million
of which remains available for use.
BRIDGE FINANCING FOR BAI BRANDS MERGER
On November 21, 2016, the
Company
entered into a commitment letter for a 364-day bridge loan facility (the "Bridge Facility") in an aggregate principal amount of up to
$1,700 million
, in order to ensure that financing would be available for the Bai Brands Merger. On
January 31, 2017
, in accordance with its terms, the commitment under the Bridge Facility was automatically terminated upon the Company's funding of the Bai Brands Merger.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
SHELF REGISTRATION STATEMENT
On August 10, 2016, the Company's Board of Directors ("the Board") authorized the Company to issue up to
$2,000 million
of securities from time to time. Subsequently, the Company filed a "well-known seasoned issuer" shelf registration statement (the "Shelf") with the SEC, effective September 2, 2016, which registered an indeterminate amount of securities for future sales. On September 16, 2016, the Company issued
$400 million
of 2026 Notes under the Shelf, leaving
$1,600 million
of securities authorized for issuance under the Shelf. On November 16, 2016, the Board replenished the authorized aggregate amount of securities available to be issued by an additional
$400 million
, which raised the full authorized amount to
$2,000 million
. On December 14, 2016, the Company issued an aggregate of
$1,550 million
of 2021, 2023, 2027 and 2046 Notes. As of
March 31, 2017
,
$450 million
remained authorized to be issued under the Shelf.
7
.
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
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, t
he
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.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
INTEREST RATES
Fair Value Hedges
The
Company
is exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to changes in interest rates and manages these risks through the use of receive-fixed, pay-variable interest rate swaps. Any ineffectiveness is recorded as interest during the period incurred. The following table presents information regarding these interest rate swaps and the associated hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to the carrying value
|
($ in millions)
|
|
|
|
|
|
Method of
|
|
|
|
of long-term debt
|
|
|
Hedging
|
|
Number of
|
|
measuring
|
|
Notional
|
|
March 31,
|
|
December 31,
|
Period entered
|
|
relationship
|
|
instruments
|
|
effectiveness
|
|
value
|
|
2017
|
|
2016
|
November 2011
|
|
2019 Notes
|
|
2
|
|
Short cut method
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
November 2011
|
|
2021-A Notes
|
|
2
|
|
Short cut method
|
|
150
|
|
|
—
|
|
|
—
|
|
November 2012
|
|
2020 Notes
|
|
5
|
|
Short cut method
|
|
120
|
|
|
(2
|
)
|
|
(2
|
)
|
February 2015
|
|
2038 Notes
|
|
1
|
|
Regression
|
|
100
|
|
|
21
|
|
|
22
|
|
December 2016
|
|
2021-B Notes
|
|
2
|
|
Short cut method
|
|
250
|
|
|
(3
|
)
|
|
(2
|
)
|
December 2016
|
|
2023 Notes
|
|
2
|
|
Short cut method
|
|
150
|
|
|
(2
|
)
|
|
(1
|
)
|
January 2017
|
|
2022 Notes
(1)
|
|
4
|
|
Regression
|
|
250
|
|
|
22
|
|
|
24
|
|
|
|
|
|
|
|
|
|
$
|
1,120
|
|
|
$
|
36
|
|
|
$
|
41
|
|
____________________________
|
|
(1)
|
In October 2016, the Company de-designated the hedging relationships between the four outstanding interest rate swaps and the 2022 Notes. The Company will amortize
$25 million
into earnings over the remaining term of the 2022 Notes which represents the increase to the carrying value of the debt upon de-designation consisting of changes in fair market value of the debt, pull to par adjustments and ineffectiveness recorded under the previous hedging relationship. The Company recorded the change in the fair value of the interest rate swaps after de-designation into interest expense.
|
In January 2017, the Company re-designated the hedging relationships between the four outstanding interest rate swaps and the 2022 Notes, which were de-designated in 2016. The Company uses regression analysis to assess the prospective and retrospective effectiveness of these hedging relationships.
FOREIGN EXCHANGE
Cash Flow Hedges
The
Company
's Canadian and Mexican businesses purchase inventory through transactions denominated and settled in United States ("
U.S.
") dollars, a currency different from the functional currency of the those businesses. These inventory purchases are subject to exposure from movements in exchange rates. During the
three months ended March 31, 2017 and 2016
, the
Company
utilized foreign exchange forward contracts designated as cash flow hedges to manage the exposures resulting from changes in these foreign currency exchange rates. The intent of these foreign exchange contracts is to provide predictability in the
Company
's overall cost structure. These foreign exchange contracts, carried at fair value, have maturities between
one
and
nine months
as of
March 31, 2017
. The
Company
had outstanding foreign exchange forward contracts with notional amounts of
$69 million
and
$7 million
as of
March 31, 2017 and December 31, 2016
, respectively.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
COMMODITIES
Economic Hedges
DPS
centrally manages the exposure to volatility in the prices of certain commodities used in its production process and transportation through forward and future contracts. The intent of these contracts is to provide a certain level of predictability in the
Company
's overall cost structure. During the
three months ended March 31, 2017 and 2016
, 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
$262 million
and
$296 million
as of
March 31, 2017 and December 31, 2016
, respectively.
FAIR VALUE OF DERIVATIVE INSTRUMENTS
The following table summarizes the location of the fair value of the
Company
's derivative instruments within the
unaudited Condensed Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balance Sheet Location
|
|
March 31,
2017
|
|
December 31,
2016
|
Assets:
|
|
|
|
|
|
Derivative instruments designated as hedging instruments under U.S. GAAP:
|
|
|
|
|
|
Interest rate contracts
|
Prepaid expenses and other current assets
|
|
$
|
3
|
|
|
$
|
6
|
|
Interest rate contracts
|
Other non-current assets
|
|
30
|
|
|
21
|
|
Derivative instruments not designated as hedging instruments under U.S. GAAP:
|
|
|
|
|
|
Interest rate contracts
|
Prepaid expenses and other current assets
|
|
—
|
|
|
4
|
|
Commodity contracts
|
Prepaid expenses and other current assets
|
|
14
|
|
|
9
|
|
Interest rate contracts
|
Other non-current assets
|
|
—
|
|
|
8
|
|
Commodity contracts
|
Other non-current assets
|
|
14
|
|
|
12
|
|
Total assets
|
|
|
$
|
61
|
|
|
$
|
60
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments designated as hedging instruments under U.S. GAAP:
|
|
|
|
|
|
Interest rate contracts
|
Other current liabilities
|
|
$
|
2
|
|
|
$
|
1
|
|
Foreign exchange forward contracts
|
Other current liabilities
|
|
6
|
|
|
—
|
|
Interest rate contracts
|
Other non-current liabilities
|
|
6
|
|
|
7
|
|
Derivative instruments not designated as hedging instruments under U.S. GAAP:
|
|
|
|
|
|
Commodity contracts
|
Other current liabilities
|
|
—
|
|
|
1
|
|
Commodity contracts
|
Other non-current liabilities
|
|
2
|
|
|
—
|
|
Total liabilities
|
|
|
$
|
16
|
|
|
$
|
9
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
IMPACT OF CASH FLOW HEDGES
The following table presents the impact of derivative instruments designated as cash flow hedging instruments under
U.S. GAAP
to the
unaudited Condensed Consolidated
Statements of Income and Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized in
|
|
Amount of Loss Reclassified from AOCL into Income
|
|
Location of Loss Reclassified from AOCL into Income
|
(in millions)
|
Other Comprehensive Loss ("OCI")
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017:
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
Interest expense
|
Foreign exchange forward contracts
|
(5
|
)
|
|
—
|
|
|
Cost of sales
|
Total
|
$
|
(5
|
)
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016:
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
Interest expense
|
Foreign exchange forward contracts
|
(2
|
)
|
|
—
|
|
|
Cost of sales
|
Total
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
|
There was
no
hedge ineffectiveness recognized in earnings for the
three months ended March 31, 2017 and 2016
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
$2 million
from
AOCL
into net income.
IMPACT OF FAIR VALUE HEDGES
The following table presents the impact of derivative instruments designated as fair value hedging instruments under
U.S. GAAP
to the
unaudited Condensed Consolidated
Statements of Income:
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
Location of Gain
|
(in millions)
|
|
Recognized in Income
|
|
Recognized in Income
|
For the three months ended March 31, 2017:
|
|
|
|
|
Interest rate contracts
|
|
$
|
4
|
|
|
Interest expense
|
Total
|
|
$
|
4
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016:
|
|
|
|
|
Interest rate contracts
|
|
$
|
4
|
|
|
Interest expense
|
Total
|
|
$
|
4
|
|
|
|
For the
three months ended March 31, 2017
,
no
hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges. For the
three months ended March 31, 2016
,
$1 million
hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges.
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 March 31, 2017:
|
|
|
|
|
Commodity contracts
(1)
|
|
$
|
21
|
|
|
Cost of sales
|
Commodity contracts
(1)
|
|
(13
|
)
|
|
SG&A expenses
|
Interest rate contracts
(2)
|
|
1
|
|
|
Interest expense
|
Total
|
|
$
|
9
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016:
|
|
|
|
|
Commodity contracts
(1)
|
|
$
|
(1
|
)
|
|
Cost of sales
|
Commodity contracts
(1)
|
|
—
|
|
|
SG&A expenses
|
Total
|
|
$
|
(1
|
)
|
|
|
____________________________
|
|
(1)
|
Commodity contracts include both realized and unrealized gains and losses.
|
|
|
(2)
|
Represents gains on the interest rate contracts related to the 2022 Notes prior to re-designation of hedging relationship in January 2017.
|
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.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
8
.
Other Non-Current Assets and Other Non-Current Liabilities
The table below details the components of other non-current assets and other non-current liabilities:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
2017
|
|
2016
|
Other non-current assets:
|
|
|
|
Customer incentive programs
|
$
|
58
|
|
|
$
|
57
|
|
Marketable securities - trading
|
44
|
|
|
35
|
|
Derivative instruments
|
44
|
|
|
41
|
|
Cost method investments
(1)
|
1
|
|
|
16
|
|
Non-current restricted cash and restricted cash equivalents
(2)
|
16
|
|
|
—
|
|
Other
|
43
|
|
|
34
|
|
Total other non-current assets
|
$
|
206
|
|
|
$
|
183
|
|
Other non-current liabilities:
|
|
|
|
Long-term payables due to Mondelēz International, Inc.
|
$
|
21
|
|
|
$
|
21
|
|
Long-term pension and post-retirement liability
|
43
|
|
|
41
|
|
Insurance liability
|
66
|
|
|
67
|
|
Derivative instruments
|
8
|
|
|
7
|
|
Deferred compensation liability
|
44
|
|
|
35
|
|
Holdback liability to former Bai Brands shareholders
(2)
|
16
|
|
|
—
|
|
Acquired contingent liabilities
(2)
|
21
|
|
|
—
|
|
Other
|
39
|
|
|
38
|
|
Total other non-current liabilities
|
$
|
258
|
|
|
$
|
209
|
|
____________________________
|
|
(1)
|
Decrease in cost method investments resulted from our consummation of the Bai Brands Merger, as we had a cost method investment in Bai Brands as of
December 31,
2016
.
Refer to Note 2 for additional information
regarding the Bai Brands Merger and treatment of our previously held interest in Bai Brands.
|
|
|
(2)
|
Refer to Note 2 for additional information
on non-current restricted cash and restricted cash equivalents, the corresponding holdback liability to former Bai Brands shareholders, and the acquired contingent liabilities, as of
March 31,
2017
.
|
9
.
Income Taxes
The effective tax rates for the three months ended March 31, 2017 and 2016 were
28.6%
and
35.2%
, respectively.
For the three months ended March 31, 2017, the provision for income taxes included an income tax benefit of
$18 million
due to the adoption of ASU 2016-09.
Refer to Note 1 for additional information
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
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 under current market conditions.
U.S. GAAP
provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. The three-level hierarchy for disclosure of fair value measurements is as follows:
Level 1
- Quoted market prices in active markets for identical assets or liabilities.
Level 2
- Observable inputs such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3
- Valuations with one or more unobservable significant inputs that reflect the reporting entity's own assumptions.
RECURRING FAIR VALUE MEASUREMENTS
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
March 31, 2017 and December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
Commodity contracts
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
—
|
|
Interest rate contracts
|
—
|
|
|
33
|
|
|
—
|
|
Marketable securities - trading
|
44
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
44
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Interest rate contracts
|
—
|
|
|
8
|
|
|
—
|
|
Foreign exchange forward contracts
|
—
|
|
|
6
|
|
|
—
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
—
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
Commodity contracts
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
Interest rate contracts
|
—
|
|
|
39
|
|
|
—
|
|
Marketable securities - trading
|
35
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
35
|
|
|
$
|
60
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Interest rate contracts
|
—
|
|
|
8
|
|
|
—
|
|
Foreign exchange forward contracts
|
—
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
The fair values of marketable securities are determined using quoted market prices from daily exchange traded markets based on the closing price as of the balance sheet date and are classified as Level 1. The fair values of commodity forward and future contracts, interest rate swap contracts and foreign currency forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of commodity forward and future contracts are valued using the market approach based on observable market transactions, primarily underlying commodities futures or physical index prices, at the balance sheet date. Interest rate swap contracts are valued using models based primarily on readily observable market parameters, such as London Interbank Offered Rate forward rates, for all substantial terms of the
Company
's contracts and credit risk of the counterparties. The fair value of foreign currency forward contracts are valued using quoted forward foreign exchange prices at the reporting date. Therefore, the
Company
has categorized these contracts as Level 2.
As of
March 31, 2017 and December 31, 2016
, the
Company
did not have any assets or liabilities measured on a recurring basis without observable market values that would require a high level of judgment to determine fair value (Level 3).
There were no transfers of financial instruments between the three levels of the fair value hierarchy during the
three months ended March 31, 2017 and 2016
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
ESTIMATED FAIR VALUE OF THE COMPANY'S FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the
Company
's financial instruments that are not required to be measured at fair value in the
unaudited Condensed Consolidated
Balance Sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
March 31, 2017
|
|
December 31, 2016
|
(in millions)
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(1)
|
1
|
|
$
|
73
|
|
|
$
|
73
|
|
|
$
|
1,787
|
|
|
$
|
1,787
|
|
Restricted cash and restricted cash equivalents
(1)
|
1
|
|
103
|
|
|
103
|
|
|
—
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt – 2018 Notes
(2)
|
2
|
|
364
|
|
|
384
|
|
|
364
|
|
|
389
|
|
Long-term debt – 2019 Notes
(2)
|
2
|
|
249
|
|
|
253
|
|
|
249
|
|
|
254
|
|
Long-term debt – 2020 Notes
(2)
|
2
|
|
247
|
|
|
249
|
|
|
247
|
|
|
248
|
|
Long-term debt – 2021-A Notes
(2)
|
2
|
|
249
|
|
|
256
|
|
|
249
|
|
|
256
|
|
Long-term debt – 2021-B Notes
(2)
|
2
|
|
246
|
|
|
249
|
|
|
246
|
|
|
248
|
|
Long-term debt – 2022 Notes
(2)
|
2
|
|
270
|
|
|
247
|
|
|
273
|
|
|
247
|
|
Long-term debt – 2023 Notes
(2)
|
2
|
|
494
|
|
|
502
|
|
|
495
|
|
|
500
|
|
Long-term debt – 2025 Notes
(2)
|
2
|
|
495
|
|
|
502
|
|
|
495
|
|
|
498
|
|
Long-term debt – 2026 Notes
(2)
|
2
|
|
396
|
|
|
373
|
|
|
396
|
|
|
370
|
|
Long-term debt – 2027 Notes
(2)
|
2
|
|
397
|
|
|
399
|
|
|
397
|
|
|
398
|
|
Long-term debt – 2038 Notes
(2)
|
2
|
|
269
|
|
|
343
|
|
|
270
|
|
|
347
|
|
Long-term debt – 2045 Notes
(2)
|
2
|
|
247
|
|
|
250
|
|
|
247
|
|
|
253
|
|
Long-term debt – 2046 Notes
(2)
|
2
|
|
397
|
|
|
403
|
|
|
397
|
|
|
407
|
|
____________________________
|
|
(1)
|
Cash equivalents and restricted cash equivalents are composed of certificates of deposit, time deposits and other interest-bearing investments with original maturity dates of three months or less. Cash equivalents and restricted cash equivalents are recorded at cost, which approximates fair value.
|
|
|
(2)
|
The fair value amounts of long term debt were based on current market rates available to the
Company
. The difference between the fair value and the carrying value represents the theoretical net premium or discount that would be paid or received to retire all debt and related unamortized costs to be incurred at such date. The carrying amount includes the unamortized discounts and issuance costs on the issuance of debt and impact of interest rate swaps designated as fair value hedges and other hedge related adjustments.
Refer to Note 7 for additional information
regarding the notes subject to fair value hedges.
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
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 ("
RSU
s") and performance share units ("
PSU
s").
Stock-based compensation expense is recorded in
SG&A
expenses in the
unaudited Condensed Consolidated
Statements of Income. The components of stock-based compensation expense are presented below:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions)
|
2017
|
|
2016
|
Total stock-based compensation expense
|
$
|
6
|
|
|
$
|
11
|
|
Income tax benefit recognized in the statement of income
|
(2
|
)
|
|
(4
|
)
|
Stock-based compensation expense, net of tax
|
$
|
4
|
|
|
$
|
7
|
|
STOCK OPTIONS
The table below summarizes stock option activity for the
three months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value (in millions)
|
Outstanding as of January 1, 2017
|
1,342,921
|
|
|
$
|
70.83
|
|
|
7.93
|
|
$
|
27
|
|
Granted
|
423,745
|
|
|
94.62
|
|
|
|
|
|
Exercised
|
(324,922
|
)
|
|
51.91
|
|
|
|
|
14
|
|
Forfeited or expired
|
(5,751
|
)
|
|
88.06
|
|
|
|
|
|
Outstanding as of March 31, 2017
|
1,435,993
|
|
|
82.06
|
|
|
8.56
|
|
23
|
|
Exercisable as of March 31, 2017
|
611,415
|
|
|
69.72
|
|
|
7.60
|
|
17
|
|
As of
March 31, 2017
, there was
$8 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
1.58 years
.
RESTRICTED STOCK UNITS
The table below summarizes
RSU
activity for the
three months ended
March 31, 2017
. The fair value of
RSU
s 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, 2017
|
1,218,244
|
|
|
$
|
71.08
|
|
|
0.80
|
|
$
|
110
|
|
Granted
|
385,417
|
|
|
94.62
|
|
|
|
|
|
Vested and released
|
(608,388
|
)
|
|
57.89
|
|
|
|
|
58
|
|
Forfeited
|
(10,060
|
)
|
|
82.60
|
|
|
|
|
|
Outstanding as of March 31, 2017
|
985,213
|
|
|
88.32
|
|
|
1.53
|
|
96
|
|
As of
March 31, 2017
, there was
$64 million
of unrecognized compensation cost related to unvested
RSU
s granted under the
DPS Stock Plan
that is expected to be recognized over a weighted average period of
1.51 years
.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
During the
three months ended
March 31, 2017
,
608,388 shares
subject to previously granted
RSU
s vested. A majority of these vested
RSU
s were net share settled. The Company withheld
191,820 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
$20 million
and
$19 million
for the
three months ended March 31, 2017 and 2016
, 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
RSU
s and dividend equivalent units ("
DEUs
"). These payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of equity.
PERFORMANCE SHARE UNITS
The table below summarizes
PSU
activity for the
three months ended
March 31, 2017
. The fair value of
PSU
s 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, 2017
|
374,618
|
|
|
$
|
64.86
|
|
|
0.89
|
|
$
|
34
|
|
Granted
|
119,879
|
|
|
77.97
|
|
|
|
|
|
Performance adjustment
(1)
|
146,313
|
|
|
51.68
|
|
|
|
|
|
Vested and released
|
(292,626
|
)
|
|
51.68
|
|
|
|
|
28
|
|
Forfeited
|
(1,128
|
)
|
|
59.78
|
|
|
|
|
|
Outstanding as of March 31, 2017
|
347,056
|
|
|
69.96
|
|
|
1.74
|
|
34
|
|
____________________________
|
|
(1)
|
For
PSU
s which vested during the
three months ended
March 31, 2017
, the Company awarded additional
PSU
s, as actual results measured at the end of the performance period exceeded target performance levels.
|
As of
March 31, 2017
, there was
$14 million
of unrecognized compensation cost related to unvested
PSU
s granted under the
DPS Stock Plan
that is expected to be recognized over a weighted average period of
1.75 years
.
During the
three months ended
March 31, 2017
,
292,626 units
subject to previously granted
PSU
s vested. A majority of these vested
PSU
s were net share settled. The Company withheld
101,702 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
$10 million
and
$12 million
for the
three months ended March 31, 2017 and 2016
, 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
PSU
s and
DEUs
. These payments had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued on the vesting date and were recorded as a reduction of equity.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
12
.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities. The following table presents the basic and diluted EPS and the Company's basic and diluted shares outstanding:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions, except per share data)
|
2017
|
|
2016
|
Basic EPS:
|
|
|
|
Net income
|
$
|
177
|
|
|
$
|
182
|
|
Weighted average common shares outstanding
|
183.4
|
|
|
187.6
|
|
Earnings per common share — basic
|
$
|
0.97
|
|
|
$
|
0.97
|
|
Diluted EPS:
|
|
|
|
Net income
|
$
|
177
|
|
|
$
|
182
|
|
Weighted average common shares outstanding
|
183.4
|
|
|
187.6
|
|
Effect of dilutive securities:
|
|
|
|
Stock options
|
0.3
|
|
|
0.3
|
|
RSUs
|
0.7
|
|
|
0.9
|
|
PSUs
|
0.2
|
|
|
0.2
|
|
Weighted average common shares outstanding and common stock equivalents
|
184.6
|
|
|
189.0
|
|
Earnings per common share — diluted
|
$
|
0.96
|
|
|
$
|
0.96
|
|
Stock options,
RSU
s,
PSU
s and
DEUs
totaling
0.5 million
and
0.2 million
shares were excluded from the diluted weighted average shares outstanding for the
three months ended March 31, 2017
and 2016, 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
March 31, 2017
, there were
30,534
DEUs
, which will vest at the time that the underlying
RSU
or
PSU
vests.
Through 2016, the
Company
's Board has authorized a total aggregate share repurchase plan of
$5 billion
. The Company repurchased and retired
0.3 million
shares of common stock valued at approximately
$28 million
and
2.0 million
shares of common stock valued at approximately
$179 million
for the
three months ended March 31, 2017
and 2016, respectively. These amounts were recorded as a reduction of equity in the
unaudited Condensed Consolidated
Statement of Changes in Stockholders' Equity. As of
March 31, 2017
,
$1,104 million
remains available for share repurchases under the Board's authorization.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
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 January 1, 2016
|
$
|
(125
|
)
|
|
$
|
(36
|
)
|
|
$
|
(34
|
)
|
|
$
|
(195
|
)
|
OCI before reclassifications
|
(39
|
)
|
|
(5
|
)
|
|
—
|
|
|
(44
|
)
|
Amounts reclassified from AOCL
|
—
|
|
|
4
|
|
|
6
|
|
|
10
|
|
Net current year OCI
|
(39
|
)
|
|
(1
|
)
|
|
6
|
|
|
(34
|
)
|
Balance as of December 31, 2016
|
(164
|
)
|
|
(37
|
)
|
|
(28
|
)
|
|
(229
|
)
|
OCI before reclassifications
|
25
|
|
|
(1
|
)
|
|
(3
|
)
|
|
21
|
|
Amounts reclassified from AOCL
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
Net current year OCI
|
25
|
|
|
—
|
|
|
(2
|
)
|
|
23
|
|
Balance as of March 31, 2017
|
$
|
(139
|
)
|
|
$
|
(37
|
)
|
|
$
|
(30
|
)
|
|
$
|
(206
|
)
|
The following table presents the amount of loss reclassified from
AOCL
into the
unaudited Condensed Consolidated
Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions)
|
Location of Loss Reclassified from AOCL into Income
|
|
2017
|
|
2016
|
Loss on cash flow hedges:
|
|
|
|
|
|
Interest rate contracts
|
Interest expense
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
Foreign exchange forward contracts
|
Cost of sales
|
|
—
|
|
|
—
|
|
Total
|
|
|
(2
|
)
|
|
(2
|
)
|
Income tax benefit
|
|
|
(1
|
)
|
|
(1
|
)
|
Total
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
Defined benefit pension and postretirement plan items:
|
|
|
|
|
|
Amortization of actuarial losses, net
|
SG&A expenses
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
Total
|
|
|
(1
|
)
|
|
(1
|
)
|
Income tax benefit
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
Total reclassifications
|
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
14
.
Supplemental Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported with the
unaudited Condensed Consolidated
Balance Sheets to the total of the same amounts shown in the
unaudited Condensed Consolidated
Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
2017
|
|
2016
|
Cash and cash equivalents
|
$
|
73
|
|
|
$
|
1,787
|
|
Restricted cash and restricted cash equivalents
(1)
|
87
|
|
|
—
|
|
Non-current restricted cash and restricted cash equivalents included in Other non-current assets
(1)
|
16
|
|
|
—
|
|
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the unaudited Condensed Consolidated Statement of Cash Flows
|
$
|
176
|
|
|
$
|
1,787
|
|
____________________________
|
|
(1)
|
Amounts included in restricted cash and restricted cash equivalents represent the holdback held in escrow in connection with the Bai Brands Merger.
Refer to Note 2 for additional information
on the Bai Brands Merger.
|
The following table details supplemental cash flow disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions)
|
2017
|
|
2016
|
Supplemental cash flow disclosures of non-cash investing and financing activities:
|
|
|
|
Dividends declared but not yet paid
|
$
|
107
|
|
|
$
|
99
|
|
Capital expenditures included in accounts payable and other current liabilities
|
9
|
|
|
10
|
|
Holdback liability for acquisition of business
|
103
|
|
|
—
|
|
Capital lease additions
|
7
|
|
|
6
|
|
Supplemental cash flow disclosures:
|
|
|
|
Interest paid
|
$
|
13
|
|
|
$
|
13
|
|
Income taxes paid
|
7
|
|
|
33
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
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
.
16
.
Segments
As of
March 31, 2017
and for the
three months ended
March 31, 2017
, the
Company
's operating structure consisted of the following
four
operating segments upon consummation of the Bai Brands Merger:
|
|
•
|
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 Excluding Bai 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 the Direct Store Delivery system and the Warehouse Direct system.
|
|
|
•
|
The Bai segment reflects sales of Bai Brands finished goods to third party distributors, primarily in the U.S., as net sales to the Packaged Beverages Excluding Bai segment are eliminated in consolidation.
Refer to Note 2 for additional information
regarding the impact of Bai Brands on the Company's net sales presented in the
unaudited Condensed Consolidated
Statements of Operations.
|
|
|
•
|
The Latin America Beverages segment reflects sales in Mexico, the Caribbean, and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.
|
The Company has determined that Packaged Beverages Excluding Bai and Bai, which have been identified as operating segments, meet the aggregation criteria under U.S. GAAP. As such, these segments have been aggregated into one reportable segment, Packaged Beverages, based on similarities among the operating units including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products and services and the nature of the regulatory environment.
As of December 31, 2016 and for the three months ended March 31, 2016, the Company's operating structure consisted of the
three
operating segments identified prior to the Bai Brands Merger.
Segment results are based on management reports. Net sales and
SOP
are the significant financial measures used to assess the operating performance of the
Company
's operating segments. Intersegment sales are recorded at cost and are eliminated in the
unaudited Condensed Consolidated
Statements of Operations. “Unallocated corporate costs” are excluded from the Company's measurement of segment performance and include stock-based compensation expense, unrealized commodity derivative gains and losses, and certain general corporate expenses.
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
Information about the
Company
's operations by reporting segment is as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions)
|
2017
|
|
2016
|
Segment Results – Net sales
|
|
|
|
Beverage Concentrates
|
$
|
294
|
|
|
$
|
287
|
|
Packaged Beverages
|
1,118
|
|
|
1,097
|
|
Latin America Beverages
|
98
|
|
|
103
|
|
Net sales
|
$
|
1,510
|
|
|
$
|
1,487
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in millions)
|
2017
|
|
2016
|
Segment Results – SOP
|
|
|
|
Beverage Concentrates
|
$
|
186
|
|
|
$
|
187
|
|
Packaged Beverages
|
141
|
|
|
175
|
|
Latin America Beverages
|
11
|
|
|
15
|
|
Total SOP
|
338
|
|
|
377
|
|
Unallocated corporate costs
|
81
|
|
|
64
|
|
Other operating income, net
|
(28
|
)
|
|
—
|
|
Income from operations
|
285
|
|
|
313
|
|
Interest expense, net
|
39
|
|
|
33
|
|
Other income, net
|
(2
|
)
|
|
(1
|
)
|
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
|
$
|
248
|
|
|
$
|
281
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
2017
|
|
2016
|
Identifiable operating assets
|
|
|
|
|
|
Beverage Concentrates
|
$
|
4,168
|
|
|
$
|
4,108
|
|
Packaged Beverages
|
5,253
|
|
|
3,474
|
|
Latin America Beverages
|
343
|
|
|
312
|
|
Segment total
|
9,764
|
|
|
7,894
|
|
Corporate and other
|
221
|
|
|
1,874
|
|
Total identifiable operating assets
|
9,985
|
|
|
9,768
|
|
Investments in unconsolidated subsidiaries
|
23
|
|
|
23
|
|
Total assets
|
$
|
10,008
|
|
|
$
|
9,791
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
17
.
Guarantor and Non-Guarantor Financial Information
The Company's outstanding senior unsecured notes (the "
Notes
") are fully and unconditionally guaranteed by substantially all of the
Company
's existing and future direct and indirect domestic subsidiaries (except one immaterial subsidiary associated with charitable purposes) (the "
Guarantors
"), as defined in the indentures governing the
Notes
. The
Guarantors
are 100% owned either directly or indirectly by the
Company
and jointly and severally guarantee, subject to the release provisions described below, the
Company
's obligations under the
Notes
. None of the
Company
's subsidiaries organized outside of the U.S. or immaterial subsidiaries used for charitable purposes (collectively, the "
Non-Guarantors
") guarantee the Notes. The subsidiary guarantees with respect to the
Notes
are subject to release upon the occurrence of certain events, including the sale of all or substantially all of a subsidiary's assets, the release of the subsidiary's guarantee of other indebtedness of the Company, the
Company
's exercise of its legal defeasance option with respect to the
Notes
and the discharge of the
Company
's obligations under the applicable indenture.
The following schedules present the financial information for Dr Pepper Snapple Group, Inc. (the "
Parent
"),
Guarantors
and
Non-Guarantors
. The consolidating schedules are provided in accordance with the reporting requirements of Rule 3-10 under SEC Regulation S-X for guarantor subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
|
|
For the Three Months Ended March 31, 2017
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Net sales
|
$
|
—
|
|
|
$
|
1,407
|
|
|
$
|
136
|
|
|
$
|
(33
|
)
|
|
$
|
1,510
|
|
Cost of sales
|
—
|
|
|
564
|
|
|
76
|
|
|
(33
|
)
|
|
607
|
|
Gross profit
|
—
|
|
|
843
|
|
|
60
|
|
|
—
|
|
|
903
|
|
Selling, general and administrative expenses
|
2
|
|
|
577
|
|
|
42
|
|
|
—
|
|
|
621
|
|
Depreciation and amortization
|
—
|
|
|
23
|
|
|
2
|
|
|
—
|
|
|
25
|
|
Other operating (income) expense, net
|
—
|
|
|
(28
|
)
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
Income from operations
|
(2
|
)
|
|
271
|
|
|
16
|
|
|
—
|
|
|
285
|
|
Interest expense
|
63
|
|
|
19
|
|
|
—
|
|
|
(42
|
)
|
|
40
|
|
Interest income
|
(16
|
)
|
|
(27
|
)
|
|
—
|
|
|
42
|
|
|
(1
|
)
|
Other (income) expense, net
|
(4
|
)
|
|
(1
|
)
|
|
3
|
|
|
—
|
|
|
(2
|
)
|
Income (loss) before provision (benefit) for income taxes and equity in earnings of subsidiaries
|
(45
|
)
|
|
280
|
|
|
13
|
|
|
—
|
|
|
248
|
|
Provision (benefit) for income taxes
|
(16
|
)
|
|
83
|
|
|
4
|
|
|
—
|
|
|
71
|
|
Income (loss) before equity in earnings of subsidiaries
|
(29
|
)
|
|
197
|
|
|
9
|
|
|
—
|
|
|
177
|
|
Equity in earnings of consolidated subsidiaries
|
206
|
|
|
9
|
|
|
—
|
|
|
(215
|
)
|
|
—
|
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
$
|
177
|
|
|
$
|
206
|
|
|
$
|
9
|
|
|
$
|
(215
|
)
|
|
$
|
177
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
|
|
For the Three Months Ended March 31, 2016
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Net sales
|
$
|
—
|
|
|
$
|
1,367
|
|
|
$
|
124
|
|
|
$
|
(4
|
)
|
|
$
|
1,487
|
|
Cost of sales
|
—
|
|
|
548
|
|
|
58
|
|
|
(4
|
)
|
|
602
|
|
Gross profit
|
—
|
|
|
819
|
|
|
66
|
|
|
—
|
|
|
$
|
885
|
|
Selling, general and administrative expenses
|
—
|
|
|
497
|
|
|
49
|
|
|
—
|
|
|
546
|
|
Depreciation and amortization
|
—
|
|
|
25
|
|
|
1
|
|
|
—
|
|
|
26
|
|
Other operating (income) expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income from operations
|
—
|
|
|
297
|
|
|
16
|
|
|
—
|
|
|
313
|
|
Interest expense
|
53
|
|
|
17
|
|
|
—
|
|
|
(37
|
)
|
|
33
|
|
Interest income
|
(13
|
)
|
|
(23
|
)
|
|
(1
|
)
|
|
37
|
|
|
—
|
|
Other expense (income), net
|
(2
|
)
|
|
(1
|
)
|
|
2
|
|
|
—
|
|
|
(1
|
)
|
Income (loss) before provision (benefit) for income taxes and equity in earnings of subsidiaries
|
(38
|
)
|
|
304
|
|
|
15
|
|
|
—
|
|
|
281
|
|
Provision (benefit) for income taxes
|
(14
|
)
|
|
109
|
|
|
4
|
|
|
—
|
|
|
99
|
|
Income (loss) before equity in earnings of subsidiaries
|
(24
|
)
|
|
195
|
|
|
11
|
|
|
—
|
|
|
182
|
|
Equity in earnings of consolidated subsidiaries
|
206
|
|
|
11
|
|
|
—
|
|
|
(217
|
)
|
|
—
|
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
$
|
182
|
|
|
$
|
206
|
|
|
$
|
11
|
|
|
$
|
(217
|
)
|
|
$
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
For the Three Months Ended March 31, 2017
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Comprehensive income (loss)
|
$
|
200
|
|
|
$
|
227
|
|
|
$
|
30
|
|
|
$
|
(257
|
)
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
For the Three Months Ended March 31, 2016
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Comprehensive income (loss)
|
$
|
190
|
|
|
$
|
215
|
|
|
$
|
33
|
|
|
$
|
(248
|
)
|
|
$
|
190
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheets
|
|
As of March 31, 2017
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
73
|
|
Restricted cash and cash equivalents
|
—
|
|
|
87
|
|
|
—
|
|
|
—
|
|
|
87
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
Trade, net
|
—
|
|
|
545
|
|
|
61
|
|
|
—
|
|
|
606
|
|
Other
|
8
|
|
|
37
|
|
|
10
|
|
|
—
|
|
|
55
|
|
Related party receivable
|
19
|
|
|
33
|
|
|
—
|
|
|
(52
|
)
|
|
—
|
|
Inventories
|
—
|
|
|
217
|
|
|
29
|
|
|
—
|
|
|
246
|
|
Prepaid expenses and other current assets
|
388
|
|
|
169
|
|
|
15
|
|
|
(392
|
)
|
|
180
|
|
Total current assets
|
415
|
|
|
1,111
|
|
|
165
|
|
|
(444
|
)
|
|
1,247
|
|
Property, plant and equipment, net
|
—
|
|
|
985
|
|
|
140
|
|
|
—
|
|
|
1,125
|
|
Investments in consolidated subsidiaries
|
8,288
|
|
|
322
|
|
|
—
|
|
|
(8,610
|
)
|
|
—
|
|
Investments in unconsolidated subsidiaries
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Goodwill
|
—
|
|
|
3,537
|
|
|
23
|
|
|
—
|
|
|
3,560
|
|
Other intangible assets, net
|
—
|
|
|
3,733
|
|
|
51
|
|
|
—
|
|
|
3,784
|
|
Long-term receivable, related parties
|
3,225
|
|
|
5,246
|
|
|
—
|
|
|
(8,471
|
)
|
|
—
|
|
Other non-current assets
|
75
|
|
|
114
|
|
|
20
|
|
|
(3
|
)
|
|
206
|
|
Non-current deferred tax assets
|
20
|
|
|
—
|
|
|
63
|
|
|
(20
|
)
|
|
63
|
|
Total assets
|
$
|
12,023
|
|
|
$
|
15,071
|
|
|
$
|
462
|
|
|
$
|
(17,548
|
)
|
|
$
|
10,008
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
316
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
353
|
|
Related party payable
|
26
|
|
|
16
|
|
|
10
|
|
|
(52
|
)
|
|
—
|
|
Deferred revenue
|
—
|
|
|
69
|
|
|
2
|
|
|
(7
|
)
|
|
64
|
|
Short-term borrowings and current portion of long-term obligations
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
Income taxes payable
|
—
|
|
|
409
|
|
|
—
|
|
|
(385
|
)
|
|
24
|
|
Other current liabilities
|
167
|
|
|
480
|
|
|
49
|
|
|
—
|
|
|
696
|
|
Total current liabilities
|
193
|
|
|
1,300
|
|
|
98
|
|
|
(444
|
)
|
|
1,147
|
|
Long-term obligations to third parties
|
4,320
|
|
|
147
|
|
|
—
|
|
|
—
|
|
|
4,467
|
|
Long-term obligations to related parties
|
5,246
|
|
|
3,225
|
|
|
—
|
|
|
(8,471
|
)
|
|
—
|
|
Non-current deferred tax liabilities
|
—
|
|
|
862
|
|
|
—
|
|
|
(20
|
)
|
|
842
|
|
Non-current deferred revenue
|
—
|
|
|
1,078
|
|
|
26
|
|
|
(3
|
)
|
|
1,101
|
|
Other non-current liabilities
|
71
|
|
|
171
|
|
|
16
|
|
|
—
|
|
|
258
|
|
Total liabilities
|
9,830
|
|
|
6,783
|
|
|
140
|
|
|
(8,938
|
)
|
|
7,815
|
|
Total stockholders' equity
|
2,193
|
|
|
8,288
|
|
|
322
|
|
|
(8,610
|
)
|
|
2,193
|
|
Total liabilities and stockholders' equity
|
$
|
12,023
|
|
|
$
|
15,071
|
|
|
$
|
462
|
|
|
$
|
(17,548
|
)
|
|
$
|
10,008
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheets
|
|
As of December 31, 2016
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
1,736
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
1,787
|
|
Restricted cash and cash equivalents
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
Trade, net
|
—
|
|
|
540
|
|
|
55
|
|
|
—
|
|
|
595
|
|
Other
|
3
|
|
|
39
|
|
|
9
|
|
|
—
|
|
|
51
|
|
Related party receivable
|
15
|
|
|
37
|
|
|
—
|
|
|
(52
|
)
|
|
—
|
|
Inventories
|
—
|
|
|
178
|
|
|
24
|
|
|
—
|
|
|
202
|
|
Prepaid and other current assets
|
379
|
|
|
84
|
|
|
7
|
|
|
(369
|
)
|
|
101
|
|
Total current assets
|
397
|
|
|
2,614
|
|
|
146
|
|
|
(421
|
)
|
|
2,736
|
|
Property, plant and equipment, net
|
—
|
|
|
1,007
|
|
|
131
|
|
|
—
|
|
|
1,138
|
|
Investments in consolidated subsidiaries
|
8,067
|
|
|
302
|
|
|
—
|
|
|
(8,369
|
)
|
|
—
|
|
Investments in unconsolidated subsidiaries
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Goodwill
|
—
|
|
|
2,972
|
|
|
21
|
|
|
—
|
|
|
2,993
|
|
Other intangible assets, net
|
—
|
|
|
2,609
|
|
|
47
|
|
|
—
|
|
|
2,656
|
|
Long-term receivable, related parties
|
3,209
|
|
|
5,077
|
|
|
—
|
|
|
(8,286
|
)
|
|
—
|
|
Other non-current assets
|
64
|
|
|
107
|
|
|
12
|
|
|
—
|
|
|
183
|
|
Non-current deferred tax assets
|
20
|
|
|
—
|
|
|
62
|
|
|
(20
|
)
|
|
62
|
|
Total assets
|
$
|
11,757
|
|
|
$
|
14,711
|
|
|
$
|
419
|
|
|
$
|
(17,096
|
)
|
|
$
|
9,791
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
276
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
303
|
|
Related party payable
|
31
|
|
|
14
|
|
|
7
|
|
|
(52
|
)
|
|
—
|
|
Deferred revenue
|
—
|
|
|
63
|
|
|
1
|
|
|
—
|
|
|
64
|
|
Short-term borrowings and current portion of long-term obligations
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
Income taxes payable
|
—
|
|
|
372
|
|
|
1
|
|
|
(369
|
)
|
|
4
|
|
Other current liabilities
|
128
|
|
|
502
|
|
|
40
|
|
|
—
|
|
|
670
|
|
Total current liabilities
|
159
|
|
|
1,237
|
|
|
76
|
|
|
(421
|
)
|
|
1,051
|
|
Long-term obligations to third parties
|
4,325
|
|
|
143
|
|
|
—
|
|
|
—
|
|
|
4,468
|
|
Long-term obligations to related parties
|
5,077
|
|
|
3,209
|
|
|
—
|
|
|
(8,286
|
)
|
|
—
|
|
Non-current deferred tax liabilities
|
(1
|
)
|
|
833
|
|
|
—
|
|
|
(20
|
)
|
|
812
|
|
Non-current deferred revenue
|
—
|
|
|
1,091
|
|
|
26
|
|
|
—
|
|
|
1,117
|
|
Other non-current liabilities
|
63
|
|
|
131
|
|
|
15
|
|
|
—
|
|
|
209
|
|
Total liabilities
|
9,623
|
|
|
6,644
|
|
|
117
|
|
|
(8,727
|
)
|
|
7,657
|
|
Total stockholders' equity
|
2,134
|
|
|
8,067
|
|
|
302
|
|
|
(8,369
|
)
|
|
2,134
|
|
Total liabilities and stockholders' equity
|
$
|
11,757
|
|
|
$
|
14,711
|
|
|
$
|
419
|
|
|
$
|
(17,096
|
)
|
|
$
|
9,791
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
For the Three Months Ended March 31, 2017
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
$
|
(23
|
)
|
|
$
|
122
|
|
|
$
|
8
|
|
|
$
|
(10
|
)
|
|
$
|
97
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisition of business
|
—
|
|
|
(1,548
|
)
|
|
—
|
|
|
—
|
|
|
(1,548
|
)
|
Cash acquired in step acquisition of unconsolidated subsidiaries
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Purchase of property, plant and equipment
|
—
|
|
|
(15
|
)
|
|
(1
|
)
|
|
—
|
|
|
(16
|
)
|
Investment in unconsolidated subsidiaries
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Purchase of intangible assets
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Proceeds from disposals of property, plant and equipment
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Issuance of related party notes receivable
|
—
|
|
|
(169
|
)
|
|
—
|
|
|
169
|
|
|
—
|
|
Other, net
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
Net cash (used in) provided by investing activities
|
(7
|
)
|
|
(1,730
|
)
|
|
(1
|
)
|
|
169
|
|
|
(1,569
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of related party debt
|
169
|
|
|
—
|
|
|
—
|
|
|
(169
|
)
|
|
—
|
|
Repurchase of shares of common stock
|
(28
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
Dividends paid
|
(97
|
)
|
|
—
|
|
|
(10
|
)
|
|
10
|
|
|
(97
|
)
|
Tax withholdings related to net share settlements of certain stock awards
|
(30
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(30
|
)
|
Proceeds from stock options exercised
|
17
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Deferred financing charges paid
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Capital lease payments
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Net cash (used in) provided by financing activities
|
30
|
|
|
(3
|
)
|
|
(10
|
)
|
|
(159
|
)
|
|
(142
|
)
|
Cash and cash equivalents — net change from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating, investing and financing activities
|
—
|
|
|
(1,611
|
)
|
|
(3
|
)
|
|
—
|
|
|
(1,614
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
1
|
|
|
2
|
|
|
—
|
|
|
3
|
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
|
—
|
|
|
1,736
|
|
|
51
|
|
|
—
|
|
|
1,787
|
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
|
$
|
—
|
|
|
$
|
126
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
176
|
|
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
For the Three Months Ended March 31, 2016
|
(in millions)
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Total
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
$
|
—
|
|
|
$
|
185
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
197
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
—
|
|
|
(22
|
)
|
|
(5
|
)
|
|
—
|
|
|
(27
|
)
|
Investments in unconsolidated subsidiaries
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
Proceeds from disposals of property, plant and equipment
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Issuance of related party notes receivable
|
—
|
|
|
(800
|
)
|
|
—
|
|
|
800
|
|
|
—
|
|
Other, net
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
Net cash (used in) provided by investing activities
|
(8
|
)
|
|
(827
|
)
|
|
(5
|
)
|
|
800
|
|
|
(40
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of related party debt
|
800
|
|
|
—
|
|
|
—
|
|
|
(800
|
)
|
|
—
|
|
Repayment of senior unsecured notes
|
(500
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(500
|
)
|
Repurchase of shares of common stock
|
(179
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(179
|
)
|
Dividends paid
|
(90
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(90
|
)
|
Tax withholdings related to net share settlements of certain stock awards
|
(31
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31
|
)
|
Proceeds from stock options exercised
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Capital lease payments
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Other, net
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net cash (used in) provided by financing activities
|
8
|
|
|
(3
|
)
|
|
—
|
|
|
(800
|
)
|
|
(795
|
)
|
Cash and cash equivalents — net change from:
|
|
|
|
|
|
|
|
|
|
Operating, investing and financing activities
|
—
|
|
|
(645
|
)
|
|
7
|
|
|
—
|
|
|
(638
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
|
—
|
|
|
859
|
|
|
52
|
|
|
—
|
|
|
911
|
|
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
|
$
|
—
|
|
|
$
|
214
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
275
|
|
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, 2016
(the "Annual Report").
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. 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.
BAI BRANDS LLC MERGER
On January 31, 2017, we consummated our Agreement and Plan of Merger (the "Merger Agreement") with Bai Brands LLC ("Bai Brands") and completed the acquisition of Bai Brands for a cash purchase price of $1.690 billion, subject to certain adjustments provided in the Merger Agreement (the "Merger" or the"Bai Brands Merger"). The results of Bai Brands are included in the Packaged Beverages reporting segment.
In discussing our results, we may use the terms "acquired" and "organic". "Acquired" represents the incremental impact to our results due to the Bai Brands Merger, which primarily reflects sales of Bai Brands finished goods to third party distributors. "Organic" represents the incremental impact to our results from our pre-existing business prior to the Bai Brands Merger.
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 ("
CSD
s") and non-carbonated beverages ("
NCB
s"), including ready-to-drink teas, juices, juice drinks, water and mixers. Our brand portfolio includes popular
CSD
brands such as Dr Pepper, Canada Dry, Peñafiel, Squirt, 7UP, Crush, A&W, Sunkist soda and Schweppes, and NCB brands such as Snapple, Hawaiian Punch, Mott's, Clamato, Bai, Mr & Mrs T mixers and Rose's. Our largest brand, Dr Pepper, is a leading flavored
CSD
in the
U.S.
as reporte
d by Information Resources, Inc. We h
ave 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 reporting 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.
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 the combined product 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.
Our Beverage Concentrates brands are sold by our 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 reporting 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 privat
e label beverages, primarily in the U.S. and Canada. Key
NCB
brands in this segment include Snapple, Hawaiian Punch, Mott's, Clamato, Bai, Yoo-Hoo, Deja Blue, ReaLemon, Mr and Mrs T mixers, Nantucket Nectars, Mistic, Garden Cocktail and Rose's. Key
CSD
brands in this segment include 7UP, Dr Pepper, A&W, Canada Dry, Sunkist soda, Squirt, RC Cola, Vernors, Diet Rite and Sun Drop.
Additionally, we distribute
third-party brands such as Big Red, FIJI mineral water, AriZona tea, Vita Coco coconut water, BODYARMOR, Neuro drinks, Core Hydration, Sparkling Fruit
2
O, Hydrive energy drinks and High-Brew. Although the majority of our Packaged Beverages' net sales relate to our brands, we also provide a route-to-market for these 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.
A portion of our sales also comes from bottling beverages and other products for private label owners or others, which is also referred to as contract manufacturing.
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, vegetable juice categories and grapefruit flavored
CSD
s. Key brands include Peñafiel, Squirt, Aguafiel, Clamato and Crush.
In Mexico, we manufacture and distribute our products through our bottling operations and third party bottlers and distributors.
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.
In the Caribbean, we distribute our products through third-party bottlers and distributors.
We have also begun to distribute certain products in other international jurisdictions through various third-party bottlers and distributors.
VOLUME
In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates or finished beverages.
Beverage Concentrates Sales Volume
In our Beverage Concentrates segment, we measure our sales volume in two ways: (1) "concentrate case sales" and (2) "bottler case sales." The unit of measurement for both concentrate case sales and bottler case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.
Concentrate case sales represent units of measurement for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases.
Although net sales in our concentrate businesses are based on concentrate case sales, we believe that bottler case sales are also a significant measure of our performance because they measure sales of packaged beverages into retail channels.
Packaged Beverages Sales Volume
In our Packaged Beverages reporting 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
|
|
•
|
On January 31, 2017, we completed the Bai Brands Merger for a purchase price of
$1.69 billion
. For the
three months ended March 31, 2017
, the impact of the Bai Brands Merger decreased diluted earnings per share in total by $0.07. The drivers of this decrease include the associated transaction and integration expenses, the ongoing operations of Bai Brands, and the interest expense associated with the financing to complete the Bai Brands Merger decreased diluted earnings per share by
$0.07
,
$0.06
, and
$0.04
, respectively, while the gain on the step-acquisition of Bai Brands increased diluted earnings per share by
$0.10
. The impact of the ongoing operations of Bai Brands includes the incremental profit margin benefit we experienced in the first quarter as the brand owner partially offset by the
$9 million
initial profit in stock adjustment related to Bai Brands inventories.
|
|
|
•
|
As of January 1, 2017, we adopted a new accounting standard which changed the recognition of excess tax benefits related to stock awards. For the
three months ended March 31, 2017
, the impact of the new accounting standard increased dilutive earnings per share by
$0.10
.
|
|
|
•
|
During the
three months ended March 31, 2017
and
2016
, we repurchased
0.3 million
and
2.0 million
shares of our common stock valued at approximately
$28 million
and
$179 million
, respectively.
|
RESULTS OF OPERATIONS
We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements and the intercompany transactions with our equity method investees.
References in the financial tables to percentage changes that are not meaningful are denoted by "NM."
Three Months Ended
March 31, 2017
Compared to
Three Months Ended
March 31,
2016
Consolidated Operations
The following table sets forth our
unaudited consolidated
results of operations for the
three months ended March 31, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
2017
|
|
2016
|
|
Dollar
|
|
Percentage
|
($ in millions)
|
Dollars
|
|
Percent
|
|
Dollars
|
|
Percent
|
|
Change
|
|
Change
|
Net sales
|
$
|
1,510
|
|
|
100.0
|
%
|
|
$
|
1,487
|
|
|
100.0
|
%
|
|
$
|
23
|
|
|
2
|
%
|
Cost of sales
|
607
|
|
|
40.2
|
|
|
602
|
|
|
40.5
|
|
|
5
|
|
|
1
|
|
Gross profit
|
903
|
|
|
59.8
|
|
|
885
|
|
|
59.5
|
|
|
18
|
|
|
2
|
|
Selling, general and administrative expenses
|
621
|
|
|
41.1
|
|
|
546
|
|
|
36.7
|
|
|
75
|
|
|
14
|
|
Other operating income, net
|
(28
|
)
|
|
(1.9
|
)
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
|
NM
|
|
Income from operations
|
285
|
|
|
18.9
|
|
|
313
|
|
|
21.0
|
|
|
(28
|
)
|
|
(9
|
)
|
Interest expense
|
40
|
|
|
2.6
|
|
|
33
|
|
|
2.2
|
|
|
7
|
|
|
21
|
|
Provision for income taxes
|
71
|
|
|
4.7
|
|
|
99
|
|
|
6.7
|
|
|
(28
|
)
|
|
(28
|
)
|
Effective tax rate
|
28.6
|
%
|
|
NM
|
|
|
35.2
|
%
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
Volume (BCS)
.
Volume (BCS)
increased
1%
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. In the
U.S.
and Canada, volume was flat, and in Mexico and the Caribbean, volume increased
3%
, compared with the year ago period. Branded
CSD
volumes grew
1%
while branded
NCB
volumes declined
2%
.
In branded
CSD
s, Canada Dry increased
5%
and Schweppes grew by
8%
due to continued growth in the ginger ale and sparkling water categories. Dr Pepper grew
1%
driven by increases in our fountain business partially offset by declines in TEN. Peñafiel increased
5%
as a result of product and package innovation, partially offset by competitive headwinds, in our Latin America Beverages segment. Squirt increased
1%
. These increases were partially offset as A&W declined
2%
, 7UP decreased
2%
, driven by declines in Puerto Rico, and our other CSD brands were
1%
lower compared to the year ago period.
In branded
NCB
s, Snapple declined
6%
due primarily to the timing of promotional activity. Mott's decreased
2%
as declines in the juice category were partially offset by gains in our sauce products. Our other NCB brands were
9%
lower compared to the prior period, led by Hawaiian Punch and Country Time. These declines were partially offset as our growth allied brands gained
33%
due primarily to distribution gains for BODYARMOR, Core and Fiji, and product innovation for BODYARMOR. Bai increased
80%
driven by the acquired Bai Brands shipments to third party distributors since the Merger and continued growth in our existing distribution as a result of distribution gains and product innovation. Clamato was flat compared with the year ago period.
Net Sales.
Net sales increased
$23 million
, or approximately
2%
, for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. The primary drivers of the increase in net sales included:
|
|
•
|
$11 million
of acquired Bai Brands shipments to third party distributors since the Merger, which increased net sales by
1.00%
;
|
|
|
•
|
Favorable product, package and segment mix, which increased net sales by
1.00%
;
|
|
|
•
|
Higher net pricing, which increased net sales by
0.25%
;
|
|
|
•
|
Increase in shipments, which increased net sales by
0.25%
; and
|
|
|
•
|
Unfavorable foreign currency translation of
$9 million
, which decreased net sales by
0.50%
.
|
Gross Profit
.
Gross profit increased
$18 million
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. Gross margin was
59.8%
for the
three months ended
March 31, 2017
compared to the gross margin of
59.5%
for the
three months ended
March 31,
2016
. The primary drivers of the change in gross margin included:
|
|
•
|
Favorable comparison in our mark-to-market activity on commodity derivative contracts, which raised our gross margin by
1.1%
;
|
|
|
•
|
Lower commodity costs, led by packaging, which increased our gross margin by
0.2%
;
|
|
|
•
|
Ongoing productivity improvements, which increased our gross margin by
0.2%
;
|
|
|
•
|
Unfavorable product, package and segment mix, which decreased our gross margin by
0.6%
;
|
|
|
•
|
An increase in our other manufacturing costs, which reduced our gross margin by
0.5%
; and
|
|
|
•
|
Unfavorable foreign currency effects, which lowered our gross margin by
0.1%
.
|
The favorable mark-to-market activity on commodity derivative contracts for the
three months ended
March 31, 2017
was
$18 million
in unrealized gains versus
$3 million
in unrealized gains in the year ago period.
The Bai Brands Merger had no incremental impact to the consolidated gross margin during the three months ended March 31, 2017 as a result of initial accounting adjustments.
SG&A Expenses.
SG&A expenses increased
$75 million
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. The primary driver of the increase in SG&A expenses was the impact of the Bai Brands Merger, which includes the acquired operating costs, primarily marketing and people costs, as well as
$19 million
in transaction expenses. Other drivers of the increase include an
$18 million
unfavorable comparison in the mark-to-market activity on commodity derivative contracts, higher people costs, driven by inflationary increases and additional frontline labor investment, and a
$9 million
increase in planned marketing investments. These increases were partially offset by lower incentive compensation and the favorable comparison to the
$4 million
arbitration award related to our Mexican joint venture.
The unfavorable mark-to-market activity on commodity derivative contracts for the
three months ended
March 31, 2017
was
$14 million
in unrealized losses versus
$4 million
in unrealized gains in the year ago period.
Income from Operations.
Income from operations decreased
$28 million
to
$285 million
for the
three months ended
March 31, 2017
due primarily to the increase in SG&A expenses, partially offset by the
$28 million
gain on the step-acquisition of Bai Brands and the increase in gross profit. Refer to
Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements
for the gain on the step-acquisition of Bai Brands.
Interest Expense.
Interest expense increased
$7 million
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
due primarily to the higher average debt balance associated with the senior unsecured notes issued in the fourth quarter of 2016 to fund the Bai Brands Merger, partially offset by the impact of the partial redemption of the 6.82% senior notes due on May 1, 2018, which also occurred in the fourth quarter of 2016.
Effective Tax Rate.
The effective tax rates for the
three months ended
March 31, 2017
and
2016
were
28.6%
and
35.2%
, respectively. For the
three months ended
March 31, 2017
, the provision for income taxes included an income tax benefit of
$18 million
due to the adoption of the new accounting standard for stock-based compensation. See Recently Adopted Provisions of U.S. GAAP within
Note 1 of the Notes to our Unaudited Condensed Consolidated Financial Statements
for further information.
Results of Operations by Segment
The following tables set forth net sales and
SOP
for our segments for the
three months ended
March 31, 2017
and
2016
, 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 Three Months Ended
|
|
March 31,
|
(in millions)
|
2017
|
|
2016
|
Segment Results — Net sales
|
|
|
|
Beverage Concentrates
|
$
|
294
|
|
|
$
|
287
|
|
Packaged Beverages
|
1,118
|
|
|
1,097
|
|
Latin America Beverages
|
98
|
|
|
103
|
|
Net sales
|
$
|
1,510
|
|
|
$
|
1,487
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
|
(in millions)
|
2017
|
|
2016
|
Segment Results — SOP
|
|
|
|
Beverage Concentrates
|
$
|
186
|
|
|
$
|
187
|
|
Packaged Beverages
|
141
|
|
|
175
|
|
Latin America Beverages
|
11
|
|
|
15
|
|
Total SOP
|
338
|
|
|
377
|
|
Unallocated corporate costs
|
81
|
|
|
64
|
|
Other operating income, net
|
(28
|
)
|
|
—
|
|
Income from operations
|
285
|
|
|
313
|
|
Interest expense, net
|
39
|
|
|
33
|
|
Other income, net
|
(2
|
)
|
|
(1
|
)
|
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
|
$
|
248
|
|
|
$
|
281
|
|
BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the
three months ended March 31, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
March 31,
|
|
Dollar
|
|
Percent
|
(in millions)
|
2017
|
|
2016
|
|
Change
|
|
Change
|
Net sales
|
$
|
294
|
|
|
$
|
287
|
|
|
$
|
7
|
|
|
2
|
%
|
SOP
|
186
|
|
|
187
|
|
|
(1
|
)
|
|
(1
|
)
|
Net Sales.
Net sales
in
creased
$7 million
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. The increase was due to higher pricing and a
2%
increase in concentrate case sales, partially offset by higher discounts primarily due to timing.
SOP.
SOP
de
creased
$1 million
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
, primarily driven by higher SG&A expenses partially offset by an increase in net sales. The increase in
SG&A
expenses was primarily the result of a
$7 million
increase in planned marketing investments.
Volume (BCS)
.
Volume (BCS)
had a
1%
increase for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. Dr Pepper increased
1%
compared to the year ago period driven by increases in our fountain business partially offset by declines in TEN. Schweppes and Canada Dry had gains of
7%
and
5%
, respectively, due to continued growth in the ginger ale and sparkling water categories. 7UP grew
1%
compared to the year ago period. These increases were partially offset by a
1%
decrease in A&W and a
3%
decline in our other brands in total as a result of discontinuing the distribution of Country Time.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the
three months ended March 31, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
March 31,
|
|
Dollar
|
|
Percent
|
(in millions)
|
2017
|
|
2016
|
|
Change
|
|
Change
|
Net sales
|
$
|
1,118
|
|
|
$
|
1,097
|
|
|
$
|
21
|
|
|
2
|
%
|
SOP
|
141
|
|
|
175
|
|
|
(34
|
)
|
|
(19
|
)
|
Volume.
Branded CSD volumes were flat for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. Canada Dry increased
7%
due to continued growth in the ginger ale and sparkling water categories and 7UP grew
1%
. These increases were fully offset by a
3%
decline in A&W compared to the prior period, while Dr Pepper decreased
1%
due to declines in TEN. Our other CSD brands decreased
3%
.
Branded
NCB
volumes were flat for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. Our growth allied brands gained
34%
due primarily to distribution gains for BODYARMOR, Core and Fiji, and product innovation for BODYARMOR. Bai increased
80%
driven by the acquired Bai Brands shipments to third party distributors since the Merger and continued growth in our existing distribution as a result of distribution gains and product innovation. Clamato increased
1%
. These increases were fully offset as Snapple declined
7%
due primarily to the timing of promotional activity. Mott's decreased
2%
as declines in the juice category were partially offset by gains in our sauce products. Our other NCB brands were
7%
lower compared to the prior period, led by Hawaiian Punch.
Contract manufacturing decreased
2%
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
.
Net Sales.
Net sales increased
$21 million
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. Net sales increased due to favorable product and package mix, as a result of our NCBs, including our allied brands, and
$11 million
in acquired Bai Brands shipments to third party distributors since the Merger. These increases were partially offset by lower organic sales volumes.
SOP.
SOP decreased
$34 million
for the
three months ended
March 31, 2017
, compared with the
three months ended
March 31,
2016
as increases in SG&A expenses and cost of sales were partially offset by increases in net sales.
Cost of sales increased as a result of higher costs associated with product mix, as a result of our NCBs, including our allied brands, an increase in costs associated with the acquired Bai Brands shipments to third party distributors since the Merger and an increase in other manufacturing costs. These increases were partially offset by lower commodities, led by packaging, and lower costs due to lower organic sales volumes. As a result of the Bai Brands Merger, we incurred a
$9 million
initial profit in stock adjustment related to Bai Brands inventories that almost completely offset the incremental profit margin benefit we experienced in the first quarter as the brand owner.
SG&A expenses increased driven primarily by the Bai Brands Merger, which include the acquired operating costs, primarily marketing and people costs, as well as transaction expenses. Other drivers of the increase include higher people costs, driven by inflationary increases and additional frontline labor investment, and increased planned marketing investments.
LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the
three months ended March 31, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
March 31,
|
|
Dollar
|
|
Percent
|
(in millions)
|
2017
|
|
2016
|
|
Change
|
|
Change
|
Net sales
|
$
|
98
|
|
|
$
|
103
|
|
|
$
|
(5
|
)
|
|
(5
|
)%
|
SOP
|
11
|
|
|
15
|
|
|
(4
|
)
|
|
(27
|
)
|
Volume.
Sales volume
in
creased
3%
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. The
in
crease in sales volume was driven primarily by a
5%
increase in Peñafiel as a result of product and package innovation, partially offset by competitive headwinds, and a
3%
gain in our other brands. These increases were partially offset by a
1%
decline in Clamato. Squirt was flat for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
.
Net Sales.
Net sales
de
creased
$5 million
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
. Net sales
de
creased as a result of unfavorable foreign currency translation of
$11 million
, partially offset by increased sales volume and higher pricing.
SOP.
SOP
de
creased
$4 million
for the
three months ended
March 31, 2017
compared with the
three months ended
March 31,
2016
, driven by a decrease in net sales and an increase in cost of sales, partially offset by a reduction in SG&A expenses. Cost of sales increased compared to the prior period as a result of higher costs associated with increased favorable product mix and sales volume, an increase in other manufacturing costs, which included higher utility rates, and higher commodity costs, led by packaging. These increases were partially offset by favorable foreign currency effects.
SG&A
expenses decreased compared to the prior period primarily driven by the favorable comparison to the
$4 million
arbitration award related to our Mexican joint venture and favorable foreign currency effects. These decreases were partially offset by higher people costs and increases in other operating costs. The impact of the favorable foreign currency effects, which decreased cost of sales and
SG&A
expenses, totaled
$7 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.
Business Combinations
We record acquisitions using the purchase method of accounting. All of the assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. The application of the purchase method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed, in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. The fair value assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Significant assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset, if applicable. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements may be exposed to potential impairment of the intangible assets and goodwill.
There have been no other changes to our critical accounting estimates, which are discussed in greater detail in our Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
Trends and Uncertainties Affecting Liquidity
Customer and consumer demand for our products may be impacted by various risk factors discussed under "Risk Factors" in Part I, Item 1A, of our Annual Report, including recession or other economic downturn in the
U.S.
,
Mexico and the Caribbean or Canada
, which could result in a reduction in our sales volume. Similarly, disruptions in financial and credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials.
We believe that the following events, trends and uncertainties may also impact liquidity:
|
|
•
|
our continued repurchases of our outstanding common stock pursuant to our repurchase programs;
|
|
|
•
|
continued payment of dividends;
|
|
|
•
|
continued capital expenditures;
|
|
|
•
|
seasonality of our operating cash flows could impact short-term liquidity;
|
|
|
•
|
our ability to issue unsecured commercial paper notes ("
Commercial Paper
") on a private placement basis up to a maximum aggregate amount outstanding at any time of
$500 million
;
|
|
|
•
|
the integration of Bai Brands following completion of the Bai Brands Merger;
|
|
|
•
|
fluctuations in our tax obligations;
|
|
|
•
|
future equity investments in allied brands; and
|
|
|
•
|
future mergers or acquisitions of regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.
|
Financing Arrangements
The following descriptions represent our available financing arrangements as of
March 31, 2017
. As of
March 31, 2017
, we were in compliance with all covenant requirements fo
r 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
as needed for general corporate purposes. The program is supported by the
Revolver
(as defined below). As of
March 31, 2017
and
2016
, we had
no
Commercial Paper
outstanding. During the three months ended
March 31, 2017
, we had weighted average Commercial Paper borrowings of
$6 million
with maturities of 90 days or less and a weighted average borrowing rate of
1.03%
. There were
no
commercial paper borrowings during the three months ended
March 31, 2016
.
Unsecured Credit Agreement
In March 2017, the Company entered into a new five-year unsecured credit agreement (the "
Credit Agreement
"), which provides for a
$500 million
revolving line of credit (the "
Revolver
"). This
Credit Agreement
and
Revolver
fully replaced the Company's previous unsecured credit agreement and revolving line of credit, which was due to expire on September 25, 2017 and was terminated on March 16, 2017. There were no principal borrowings outstanding under the previous unsecured credit agreement upon termination.
Borrowings under the
Revolver
bear interest at a floating rate per annum based upon the alternate base rate ("ABR") or the Eurodollar rate, in each case plus an applicable margin which varies based upon the Company's debt ratings. Rates range from
0.000%
to
0.300%
for the ABR loans and from
0.805%
to
1.300%
for Eurodollar loans. The ABR is defined as the greater of (a) JPMorgan Chase Bank's prime rate, (b) the Federal Reserve Bank of New York ("NYFRB") rate plus
0.500%
and (c) the Adjusted LIBOR for a one month interest period plus 1.00%. The NYFRB rate is the greater of (a) the federal funds effective rate or (b) the overnight bank funding rate. The Adjusted LIBOR is the London interbank offered rate for dollars, adjusted for a statutory reserve rate set by the Board of Governors of the Federal Reserve System of the United States of America.
Additionally, the Revolver is available for the issuance of letters of credit, not to exceed
$75 million
. Letters of credit will reduce, on a dollar for dollar basis, the amount available under the Revolver.
Refer to
Note 6 of the Notes to our Unaudited Condensed Consolidated Financial Statements
for discussion of amounts utilized and available under the
Revolver
.
The
Credit Agreement
further provides that we may request at any time, subject to the satisfaction of certain conditions, that the aggregate commitments under the facility be increased by a total amount not to exceed
$250 million
.
The
Credit Agreement
's representations, warranties, covenants and events of default are generally customary for investment grade credit and include a financial covenant that requires the Company to maintain a ratio as provided therein of Consolidated Total Debt to Consolidated EBITDA of no more than
3.50
to
1.00
, tested quarterly. During the twelve month period following a Material Acquisition thereunder, the ratio may increase to no more than
4.00
to
1.00
. Upon the occurrence of an event of default, among other things, amounts outstanding may be accelerated and the commitments may be terminated. The Company's obligations are guaranteed by certain of the Company's direct and indirect domestic subsidiaries. The Credit Agreement has a maturity date of March 16, 2022; however, with the consent of lenders holding more than 50% of the total commitments thereunder and subject to the satisfaction of certain conditions, the Company may extend the maturity date for up to two additional one-year terms.
A
facility fee is payable quarterly to the lenders on the unused portion of the commitments available under the
Revolver
equal to
0.07%
to
0.20%
per annum, depending upon our credit ratings.
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,
$120 million
is available for the issuance of letters of credit,
$60 million
of which was utilized as of
March 31, 2017
and
$60 million
of which remains available for use.
Shelf Registration Statement
On August 10, 2016, the Company's Board of Directors ("the Board") authorized the Company to issue up to
$2,000 million
of securities from time to time. Subsequently, the Company filed a "well-known seasoned issuer" shelf registration statement (the "Shelf") with the SEC, effective September 2, 2016, which registered an indeterminate amount of securities for future sales. On September 16, 2016, the Company issued
$400 million
of 2026 Notes under the Shelf, leaving
$1,600 million
of securities authorized for issuance under the Shelf. On November 16, 2016, the Board replenished the authorized aggregate amount of securities available to be issued by an additional
$400 million
, which raised the full authorized amount to
$2,000 million
. On December 14, 2016, the Company issued an aggregate of
$1,550 million
of 2021, 2023, 2027 and 2046 Notes. As of
March 31, 2017
,
$450 million
remained authorized to be issued under the Shelf.
Debt Ratings
As of
March 31, 2017
, our credit ratings were as follows:
|
|
|
|
|
|
Rating Agency
|
Long-Term Debt Rating
|
Commercial Paper Rating
|
Outlook
|
Date of Last Change
|
Moody's
|
Baa1
|
P-2
|
Stable
|
May 18, 2011
|
S&P
|
BBB+
|
A-2
|
Stable
|
November 13, 2013
|
These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.
Cash Management
We primarily fund our liquidity needs from cash flow from operations and cash on hand. We will use amounts available to us as discussed in "
Financing Arrangements,
" as seasonality of our operating cash flows impact short-term liquidity, our senior unsecured notes mature, or as other events may occur as described in "
Acquisitions and Investments.
"
Capital Expenditures
Capital expenditures were
$16 million
for the
three months ended March 31, 2017
. Capital expenditures were primarily related to machinery and equipment, IT investments and expansion and replacement of existing cold drink equipment. In
2017
, we expect to incur annual capital expenditures, net of proceeds from disposals, in an amount approximately 3% of our net sales, which we expect to fund through cash provided by operating activities.
Acquisitions and Investments
We may make future equity investments in allied brands and/or acquisitions of regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage. Any acquisitions may require additional funding for future capital expenditures and possibly restructuring expenses.
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
three months ended March 31, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
|
(in millions)
|
2017
|
|
2016
|
Net cash provided by operating activities
|
$
|
97
|
|
|
$
|
197
|
|
Net cash used in investing activities
|
(1,569
|
)
|
|
(40
|
)
|
Net cash used in financing activities
|
(142
|
)
|
|
(795
|
)
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities
de
creased
$100 million
for the
three months ended
March 31, 2017
, as compared to the
three months ended
March 31, 2016
, primarily due to unfavorable working capital comparisons to the prior period.
NET CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities for the
three months ended
March 31, 2017
consisted primarily of cash paid in connection with our Bai Brands Merger of
$1,548 million
and purchases of property, plant and equipment of
$16 million
.
Cash used in investing activities for the
three months ended
March 31, 2016
consisted primarily of purchases of property, plant and equipment of
$27 million
and an additional investment in BA Sports Nutrition, LLC of
$6 million
.
NET CASH USED IN FINANCING ACTIVITIES
Cash used in financing activities for the
three months ended
March 31, 2017
consisted primarily of dividend payments of
$97 million
and stock repurchases of
$28 million
.
Net cash used in financing activities for the
three months ended
March 31, 2016
consisted primarily of the repayment of the aggregate principal amount of the 2016 Notes of
$500 million
, stock repurchases of
$179 million
and dividend payments of
$90 million
.
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents
de
creased
$1,611 million
since
December 31, 2016
to
$176 million
as of
March 31, 2017
primarily driven by the funding of the Bai Brands Merger, returns to our stockholders, and capital expenditures, 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
$50 million
and
$51 million
as of
March 31, 2017
and
December 31, 2016
, respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.
|
|
|
Total Shareholder Distributions
|
|
Our Board declared dividends aggregating $0.58 and $0.53 per share on outstanding common stock during the three months ended March 31, 2017 and 2016, respectively, and we continued common stock repurchases based upon authorizations from our Board. Refer to Part II, Item 2 of this Quarterly Report on Form 10-Q for additional information regarding these repurchases.
|
The following chart details these payments during the three months ended March 31, 2017 and 2016.
|
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
March 31, 2017
, that have significantly changed from the amounts disclosed in our Annual Report:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in Year
|
(in millions)
|
Total
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
After 2021
|
Bai Brands Merger consideration
(1)
|
103
|
|
|
6
|
|
|
87
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
Purchase obligations
(2)
|
1,139
|
|
|
616
|
|
|
220
|
|
|
140
|
|
|
90
|
|
|
31
|
|
|
42
|
|
Total
|
$
|
1,242
|
|
|
$
|
622
|
|
|
$
|
307
|
|
|
$
|
140
|
|
|
$
|
100
|
|
|
$
|
31
|
|
|
$
|
42
|
|
____________________________
|
|
(1)
|
Amounts represent the holdback liability to the former shareholders of Bai Brands, which is held in escrow. Please refer to
Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements
for further information.
|
|
|
(2)
|
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
March 31, 2017
, there have been no other material changes to the amounts disclosed in our Annual Report.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes in off-balance sheet arrangements from those disclosed in our Annual Report.
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
.